Thank you for standing by. Welcome to the AeroVironment fiscal 2025 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Jonah Teeter-Balin. Please go ahead.

Thanks, and good afternoon, ladies and gentlemen. Welcome to AeroVironment's fiscal year 2025 third quarter earnings call. This is Jonah Teeter-Balin, Vice President of Corporate Development and Investor Relations. 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, particularly in the risk factors and forward-looking statement portions of such filings. Copies are available from the SEC, on the AeroVironment website at 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 Investors 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 4, 2025. 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 AeroVironment are Chairman, President, and Chief Executive Officer, Mr. Wahid Nawabi, and Senior Vice President and Chief Financial Officer, Mr. Kevin McDonnell. We will now begin with remarks from Wahid Nawabi.

Thank you, Jonah. Welcome everyone to our third quarter fiscal year 2025 earnings conference call. I'll start by summarizing our quarterly performance and provide an update on the BlueHalo transaction, followed by Kevin who will review our financial results in greater detail. Next, I will provide an update on our expectations for the rest of fiscal year 2025, before Kevin, Jonah, and I take your questions. I'm pleased to report that we made significant progress on our long-term growth despite several short-term challenges. We continued to see strong demand for our solutions while expanding capabilities and capacity as the global leader in defense technology. Our key messages, which are included on slide number three of our earnings presentation, are as follows: First, we won large contract awards tied to key long-term strategic programs including the US Army's LASSO, US DOD's replicator, and the Danish Ministry of Defense while growing our backlog to a record $764 million. Second, we continue to make disciplined investments expanding production capacity, launching innovative products, and new capabilities and leveraging our acquisitions to strengthen our market leadership position. Third, despite our solid progress, third quarter financial performance came in slightly below our expectations, primarily due to the unprecedented LA windstorms. And four, given recent challenges, we are lowering our guidance but remain on track for record fourth quarter revenue and accelerating growth in fiscal year 2026. While we encountered challenges in executing our plans this quarter, we remain firmly on track with our long-term growth strategy. The defense technology sector is experiencing a generational shift driven by distributed autonomous AI-enabled solutions. We continue to believe we are uniquely positioned to meet our customers' evolving needs by leveraging our core strengths, cutting-edge technology, unmatched production capacity, and decades of battlefield experience. We are further strengthening these advantages…

Thank you, Wahid. Today, I will be 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. Overall, we had a mixed financial quarter with record orders and backlogs, but with revenue and profitability below expectations. Our revenues were impacted by production issues related to shutdowns as a result of the high winds in the Simi Valley area and to a lesser extent some sporadic supplier challenges as we continue to ramp up LMS production. Given the pending BlueHalo acquisition, any references to future performance exclude the impact of BlueHalo, which is expected to close in Q2 of calendar 2025. As Wahid mentioned in his remarks, revenue for the third quarter of fiscal 2025 was $167.6 million, a decrease of 10% as compared to the $186.6 million for the third quarter of fiscal 2024. As Wahid explained in his remarks, UK revenues accounted for approximately 5% of revenues in Q3. Slide six of the earnings presentation provides a breakdown of revenue by segment for the quarter. The biggest revenue story during the quarter was our continued growth of our loitering munitions business despite some challenges mentioned earlier. LMS segment recorded revenue of $83.9 million, a 46% increase as compared to the $57.7 million during last year's third quarter. Switchblade 600 represented over 70% of the LMS revenue for the quarter. Our uncrewed systems segment, UXS, which is a combination of our small UAS, medium UAS, and UGV businesses generated $53.8 million of revenue in the quarter, which is down 44% from last year's total of $113.3 million primarily driven by a decrease in Ukraine revenue of $47 million. However, we expect strong growth in the UX segment in the fourth quarter driven by recent awards…

