Good day, everyone, and welcome to AeroVironment Third Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the call over to the Head of Investor Relations, Denise Pacioni. Please proceed.

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 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 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 2. 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 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. And fourth, looking ahead, we're adjusting our revenue guidance range to between $1.85 billion and $1.95 billion and adjusted EBITDA to between…

Thank you, Wahid. Today, I'll 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. I will briefly comment on our results for the quarter and then turn to guidance for the remainder of FY '26. While the third quarter did not meet our expectations on several fronts, and 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 noncash $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…

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. And 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. And with that, Kevin, Denise and I will now take your questions.

[Operator Instructions] it comes from the line of Andre Madrid with BTIG.

And Kevin, thank you so much for everything. It's been a pleasure to work with you and best of luck with everything ahead.

Thank you.

I want to -- I wanted to start by maybe just talking about the long-term prospects of SCDE now with the absence of SCAR. I mean how should we be thinking about growth at the business moving forward? And not even just growth, but if you could break it down a little bit further, I mean, to the margins, I understand SCAR was a pretty big driver of what you guys were expecting to do in EBITDA this year for that segment? What else could be kind of carrying the weight here on out, not just in '26 but beyond?

Thanks, Andre, for the question. So the situation with the Space Force and the SCAR program is evolving daily. I was in [ Albuquerque ] New Mexico yesterday, met with the key decision-makers and the program leaders of the SCAR-BADGER program at Space Force. And we -- as you know, we started negotiations with the customer so we can resume the work. Unfortunately, we could not come to a mutually acceptable solution that allows us to have a win-win outcome moving forward by renegotiating and resuming the work. So the customer had to choose to terminate for convenience and we're entitled to our allowable legal costs incurred plus a profit fee. We are more bullish than ever before that the Phased Array BADGER system and the technology that we have is best-in-class and needed badly for the needs of our country and for the constellation of geosynchronous satellites the U.S. military has. The urgency and the priority on that capability gap and the need for our solution is actually stronger and more urgent now than ever before. Space Force has directly told me that they're actually going to invest more money in this area because we need it at the country. Lastly, we're not going to stop our efforts because we are a firm believer in developing this solution as a commercial item and basically applying our recipe that we've done for years. We're going to continue to develop the capability. We believe we have at least a 3 to 3.5-year head start on all competitors. If Space Force is successful to recompete, great, we will be eligible to recompete and participate. And our ultimate goal is to basically able to sell the solution to them as a commercial item. We believe that's much more favorable for the customer and for AV financially and operational. So we do not expect the SCAR program to have a significant impact on our growth profile beyond this year. We're still going to have a growth year this year. We're going to have a record fourth quarter, record fiscal year performance, both on top line and profitability. And we're positioned for strong growth next year and beyond. There are several other products and technologies within our Space & Directed Energy business that is in high, high demand and a transition to commercialization today. That includes our LOCUST system, our directed gunsight and our laser communication terminals, all of which are expected to grow rapidly over the next 2 to 3 years. So we're very bullish in this segment. We're very confident about this acquisition in this segment, in this business in general. We are more than ever before, committed to accelerating our progress. This is something that we've done several times in our history, and we have prevailed and we've demonstrated a business success outcome both for ourselves and value for our customers.

Got it. Got it. Really appreciate the color there, Wahid. Maybe on a -- if we could pivot to the Autonomous Systems business. You look there, I mean, on the $990 million IDIQ that you guys have, you've got a recent delivery order of $186 million. Over less than 2 years, you're already up to over $700 million in terms of -- on that vehicle. Have you been having discussions with the customer as to when that could potentially be upsized? Is that something that's in the cards? Or is that something that comes up in conversations often?

Andre, the short answer is yes. We're actively talking to the customer. And as I mentioned in my remarks. The customer just placed another contract, and awarded us a contract for over $800 million for our family of products, including Switchblade family products, primarily for FMS sales. But it does not -- it gives them a lot of flexibility. So we have 2 large contract awards and platforms that the customer can buy under, a; b, the customer does have the ability to increase the ceiling on these contracts and the customer also has the potential option to extend the time frame on these contracts. We've had that several times in our past. And I believe, to your point, we are reaching a point where they could consume more products than the ceiling allows today, and we're actively working those different options with the customer. And that's the reason why we feel so bullish to increase our production capacity and going beyond this fiscal year into even next fiscal year 2028 and build another factory that could produce another $2 billion worth of our products. So we feel very strong about that momentum.

