AeroVironment Inc Q3 2026 earnings call

Thank you, and good afternoon, ladies, and gentlemen. Welcome to AV's third quarter fiscal year 2026 earnings call. My name is Denise Pacioni, Head of Investor Relations for AV. Before we begin, please note that certain information presented on this call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve many risks and uncertainties that could cause actual results to differ materially from our expectations. Further information on these risks and uncertainties is contained in the company's 10-K and other filings with the SEC, in particular in the risk factors and forward-looking statement portions of such filings. Copies are available from the SEC on the AeroVironment website, www.avinc.com, or from our Investor Relations team.

This afternoon we also filed a slide presentation with our earnings release and posted the presentation to the investor section of our website under Events and Presentations. The content of this conference call contains time-sensitive information that is accurate only as of today, March 10, 2026. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. Joining me today from AV are Chairman, President, and Chief Executive Officer Mr. Wahid Nawabi and Executive Vice President and Chief Financial Officer Mr. Kevin McDonnell. We will now begin with remarks from Wahid Nawabi. Wahid.

Thank you, Denise. Welcome everyone to our third quarter fiscal year 2026 earnings conference call. I will begin by summarizing our quarterly performance, followed by Kevin, who will review our financial results in greater detail and then discuss guidance for fiscal year 2026. After this, Kevin, Denise, and I will take your questions. This past quarter's results came in below expectations, primarily driven by revenue timing and adjustments made in our Space business. Given industry-wide delays in government funding along with the shutdown, several orders we anticipated to receive in the third quarter have shifted to the right by a quarter or two. Recognizing we fell short on expectations this quarter, we are now more than ever focused on leveraging our unique operational and execution capabilities and driving long-term value creation.

We have a track record of delivering strong results, and our core strengths in product innovation, deep customer relationships, and manufacturing scalability will enable us to capture increased demand in this high-growth market. Strong order flow increased our funded backlog in the third quarter, which is positioning us for record fourth quarter revenue and a solid start to our fiscal year 2027. Before providing details on our progress to achieve our growth targets, let me cover key highlights from the third quarter. First, we achieved strong orders and grew our funded backlog to $1.1 billion with year-to-date total re-awards of $4.6 billion. Second, we announced several key program awards and bookings in high growth markets where AV holds a competitive advantage over our peers.

Third, we're transitioning certain programs to commercial product solutions that are aligned with customer expectations, leading to improved long-term profitability and broader market adoption. Fourth, looking ahead, we're adjusting our revenue guidance range to between $1.85 billion and $1.95 billion and Adjusted EBITDA to between $265 million and $285 million and remain on track for record fourth quarter revenue. You're going to hear a lot about what we have underway and what's behind our strong forecast. Let me start by outlining exactly what drives our confidence in our fourth quarter and fiscal year 2027. The demand for cost-efficient AI-enabled autonomous non-lethal and lethal drones and counter drones are unprecedented. AV is well-positioned to capitalize on this generational opportunity that is in front of us.

Our products and solutions are helping shape the newly defined battlefield with a full suite of loitering munition offerings, long-range one-way attack drones, advanced radio frequency-based counter-UAS solutions, Group 1 through 3 uncrewed aircraft systems, and space, cyber, and directed energy platforms and technologies to support our U.S. Defense and international allies. Producing in high volume and continuously scaling production ahead of demand are key differentiators that allow us to stay ahead of our customers' needs. During this past quarter, we progressed the build-out of our new manufacturing facility in Salt Lake City, Utah, and we expect it to be operational about a year from now. This 140,000 sq ft facility has the potential to produce more than $2 billion worth of Switchblades or other AAV products annually.

In addition to expanding our manufacturing footprint, we continue to evaluate the strength of our supply chain by identifying long lead items and ensuring all suppliers can scale along with increased demand. Taken together, these actions reflect our company strategy and focus that have guided our business for more than a decade. Investing capital into the business, developing commercial products, building out capacity slightly ahead of demand, and most importantly, ensuring we are delivering best-in-class solutions that meet our customers' mission objectives. We remain in active discussions with the U.S. Space Force regarding the Badger phased array antenna system to support the SCAR, or Satellite Communication Augmentation Resource program. We appreciate that the contract was temporarily paused while we work together on a firm-fixed-price contract that provides a commercialized product solution.