Thanks, Kevin. Given our third-quarter performance and recent developments, we have lowered and narrowed our full fiscal year guidance. For fiscal year 2025, we now expect revenues of $780 million to $795 million, adjusted EBITDA of $135 million to $142 million, and non-GAAP earnings of $2.92 to $3.13 per share. We also expect R&D expenses to be 12% to 13% of revenues, and adjusted gross margins of 40% to 41% for the full fiscal year. Before turning the call over for questions, let me summarize the key takeaways from today's call. First, we won large awards tied to key long-term strategic programs growing our backlog to a record $764 million. Second, we continue to make disciplined investments to reinforce our market leadership, expanding our capabilities, and support our growth. Third, high winds and fires in the Los Angeles area impacted our third-quarter financial performance creating short-term operational challenges. And fourth, we have lowered our fiscal year 2025 guidance but remain on track for another record fourth-quarter revenue with accelerating growth in fiscal year 2026. At the start of this call, I highlighted the significant progress we made this quarter. AeroVironment is not just responding to the evolution of modern warfare. We are driving this transformation in our industry. The world is now recognizing what we have long believed, that autonomous AI-enabled drones and loitering munitions will be much more widely adopted as they transform defense strategy. These are categories we pioneered and that we continue to lead on a global scale. We're also encouraged by the momentum within the new administration which has prioritized the rapid fielding of AI-driven autonomous systems. A vision that aligns seamlessly with AeroVironment's capabilities, expertise, and industry leadership. With battle-proven technology, the largest global installed base, and unmatched production capacity, AeroVironment is not just prepared to meet this demand, we are defining the future of modern warfare. This is our mission. This is why we exist. Our employees come to work every day driven by the belief that what we do truly matters. I want to personally thank our employees, shareholders, and customers for their commitment to delivering cutting-edge solutions that protect our nation and its allies. We are honored to support the most critical defense missions at this pivotal moment. And with that, Kevin, Jonah, and I will now take your questions.

Thank you. To withdraw your question, please standby while we compile the Q&A roster. And our first question will come from the line of Greg Konrad with Jefferies. Your line is open.

Good evening. You teased fiscal year 26 a bit in the script. I mean, if we look at guidance, it implies an exit rate run rate of sales of, like, $240 million in Q4. How are you thinking about the bridge to fiscal year 26 given the backlog and some of your commentary around Ukraine?

Thanks, Greg. Sure. So we are very, very well poised for a strong accelerating growth and profitable growth year for fiscal 26. As you mentioned, our backlog is at unprecedented levels, record levels, close to $750 million, number one. Number two, we're going to exit Q4 roughly at about $240 to $250 million in revenue, which is, again, going to be a significant quarter for us, a very large quarter. That positions us to nearly a billion-dollar year next year. While there's still some uncertainties related to the current administration's decisions, we feel very confident the demand for our systems across the world is growing. We have an incredibly strong backlog. We have a growing pipeline of opportunities. The administration is incredibly positive towards the categories that we play and we lead the market globally. And the world is still a very, sort of unsafe place. There are lots of conflicts around the globe. And our solutions have performed and delivered exceptionally well during the conflicts in Ukraine. And so I really believe that next year is going to be another record year for us with accelerating growth. And our pipeline supports nearly a billion-dollar business for us next year organically alone. And, of course, when you couple that with the BlueHalo acquisition, which brings significant new capabilities to our portfolio, as long as that goes through, which we expect it to happen, sometimes in the next quarter, then we're going to be very much in a great position globally.

And then maybe just as a follow-up to stick with BlueHalo, you know, pretty impressive forecast in the S-4, you know, seems like there's some acceleration for that business next year. Without maybe getting into specifics, just thinking about the deal closing in Q2. What are some of the areas that you're most excited for in terms of BlueHalo growth, you know, into next year after the deal closes?