Our next question comes from the line of Louie DiPalma with William Blair.

Kevin, congratulations. It was great working with you -- definitely. For my first question, how much revenue does AV expect to recognize from SCAR for fiscal 2026 when taking into account the termination fees and the other fees associated with the -- ending the contract?

We don't get the specific forecast for each product, but it's included in our guidance. We've factored that all in. And so we feel comfortable -- even though this was late breaking news, we're very comfortable with the guidance for the year.

Yes. I was wondering from the perspective of investors are going to be wondering how they should be modeling fiscal 2027 if this contract ended? And so is there a ballpark in terms of is it like 5% of total revenue? Or is it less than 5%? Or how should we be thinking about that for fiscal [ '27 ]?

It will be less than 5%. It's not insignificant amount next year. That was factored into all of our modeling for the goodwill impairment that all stays intact. But I'd say it's less than $100 million.

Great. And Wahid and Kevin, you recently announced the $186 million Army order for the directed requirement involving the Switchblade 600 and the Switchblade 300. Four of your competitors have made contract announcements recently for the Army LASSO program and the Marine Corps Organic Precision Fires-Light. How has AV progressed with both of those programs? And what's the timing in terms of when you expect your awards and the timing for a potential production award, I think, for LASSO, you are using your Switchblade 400. So yes, what's the sense of timing for those programs?

So Louie, we are very actively engaged with the U.S. Army on several fronts on the Switchblade family products. First of all, you're absolutely right. we were just awarded a $186 million contract for production delivery, not prototypes, not early testing and evaluation, but production units of our second-generation Switchblade 600 Block 2 and then also our Block 20 Switchblade 300. These are the initial two orders for the next generation of Switchblade 300 and Switchblade 600 products. In regards to the LASSO program, if you recall, a year plus ago, we were awarded multiple tranches of task orders by the U.S. Army for the directed -- who was referred to as directed requirements, which was essentially part of the LASSO program. So we were the only company who received those awards about 1 year to 2 years ago. And most of the other players didn't get anything at that time. So it's actually a catch-up for the other players to stay in the game and receive some awards as part of the competition in order to put the competition for the LASSO to be valid and fair. So, a. B, I must also say that our Switchblade 400 is purposely designed for the LASSO program. We've designed this from the ground up to be a very well-suited product for that capability. It is quite likely for both LASSO and OPF Marine Corps, that there is more than one solution for the missions that they require to be part of the final selection of the portfolio of solutions they're going to have. And we feel very good about our options. We had a program review with the Army this past week in our offices for a couple of days. We're doing really well. We're executing. We're performing. Our products performing really well. We're delivering products to them, and we continue to actually see increased demand from them. They are asking us to produce more because they're going to buy more from us. That's the signal that we're getting from the U.S. Army. Exactly what this means for those competitors, I can't comment on that. That needs to be directed towards them. But what I can tell you is that we're positioned quite well on these programs. We're focused on these. We believe we have the right solutions. We have been executing, we've been delivering, and we believe that we're going to be a serious recipient of some orders in this in the long run.

Great. And one final one, do you see the Iran war accelerating the time line for your Freedom Eagle-1?

Absolutely, yes, Louie. We have seen an unprecedented amount of requests and demand for proposals and quantity and ROMs, Rough Order of Magnitude quotes from both domestic U.S. customers as well as international customers, not just for the Freedom Eagle-1, but also for our suite of our product line. The conflict in Iran is another example of how well we're positioned on the type of solutions that we've got that means the desperate need of our customers, the U.S. military and our allies. I just read a press release or a report this week that Iran has launched close to 1,400 one-way attack drones into UAE alone in one week. The need for LOCUST, the need for our RF jammers, the Titan series, the need for our one-way attack drones such as Red Dragon, the need for Freedom Eagle-1 and the need for our JUMP 20 and P550 is starting to look better and better, and I expect all this to convert to some additional demand in fiscal year '27 and beyond. So I do believe that this is a good critical moment to showcase our capabilities. And also, we're the only ones or one of the very few that can actually produce in volume and deliver a battle-tested proven technology or capability to war fighters today. Most players are talking about production capacity 2 to 3 years from now. And manufacturing sites they're going to build that's going to produce whatever number later. We're doing that today across several of our product lines.