As of this morning, we could not come to a mutually acceptable agreement with our customer to modify the existing contract and resume work. Therefore, the U.S. Space Force has concluded to terminate our existing contract for convenience, pay us for our allowable incurred costs with a fee, and enable AV to recompete for the program with their revised requirements and our proposed solution. I must emphasize that we remain fully committed to delivering this innovative capability to the market while aligning to our customers' needs and transitioning our phased array solution to a commercial offering and business model. The need for this capability gap has become more important and more urgent than before, and we believe we have an innovative and compelling solution that is unmatched in the industry.

By developing our solutions as a commercial product and recompeting for this program's revised requirement, it will enable AV to build a more flexible and profitable business in the long term while meeting our customers' critical needs. This is a recipe and strategy that AV has successfully demonstrated and achieved multiple times in our history. Additionally, we're actively working to transition several of our other new and disruptive capabilities towards commercial products across our Space and Directed Energy segment. These include our Locust directed energy counter-UAS solution, our laser communications terminal for space command and control, and our laser communication gunsights. By transitioning these offerings to commercial products, we can quickly scale manufacturing to meet accelerated delivery schedules, improve margins, and broaden our customer base while also satisfying our customers' desire for a firm fixed-price and commercialized off-the-shelf solutions.

Again, this is a recipe that AV has demonstrated successfully several times in its history over the last two decades. This is precisely our strategy with BlueHalo's solutions. We are confident that this is a new approach and a win for our customers and a win for AV. I would like to now walk you through Q3 achievements within each of our segments, as well as near and long-term growth and profitability initiatives that will help us reach our strategic growth objectives. Our Autonomous Systems segment continues to drive revenue growth for the company, making up 68% of our overall revenue for the third quarter. Even though the government shutdown in early November caused a delay in funding and shifted the timing of certain orders, revenue for the segment still experienced significant growth compared to the same quarter last year.

We expect additional delayed orders from the third quarter to be booked in the fourth quarter of this year and first quarter of fiscal year 2027. Several commercially developed and mass-produced products in our autonomous system segment are key growth drivers for the company, including our Group 2 Puma AE and P550 UAS systems, our Group 3 JUMP 20 and JUMP 20-X systems, all variants of Switchblade, our Red Dragon family of one-way attack drones, and our counter-UAS solutions, including the Titan family of AI-enabled RF jammers and Freedom Eagle-1, or FE1. These are all key strategic products that AV has developed, successfully transitioned into commercial solutions, and scaled production to meet increased customer demand.

During the third quarter, we were awarded an additional five year sole source IDIQ contract worth $874 million from the U.S. Army for our UAS and Counter-UAS product lines to support foreign military sales or FMS demands. This contract enables our allies to procure a range of AAV Group 1 through three unmanned aerial systems and Counter-UAS systems, including Vapor, JUMP 20, P550, Puma, Raven, and Titan Counter-UAS.

In addition to this large award, we received a $168 million task order from the U.S. Army for Switchblade 300 Block 20 and Switchblade 600 Block 2 loitering munition systems. This additional delivery order represents the U.S. Army's first procurement of AV's next-generation Switchblade product line and was issued under the U.S. Army's existing five-year IDIQ contract for lethal unmanned systems in August of 2024, with a total ceiling value of $990 million. Looking ahead, we anticipate continued strong demand for our Switchblade family of products from both domestic and international customers. Domestically, we are working now to increase capacity at our new Salt Lake City facility in preparation for an increase in demand, including from the Low Altitude Stalking and Strike Ordnance, or LASSO, program for our new Switchblade variant, the Switchblade 400.

Internationally, we're engaged with several allied nations, including Taiwan, Japan, and South Korea, on autonomous systems, namely the Switchblade 600, to support their national security needs. Turning to our Counter-UAS capabilities, the use case for AI-enabled RF detect and defeat Counter-UAS continues to rapidly expand both domestically and abroad. In fact, just last week, we were awarded a $23 million contract from the U.S. Marine Corps for additional deliveries of our Titan SV. With demand on the rise for our Titan family of products, we are actively increasing manufacturing by more than four times this year, with additional plans to increase by more than 10 times current levels by fiscal year 2030. Titan is the leading AI-enabled Counter-UAS solution for RF detect and defeat at home and globally.