Well, Greg, clearly, the BlueHalo acquisition is going to transform AeroVironment in the industry that we're leading already. It is unprecedented in our industry for two companies and two businesses to come together that has nearly no overlap and is incredibly complementary in order to achieve what we refer to as our future state, to be able to deliver to our customers an integrated portfolio of robotic systems, that are connected with each other, integrated, interoperable, and enabled with AI autonomy and computer vision. The areas that we're very, very excited about. Number one is their counter-UAS business. They are the leading player in that market, including capabilities and lasers, and directed energy for counter-UAS, and a layered approach to that. So that's one area. Another area of focus and excitement also is their space communication. They have won a billion-dollar plus program with the US Department of Defense, Air Force, and Space Force, to overhaul and upgrade US satellites military satellite communications. So those two by themselves, but also in the cyber and intelligence community, they're a leading player with the most advanced capabilities in that area. And so there are lots of different areas, but those three areas really stand out as incredibly complementary to what we do and potential high growth for the combined entity. Let's not also forget that the combined entity will be incredibly well-positioned with market-leading growth revenue, and profitability that's sustainable and has the track record to be continued to deliver to the market. So we're very excited about that. Beyond our own organic growth opportunities.

Thank you. Thank you.

One moment for our next question. And that will come from the line of Peter Arment with Baird. Your line is open.

Good afternoon, Wahid and Kevin, Jonah. Hey, Wahid, could you give us a little more color on the work stoppage you mentioned it's four FMS contracts. What were the reasons for that, and is this something that is going to linger into Q4 or beyond?

Yes, Peter. So great question. As I mentioned in my remarks, just this week, yesterday, I believe, we received information from the US Department of Defense that specific contracts that are roughly about $13 million in value. These are foreign military sales contracts that we've already secured. And we were in the process of actually delivering those in the fourth quarter, the majority of that. We have been asked to stop work on those particular contracts. It is not clear whether this is a temporary sort of suspension or is it permanent. My guess would be, and my personal view would be, that I do not believe that these countries are going to stay without these capabilities. There's a serious real need for our capabilities for these customers, international allies, and the US is obviously using this to reassess its priorities and reassess things. So we have removed that from our outlook for the fourth quarter. And that obviously affects our fourth-quarter results, which we have lowered our guidance accordingly. Regardless of that, our ability to grow next year despite this particular event and despite the tariffs is very, very good. We believe that next year is going to be a very strong growth year. We have never been in such a great position in my view as a company to have the backlog that we have, the demand drivers that are out there, and the focus of the US DOD in terms of the autonomous drones and loitering munitions that we are the leader in the world. So that's the extent of it. As the situation evolves, which is very fluid today, we'll keep you updated.

Okay. And then just as a follow-up, you mentioned the $500 million plus kind of revenue, you know, kind of run rate, you know, opportunity and LMS. So you talked about, you know, 26 being, you know, basically on a run rate path. Get close to a billion dollars, which implies that, you know, the uncrewed segment would be, you know, kind of seeing a significant step up in volume. I mean, I know there's the trough this quarter at $64 million. You're expecting Jump 20 volumes to pick up in the fourth quarter, but it implies basically that there's going to be a pretty healthy step up in uncrewed. Could you maybe talk about the demand environment that gives you more confidence around the uncrewed backdrop?

Absolutely. Peter, so overall, we feel very confident about our uncrewed systems business in general. There are several strong drivers for demand for that business to grow over the next several years. Specifically, we're introducing new capabilities with the best new generation of solutions, including the P550, which the US DOD has already announced at least one or two programs each worth a billion dollars plus in value. One of those, for example, is the long-range reconnaissance program. So over the next three to five years, we expect our UXS business to continue to grow in terms of adoption as well as top-line revenue, and we expect it to be a significant driver of profitability and revenue for the company. Regardless of that, fiscal year 25 has been really a transition year for us. We proactively transitioned ourselves and pivoted away from the fiscal 25 spike that we received in demand from Ukraine primarily for Puma and Switchblade systems. As I said in the remarks, that represented 38% of our revenue. Ukraine did last fiscal year. This year, it's going to be around 17% and in the fourth quarter, it'll be about 6% of our total revenue expected from Ukraine. So, essentially, we have completely pivoted away from the Ukraine demand. And despite all that, we have an unprecedented historic backlog that allows us to grow next year. So we expect loitering munitions to lead that growth, but UXS also will grow and so would our McCready Works tech. Appreciate it. Thanks, Mike.