One moment for our next question, please, it comes from the line of Jan Engelbrecht with Baird.

Congrats on retirement, Kevin. I think -- yes, sure. And an update on the -- up on the Directed Energy portfolio, just some of the key programs and maybe milestones we should look out for the rest of calendar year '26 and then '27, just some recent developments. There was a laser weapons test in Albuquerque this past weekend. You got an RFI from the Air Force for a new laser weapon system on Friday -- last Friday. And then just any updates on your specific programs on [ FPIC, ] AMP or JLTV integration? Just how should we think about that? Because it does seem like we're getting closer to an important sort of time for laser weapons, especially if you just look at what's going on in Iran?

So Jan, thank you for the comments on the question. And it is really important for our investors and our audience to recognize that the situation that we saw 3 to 4 years ago in Ukraine, where it was a showcase of our loading munitions, one-way attack, reconnaissance drone led to a significant shift in the market in terms of demand for those capabilities and higher rate production and more orders and more growth for us. I believe we're in an inflection point with both our RF counter UAS systems as well as our directed energy LOCUST systems. I was in Albuquerque facility where we manufacture these systems, and our customers would love to have a lot more of them. In fact, most of our customers are behind the eight ball as an analogy, if I may use that in terms of having systems in their hands. So we are building systems currently not only for that particular conflict today, but I believe that is going to transition into additional long-term demand in these categories which we are clearly not only the leader, but we're the only game in town that actually has a solution that works, and it's been performing in the field today. It is actively involved and engaged in theaters, multiple theaters and the customer is extremely satisfied with its performance. And we have an unprecedented opportunity and position in the market, which we are really trying to scale production and go forward. Exactly how much that demand it is and means for next year, I can't quantify right now. It is going to be strong demand, and we expect that to eventually turn into a similar situation as it was in Ukraine, even if the conflict stops tomorrow because LOCUST was developed specifically for Group 1, 2 and 3 drone defensive solution. It is the only directed energy solution that I know of, in this size and range that achieves the mission outcomes for our customers successfully, and we're delighted about being able to help our customers.

Perfect. Very helpful. And a quick follow-up, if I may. In the event, it's very uncertain -- in the event that this war with Iran is sort of drawn out or prolonged in the coming weeks. Are there any systems? I mean, I imagine you're very well positioned, but any systems you want to call out that could be fielded sort of on an accelerated basis by the DOW or sort of be part of this $50 billion emergency reconciliation munitions package that we heard about last week. Is there anything sort of a few programs or platforms you can call out where you could see that happening?

Yes. Jan, in particular, I would highlight a very strong imminent demand for accelerated adoption of our one-way long-range attack drones such as Red Dragon and its family. Our Directed Energy Systems called LOCUST, and our Titan series of RF detect and defeat solutions as well as our reconnaissance drones such as JUMP 20 and P550. Those 5 products, specifically, I expect those to have an increased demand going into fiscal '27 and then hopefully beyond.

One moment for our next question, please. It comes from the line of Ken Herbert with RBC.

Congratulations, Kevin. Maybe just to talk about the revised guide for adjusted EBITDA. How much of that -- and apologies if I missed it, but how much of that is SCAR? And anything else that's moved to the right on the adjusted EBITDA and how we think about then bridging from fiscal '26 to '27 on the adjusted EBITDA in terms of the margin potential upside?

Well, I mean, some of it is obviously related to SCAR, some of it, which is basically a reduction in the revenue. So most of the EBITDA revised guidance is a result of the revenue -- lower revenue guidance and somewhat more R&D during the year. But in terms of expenses are right on track, obviously, a little -- we're higher than we would have probably done if we know the revenue was a little lower, but the business model is definitely intact. I think that as we look at the commercialization, as Wahi was talking about of LOCUST and some of the other things in the Space & Directed Energy segment that we expect to achieve higher gross margins next year than this year, which will drive accelerated -- continued EBITDA growth probably greater than revenue next year.