Thank you, Wahid. Today, I'm reviewing the highlights of our third quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on our website. I will briefly comment on results for the quarter and then turn the guidance to the remainder of FY 2026. While the third quarter did not meet our expectations on several fronts, though we are lowering our expectations for the year slightly, we continue to be well-positioned for continued high growth as many of our products move from the test and evaluation phase to full adoption by the U.S. military and its allies. The best example of this is our LOCUST Counter-UAS directed energy product, which we expect to be a significant growth driver in the coming years. It has proven to be the leader in this extremely important category for national defense.

In addition, our mature product categories like UAS and Switchblade provide significant growth, resulting in AV organic growth of 38% year-over-year in the third quarter. At $1.6 billion of revenue in the last 12 months, AV is one of the largest, most profitable defense technology companies. We are the leader in defense technology with a diversified portfolio of proven and emerging products. The well-publicized stop work order for the SCAR program did have a negative impact on the quarter, and this is in part the reason we are lowering our full year guidance. This resulted in a non-cash $151 million goodwill impairment as the evaluation of the acquired asset, the space business, was triggered by the SCAR stop work order.

The reevaluation resulted in a reduction in the acquisition date value of the acquired space business of approximately 17%. We do not expect any further adjustments to the impairment as a result of the notification of the customer to terminate the contract for convenience. It is important to note that even with the SCAR program changes, we are still confident in our growth trajectory as a result of the diversified business model and the strength we're seeing in other product areas. Now turning to the quarterly results. We ended the quarter with $1.1 billion of funded backlog and approximately $3 billion of unfunded backlog. I should note that approximately $1.5 billion of the unfunded backlog relates to the SCAR program, for which we were under contract at the end of the quarter.

We expect an adjustment to the unfunded backlog as a result of the intent of the customer to terminate for convenience and the resolution of the customer's obligations under the current contract. As Wahid mentioned in his remarks, revenue totaled $408 million in the third quarter, which represented a 143% increase over the prior year as reported, or a 6% increase on a pro forma basis. As mentioned previously, legacy AAV organic growth was 38% in the third quarter. Slide six and seven of Ernie's presentation show the third quarter and year-to-date revenue by operating group for each of the two segments compared to pro forma FY 2025 revenue. The AxS segment recognized $279 million in revenue in the quarter, which represented a 25% increase over FY 2025 pro forma revenues.

Uncrewed Aircraft Systems, composed of Groups 1, 2, and 3 UAS, led revenue growth for the segment with more than a 50% increase compared to the pro forma FY 2025 third quarter results. Uncrewed Systems without Ukraine revenues grew 54% year-over-year, driven by Puma, JUMP 20, and the Tomahawk family of systems. Precision Strike and Counter-UAS products improved more than 21% from the pro forma results from the same quarter last year. Switchblade 600, Switchblade 300, and Titan sales continued to be very strong in the third quarter. The Space, Cyber, and Directed Energy segment recognized $121.9 million of revenue in the third quarter, a pro forma 19% decline year-over-year following the stop work order on the Space SCAR program and the U.S. government funding delays.

The Space and Directed Energy products declined 14% in the quarter versus the prior year pro forma, driven by the SCAR stop-work order, while LOCUST Directed Energy Counter-UAS continued growth. Cyber and Mission Systems showed a 22% decline in pro forma revenue, largely a result of programs that were discontinued and also negatively impacted by funding delays associated with the U.S. government shutdown. Moving to gross margins. Slide 13 shows the adjusted product and service gross margin, including reconciliations to GAAP gross margin. Third quarter overall adjusted gross margins were 27%, which was flat to the second quarter of FY 2026, but lower than the 40% third quarter FY 2025 adjusted gross margin.

As noted, the business landscape of the combined new company has changed significantly with higher service mix and several products in the early stage of maturation. The third quarter did present some additional challenges to adjusted gross margins. Specifically, third quarter margins were also affected by last-minute shipping and supply chain issues, resulting in $40 million of high-margin revenue pushed to Q4. However, we believe adjusted gross margins should improve to the low- to mid-30s% in Q4. We are now projecting a full year outlook for adjusted gross margins in the high-20s% to low-30s%, which is consistent with our original guidance for the year. Moving to operating expenses. As mentioned earlier, the SCAR stop work order represented a trigger event requiring a goodwill impairment test, resulting in the $151 million non-cash impairment charge.