You're welcome, Peter.

Thank you. One moment for our next question. And that will come from the line of Louie DiPalma with William Blair. Your line is open.

Wahid, Kevin, and Jonah, good afternoon. Wahid and Kevin, you indicated that you are confident in AeroVironment standalone generating close to a billion dollars in revenue for fiscal 2026. I was wondering, are you also confident in BlueHalo generating close to a billion dollars for fiscal 2026? I think there was that projection in the S-4 filing that just came out. But I was wondering just how current are the projections from that S-4.

Thanks. Sure. So, Louie, obviously, we feel very compelled for AeroVironment, organically. I truly believe that we've never been in such a strong position, even compared to last fiscal year. Our backlog, as a percentage of revenue and also our backlog as a total amount is unprecedented. It sets us up for a very strong fiscal 26 sort of performance, and the demand for our systems continues to increase. And I believe that the new administration's focus on the priorities that they have publicly stated is going to support our growth even more. In terms of BlueHalo, we have already published specific forecasts that have been developed internally by BlueHalo and have been verified by third-party experts, including ourselves. That's part of the S-4. I encourage you to further those and look at those. They are absolutely growing business, very complementary to AeroVironment, and we expect that to continue going beyond this fiscal year. And so while the closing is not guaranteed yet, and it's not done yet, we feel strongly that the combination of two businesses is going to be fantastic for the market. We're going to be unparalleled in terms of our offering in the market and incredibly well-positioned to benefit from the priorities of the current administration and the conflicts and the threats that are around the globe worldwide. So I feel very bullish about that, and I think it's going to be very, very positive long-term for AeroVironment.

And we'll do the combined guidance when we do year-end results.

Great. Thanks, Wahid and Kevin. And on the last quarter earnings call, you mentioned that you were close to closing two different Jump 20 orders, and you formally announced one of the orders. Did you close the second order, or is that still pending?

It's a great question. Yeah. You're absolutely correct that we said two last quarter, and we're pleased to report this quarter that we have announced one of them, which was the $181 million contract value source IDIQ for the next ten years with the Danish military. The second one was a competitive bid. It was a very competitive bid. As Kevin mentioned, that was an incredibly competitive bid. It basically highlights that Jump 20 is the leading solution in the market, the best-in-class solution in the market. And that competition actually was protested and protested again and we eventually prevailed. Regardless, we are actively working on the second one. We expect that announcement to come in sometime in the fourth quarter. Obviously, the timing of those is in the hands of our customer. But we believe that we're positioned very well. It is also a large program that we're going to be unseating another competitor hopefully, and we'll keep you updated. And we feel very strong and very positive about our position on that. And we expect that to be decided and announced sometime either Q4 or the beginning of Q1 of fiscal 26.

Great. And one final one, regarding the Army stop work order, you indicated that it was for foreign military sales and I believe that it's for multiple countries. But does this relate to multiple countries using their own funds to buy either the Switchblade or the Puma or one of your other systems? And the US Army is the last name? Fine. Countries are allies using their own funds to buy AeroVironment systems?