Okay. And maybe just an update on the Switchblade now that you officially have the 400 in the product family, how do we think about capacity on that program? And it sounds like that franchise obviously continues to -- continues to be very well viewed by the customer set. What's maybe the mix of 300, 400, 600, where is capacity? And how do you see that scaling in the next 6 to 12 months?

You're welcome, Ken. So I continue to see a lot of potential and growth in revenue for our Switchblade 300 Block 20 and Switchblade 600 Block 2, which is -- we just did our initial shipments to the U.S. Army. I think the demand for those 2 products Irrespective of the LASSO program of record or the U.S. Marine Corps OPF program record is going to be very robust, both domestically and internationally. We do not intend to reduce those or slow those down. I think we're going to continue to see demand for that, and it's going to continue to grow. Switchblade 400 is purposely developed for the future longer term growth and adoption of this family. It's primarily developed for the 2 key things. One is to be able to capture the LASSO program of record. And two, it's designed in such a way that it could be actually mounted in a variety of different platforms much easier. So future helicopters, future airplanes, future ground vehicles, are all -- future drones, larger drones are all potential recipients of the Switchblade 400 variants in the long run. But that's going to be about a year plus later based on the program adoption cycles that we see. And the reason why we're increasing our production even further with the Salt Lake City facility is because I believe that beyond fiscal year '27, we're going to continue to see demand in these categories, in these products, and the mix will shift eventually more towards 400 but not any time soon.

Our next question comes from the line of Seth Seifman with JPMorgan.

This is Rocco on for Seth. First, thanks for all the help, Kevin. It's been great working with you. Was the SCAR contract split between the Cyber & Mission Systems and Space & Directed Energy subsegments in SCD&E? And if not, what kind of weight on Cyber Emission Systems revenue in the quarter?

So that revenue is actually part of that entire segment. And the SCAR program is under the Space not the Directed Energy piece -- I'm sorry, the Space & Directed Energy, not the Cyber piece. So the cyber security and Cyber & Mission Systems, that business is separate, and it's not affected by the SCAR program. It's primarily the other side of the segment to our business, which is the Space & Directed Energy.

Right.

I mean, even though it's down year-over-year in that segment, most of that was planned because of some programs that had gone away before we even acquired BlueHalo. But obviously, we're just doing a pro forma versus the prior year. And there's parts of that business is doing very well on orders, but it's not necessarily showing up in revenue right now.

Right. That makes sense. And I guess if we're looking at SCD&E moving on in Q4 without SCAR, should we be thinking about the segments being able to see growth in Q4 versus the pro forma numbers? And what are the main growth drivers we should think about in the segment?

So long term -- I'll let Kevin answer the first part of the question. But long term, we expect our Space and Cyber business to actually be a significant growth and revenue drivers for the next few years. There are several products, as I mentioned, in technologies that we're at the cusp of transitioning into a commercial item and scaling its production. We did the first one, which was our RF Titan series from BlueHalo, but that's in Segment 1. However, the products that are in segment 2, which is essentially the LOCUST systems, the laser communication terminals and the direct -- also the gunsight -- the gunsight, the laser and gunsight system, these are just transitioning to production. And they should be significant growth drivers in fiscal year '27 and beyond. So we expect that segment to grow quite aggressively over the next several years as part of the portfolio.

Yes. And we do expect Q4 to be strong. I mean obviously, the actual Space business is going to take a hit with the SCAR program. But the other businesses like Directed Energy, we expect to have a very strong fourth quarter.

Our next question comes from the line of Jonathan Siegmann with Stifel.

Just on SCAR, I know we've been talking a lot about it. Can you just talk a little bit about what success looks like in the recompete? Is it splitting share with somebody else? Is it selling more units at less of a price? Is it having a different role in the contract? And then also an idea of when we might hear something on how you guys make out in that recompete?