Adjusted SG&A, which is net of the intangible amortization and deal integration costs, was $61 million versus $33 million in the prior year. The increase is largely a result of the combination with BlueHalo. As a percentage of our revenue, adjusted SG&A in the quarter was 15% of revenue versus 20% in FY 2025. Again, the adjusted SG&A levels represent a shift in the business model. As we expect to end the year in the 13%-14% range as we begin to realize synergies and achieve higher revenue levels. Year-to-date, we have largely achieved our expected year-one synergies. R&D expense in the third quarter was $27 million or 7% of revenue, compared to $22 million or 13% of revenue the prior year.

Again, this is a shift in the business model, and we expect R&D as a percentage of revenue to end the year between 6% and 7% of revenue range, which represents an increase in R&D dollars over the prior year for the combined company. Excuse me. In terms of Adjusted EBITDA, slide 14 of our earnings presentation shows a reconciliation of GAAP net income to Adjusted EBITDA. Adjusted EBITDA for Q3 was $44 million, up from last year's Q3 of $22 million as reported, primarily due to the incremental BlueHalo results and the legacy AV organic revenue growth. Adjusted EBITDA as a percentage of revenue was 11% in the quarter, a sequential improvement from the 10% Adjusted EBITDA margin in the second quarter. We continue to forecast full year Adjusted EBITDA margin between 14% and 15% of revenue.

Now turning to non-GAAP earnings per share. Slide 12 shows you the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per diluted share of $0.64 for the third quarter of fiscal 2026, a more than double of the $0.30 per diluted share for the third quarter of fiscal 2025. Moving to the balance sheet. At the close of the quarter, our total cash and investments amounted to $649 million, a $20 million sequential decline versus Q2 of FY 2026, primarily driven by an increase in our inventory to support Q4 revenue. Also, our unbilled receivables continue to be at a higher level than we are targeting. However, we had significant collection activity at the end of the quarter or into the fourth quarter, and we expect that to continue throughout the fourth quarter.

Turning to the backlog. As noted earlier, our funded backlog at the end of the third quarter was $1.1 billion and unfunded backlog was $3 billion, which includes the $1.5 billion SCAR-related portion, which was discussed earlier. Our visibility to the midpoint of revised guidance range is 98%. Finally, I'd like to provide you our updated FY 2026 guidance. On slide eight of the presentation, we provide our revised fiscal 2026 guidance. Fiscal year revenue is now expected between $1.85 billion-$1.95 billion. Adjusted EBITDA between $265 million-$285 million. non-GAAP Adjusted EPS is now projected between $2.75-$3.10.

The midpoint of our revenue guidance range represents 12% growth over the pro forma FY 2025 results. Although the revised guidance range reflects lower expectations for the year, our confidence in the BlueHalo acquisition remains higher than ever. This combination is a force to be reckoned with within the defense technology sector, and the full potential of the combination will be realized over the coming quarters as some of the BlueHalo acquired products start moving into a more production-commercial cadence. This is likely my last quarter as CFO. I want to thank Wahid and the AV board for the opportunity and belief in me. I am very proud of the success of AV so far and my contributions to that success.

Thanks, Kevin. Before turning the call over for questions, I would like to reiterate the positive momentum we have entering the fourth quarter of fiscal year 2026. First, despite challenging headwinds in the quarter, we achieved third quarter revenues of $408 million, up 38% organically year-over-year. Second, our funded backlog grew to $1.1 billion, and we have recorded $4.6 billion worth of total year-to-date awards, which is another record for the company. These results have positioned us to achieve another record fourth quarter financial results. Third, overall demand and business momentum remains strong across many of our product lines, as evidenced by our robust and growing funded backlog, supporting our strong growth well beyond fiscal year 2026. We remain focused on execution.

This includes transitioning more commercial products and business model approach in the BlueHalo portfolio while scaling manufacturing to meet growing customer demand and improving profitability. The long-term prospects for growth and value creation for the company have never been better. I would like to thank our employees, shareholders, and customers for their continued commitment to AV and our mission. With that, Kevin, Denise, and I will now take your questions.