Louie, great question. So the stop work that we received just yesterday is specific to particular contracts that are under the FMS foreign military sales contracts, with the US Army and AeroVironment, specific countries around the world. I'm not in a position to be able to disclose the specific countries. However, the total of it roughly adds up to about $13 million in bookings that we have in our backlog, the majority of which we were expecting to ship in Q4. The future of that is undetermined. We don't exactly know whether this is a temporary hold. We do know that the US DOD, as well as the current administration, is using all of these tools at its position to negotiate terms and negotiate various positions with these countries. Most of these deals are also foreign military funded, which means that the orders the funding for these contracts actually are provided by the US government through an FMS process. And therefore, US DOD is reevaluating whether they should proceed or not in each case. It is undetermined at this point as to what the outcome would be and how long would that last. All sorts of possibilities are probable in my view. And we don't know. What I do know is that these countries desperately need these capabilities, number one. Number two, our solutions are quite affordable. And so there's also a possibility that if these countries do not get US funding for these acquisitions that they may come up with their own funding, which many countries do already anyways. And so we felt compelled enough to share that information as it comes up. And let you know. Regardless of all that, we feel very strong about our business. We feel very strong about our backlog. We believe that we're going to have another growth year. We're going to be able to execute our Q4. The administration's position is really, really changing and evolving and fluid, and we'll keep you updated as we go forward.

Great. Thanks.

Thank you, Louie.

And our next question will come from the line of Andre Madrid with BTIG. Your line is open.

Wahid, Kevin, Jonah, thanks so much for taking the question. You know, on the topic of international sales, you mentioned last quarter there were an incremental six nations that were in different phases of the acquisition process. Can you maybe give an update on those and how negotiations are trending?

Sure. So, Andre, as I mentioned in my remarks, we have now received firm orders for approximately six of those countries in our backlog, and we expect to ship those sometime next year. And then in addition to that, there are an additional twenty countries that we're actively engaged with. All of these countries are interested in Switchblade 300 and 600 flavors or variants. And the list of these countries continues to grow. And let's not forget that almost every one of these countries these are their first-time buys, which means that as they buy these systems, they will use some of them to train their forces and also inform their usage and their force structured deployment, which eventually will lead to more adoption. So I truly believe that our loitering munition business is looking at a very large long-term growth and adoption opportunity here with our allies for Switchblade. Switchblade's performance and the conflict in Ukraine has absolutely validated this capability. We are leading the industry. We have a significant advantage in terms of our ability to deliver in volume and produce these in volume. And that's why we continue to expand capacity. We've already increased capacity significantly. But with the new facility, we're going to increase our footprint by five times again. And that facility is going to come online sometime next this calendar year towards the end of this calendar year. Which, again, it's all indicators that we strongly believe in the growth of this business not only now or next year but beyond next year. So we truly believe that this is a billion-dollar franchise that we're growing very aggressively over the next several years. And, again, all of our businesses are growing. And we'll grow next year. But LMS is obviously leading the pack and it's growing in size considerably.

Got it. Thank you, Wahid. And then I guess maybe if I pivot away from that, I mean, you know, kind of revisiting the wildfires. Could you maybe quantify exactly how much of the negative impact in Q3 was attributable to the South California fires?

Sure. So, Andre, I won't be able to get into the specifics because there are lots of different details and complex unprecedented levels of fires as well as winds. So what happened as a result of these extremely high winds, the local utilities essentially forced shutdowns for long and extended periods of time. Many weeks, we were losing power day in and day out on multiple of our sites. In some cases, almost all of our sites here in Southern California. Not only were our sites affected in terms of power outages, so were our employee base and our supplier base too that are local. So all of that would happen in a time period which was towards the middle to end of our third quarter. Which does not give us enough time to recover all the plans that we had. So we've made these adjustments. We're very pleased with our results still. We continue to grow as a company. It's going to be another record fourth-quarter revenues and profitability for the year for us. And we're going to exit the year with a strong, strong performance setting us up for next year. And I think that our company has not been in such a great position compared to even last year this time looking beyond fiscal 25 into 26. So we're excited about the future, and we look forward to that.

Awesome. Wahid, thanks so much. I'll jump back in the queue.

Thank you, Andre.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Jonah for any closing remarks.

Great. Thank you once again for joining today's conference call and for your interest in AeroVironment. As a reminder, an archived version of this call, SEC filings, and relevant news can be found under the Investors section of our website. We hope you have a good evening and look forward to speaking with you again following next quarter's results. Good evening.

This concludes today's program. Thank you all for participating. You may now disconnect.