Sure. So Jon, we intentionally work with our customers to find a win-win solution on the current contract, the way it's structured. We couldn't do that. Success will look like as follows. We want to develop this product on AV's R&D dollars as a commercial item. Because we believe the market opportunity for this is massive, in the billions of dollars globally besides just this space force. We also know that the need for this capability gap has not gone away, and it's stronger. And if we had a commercial off-the-shelf solution available today, I'm a firm believer that the space force and many of the customers would be procuring them as a commercial product with more favorable pricing and more favorable profit profile because typically, we take more risk on R&D upfront and then we sell the product at a higher margin once it becomes commercialized. That is precisely our strategy. While we're doing that, Space Force is going to try to recompete this and see if there's any better product or more than one product that can meet their needs. Because the need for this is actually increasing, not decreasing. And they have indicated to me directly that funding for this actually is going to increase, not decrease over the next 3 to 4 years. So our intent is as we develop our commercial product, to then provide a commercial solution to the U.S. Space Force and be able to sell it to them when they are procuring it. And that's the decision that we made jointly with the space force that I believe is a win-win for both parties. It achieves their objective, and it achieves our objective, what we want to do long term. Obviously, we're not happy that we're taking a hit on the short term, but it is a very good option for us long term, and we're committed to it. My personal commitment and confidence in this solution set is stronger than before. And I believe if we had a commercial offering today, we would be selling it now. It does not exist, and we want to go faster, not slower.

We've already had inquiries from other customers for the product, so -- as well.

That's right.

But is it conceivable you could be selling this revised product as early as maybe fiscal '27? Or is this more of a longer-term development effort?

So most likely, we're redoing that based on the requirements. One of the challenges is to get our customers to agree to a set of requirements that we lock in -- lock down. And most likely it will be more of a contributor in fiscal year '28 than '27, in terms of significant revenue contribution to the overall portfolio. There are other items in the space business that's going to contribute revenue, but most likely not the BADGER systems in the next fiscal year.

One moment for our next question that comes from the line of Ronald Epstein with Bank of America.

This is Samantha Stiroh on for Ron today. We're just wondering, are there other programs under OTAs that could be at risk? And the programs you highlighted as in transition, are these programs of record? Or are they still under OTA as well?

So Vanessa (sic) [ Samantha ], this is the only program that I know of today. Obviously, we have a large portfolio of programs that are very long, small and medium sizes and large. But this is the only one that I know of right now that is in this situation, and it's not just because it's OTA, it's primarily because of the circumstances of the customer and their need to go to a commercial model and the capability gap and the desire that we would like to transition there, too. The other products or technologies that we have, we're already transitioning anyway, and there's not a program record for those today. we're competing for some, but we expect those to be successful in the models that we want. So this would be the only one to my knowledge today of this size and magnitude that we're talking about.

Got it. And then when you talked about the mix shift pushing margins down for the combined BlueHalo AVAV, do we see that turn more positive? Or do we expect it to be structurally lower for the near future?

We think as we become more commercial items in the Space DE business that will drive both the adjusted gross margins, but more importantly, the adjusted EBITDA margins higher over time. Before the merger, we had about 18% adjusted EBITDA margins. BlueHalo, much of their business was more like a traditional defense contractor, but the opportunity is significant to take a lot of the things that they were working on with different customers and make them more commercially available. LOCUST is just one of them, that the gunsights product is -- we're very optimistic on that. It's getting a lot of traction. Also the Wasp product, which is kind of a derivative of BADGER for existing ground stations is also showing some traction. So we're very optimistic as we take these things to commercial markets, it will be significant growth and improve them, the gross margins and the EBITDA margins.

Our next question comes from the line of Trevor Walsh with Citizens.

Wahid, maybe just a clarification. For the programs that you called out within Space & Direct Energy, specifically the LOCUSTs, the laser comms and the laser gunsights. As you take those to more of a commercialized approach, can you just -- I'm assuming -- that doesn't mean that you're necessarily retooling those from a technology perspective to make them more cost similar to what's happening with BADGER? Or is it just more the go-to-market and just that more of just as you kind of move them to just a different phase of their cycle, if you will?

It's more, Trevor, a go-to-market business model and strategy than the programs. The reason why the BADGER was both is because we already had a contract that was a cost-plus contract, and terms and conditions of that contract basically constricted us from being able to go to a commercial model. So we had an opportunity to renegotiate that with the Space Force. And now we're moving more expeditiously towards that model. But most of it's -- no, there's not really any change in the technology. We have very compelling differentiated solutions and technology. We're trying to change the business model and the go-to-market strategy with our customers in the market on how we price these, how we offer this and how we actually want to build the business going forward and scale it.

Got it. Super helpful. And Kevin, maybe just one quick follow-up for you. Just piggybacking on around the guide and just maybe a more directed question. So if I just look at the midpoint from where you had the FY '26 guide to where you guided now, it's about a $75 million shift down. Is it fair to assume that, let's call it, a strong majority of that sum is SCAR related or maybe even -- more even split of SCAR and the other programs that you alluded to? Just trying to get a sense of kind of what the full range of that impact was.

Well, I mean, this has been a tough year in many ways. I mean, you've had all the government funding delays and the pushing of things to the right, some of the things that usually drive our margins higher. To be honest, we've been somewhat capacity constrained on the things that really, we could have probably shipped this year that we now are in the process of building capacity for. So when you put that all together, at the end of the day, we hit the midpoint of both the guidances. Obviously, we're hopeful that we'll be well into the over $1.9 billion range on the revenue as our original guidance set. It just drives that EBITDA margin down because of the volume and the mix, but it's really the volume that drives down the number. But we're very optimistic about next year, seeing the activity that's coming in. The money is starting to flow. It seems like to the different forces, different branches and then down to the programs, then the war, that activity is significant and likely to drive our growth higher than this year for next year.

Our next question comes from the line of Austin Bohlig with Needham & Company.

First one just has to do with your guys' updated full year revenue guidance. If you're just looking at the Autonomous segment, obviously, demand trend seems to be strengthening. How has that changed compared to the beginning of the year when you gave this guidance when you kind of back out the SCAR opportunity?

So Austin, we don't go into that level of detail for the future forecasts. We will provide our forecast for that later. What I can tell you is that the demand on our systems are quite strong. So we had three primary drivers that led to a quarter that we're not satisfied with. I'm not happy with, and I'm holding myself accountable more than anyone else for that. We are committed to actually deliver on our fourth quarter. We've had a long history and track record of being successful and growing and delivering value to our shareholders. We had a miss because of 2 external issues and 1 internal issue. As I described in my remarks, the demand of -- fundamental underlying demand for our systems never been stronger in my tenure at AV for 16 years. And both in our Autonomous Systems segment as well as in the Space & Cyber business, we've got strong long-term growth opportunities here. We're committed to those. We're going to have a great still year -- growth year, as Kevin mentioned earlier in his remarks, and we're going to be positioned really well for fiscal '27. And so we are committed to performing and delivering value and results to our shareholders. And in Q4, we're going to see strong growth. But unfortunately, there's not a lot of time because of the timing delays, we can't convert all that to revenue that quickly. There's only so much that our customers can take and how fast we can put through the factories and get them sold off to our customer satisfaction and keep the quality where we would like to be at 100% great quality. So it's going to go into Q1 and beyond. And I think it's going to be a growth year again next year for us.

There's nothing wrong with this year. I mean $1.9 billion of revenue, putting these 2 companies together and facing all those challenges and still be able to accomplish that with all of the government funding turmoil and things like this, a SCAR. I'm very proud of that hitting that target. And the EBITDA will be within, say, 90% of what our original guidance was. So there's not -- nothing to be ashamed about this. It's still the leading biggest defense technology company out there in terms of EBITDA, in terms of revenue, any metric you want to have. So I think it's over -- all in all, it was a great first year of this merger.

Okay. And then kind of my second question has to do with LRR. That line item in the budget got a significant increase, which includes SRR, MRR and LRR. Do you guys have a sense of kind of like what the allocation might be for you guys in LRR or related to LRR in total?

So Austin, we have not received any specific sort of breakdown of how the funding is going to be allocated to those categories. Well, what I do know and what we are certain about is that our customer is in desperate need to acquire more of these solutions as quickly as possible. We've had our manufacturing ready review with the customer for P550. They just gave us an initial order, which I described on my earnings remarks comments. And I expect the P550 and LRR to be a significant growth driver in fiscal year '27. And for that specific reason, we're actually ramping up production even more. And so I think we're going to be most likely receiving, based on my understanding and reading the market and the customer interest, healthy significant growth in our P550 product line in terms of revenue next fiscal year in orders.

Our next question comes from the line of Nicholas Labbadia with UBS.

Zooming out a bit as UAS, loitering munitions, one-way attack drones and many of your other technologies continue to evolve daily on the modern battlefield. How do you balance meeting the current demand surges that you're seeing from the customer with the risk of building excess inventory given the pace of advancements in the space and how quickly some technologies are becoming obsolete?

So thank you for asking that question because it's an important one. We really watch that very carefully to make sure that we do not have built inventory excessively that then could become obsolete or not useful for our customers. The situation is such that the customers today and most likely in the foreseeable future, will take all the demand that we can build on the categories that we are talking about. The UAS, loitering munitions, one-way attack, RF counter UAS, et cetera, et cetera, in Directed Energy. So we're scaling these things based on really, really solid anticipated demand that we see in fiscal '27 and fiscal '28, number one. Number two, the second point I want to make is that the system, the products are designed such way that we can make upgrades and improvements to them on a modular fashion quite quickly. And so the situation in the battlefield could change. And when it does change, we make adjustments, we make improvements, and we've rolled those out on the existing platforms and even on our existing systems and the architecture. So it is not a very large change in risk in that regard. Lastly, throughout the last 3 to 4 years, we've learned a lot from the Ukraine conflict. We're there involved with a dozen of our different products and thousands. And so there is not a lot that the adversary can throw at us that can surprise us. And we're staying ahead of that. We've been staying ahead of that, and I think that's a recipe that we know how to execute on quite well compared to everyone else. And so I feel pretty good about that. At the same time, our customers are really, really asking us ramping up. There is not only a shortage in terms of what they can use today. There's a shortage in terms of stockpiling and filling their magazines for the future because the world is not a safe place. And this is -- looks like it's going to continue for a while, and we're positioned quite well.

Our next question comes from the line of Clarke Jefferies with Piper Sandler.

Wahid, Kevin, maybe to put the funding turmoil in the rearview mirror. I mean we're now here with the new budget. There were reports last week that there might be an appetite to pull forward some of the reconciliations funding. Is it too early for you to see some of that contract activity or some of the new sort of process start to proceed with the budget underway? And maybe just maybe paint us a picture of the next 6 to 9 months on how some of this spending authority plays out? Do you expect the peak of the sort of contract activity to happen between now and September? Or how do you expect it to play out? And then one follow-up.

So Clarke, I do expect an uptick in contracting and awards for us in the Q1 and Q2 time frame, primarily because of the budgets. I'm in Washington at Capitol Hill and Pentagon regularly. We have a team very focused on tracking the funding and the approval of this money. While it's authorized and appropriate, it still has to come in from the OMB to the Pentagon and to specific accounts within the services in order for the program officers to be able to execute on those contracts. They are priming the pump. They are working with us. We're tracking it very closely. I see really positive signs. I can't predict it exactly to the right quantity, but I think that the momentum is moving in the right direction. And I think you're right that in Q1 and Q2, we should see an uptick, primarily because the next budget cycle starts out after that, and the government budgeting cycle ends towards the Q2 -- or Q2 roughly.

Perfect. And just a follow-up, I think you touched on a lot of coverage of the BADGER program and the commercialization in other of the SCDE programs. But I just wanted to specifically ask what commercialization might look like for the BADGER program? How does that change your current manufacturing lines or the capacity plans you may have, does the commercialization look like a retool of that technology to bring the capability more in line of what the off-the-shelf offering would look like. I just love a little margin detail on commercialization for BADGER going forward.

Sure. So let me add some color there, Clarke. We understand the capability gap. We understand that our C2, the command and control systems for all of our military and intelligent satellite needs to be upgraded and overhauled. Phased array is going to be one of the key solutions in that problem statement. And we have about a 3-, 3.5-year head start than anyone else. We also understand what it takes to actually have a solution that works. In fact, we've demonstrated some of that already. So as long as we can neck down the requirements with the customer to a definitive crisp level, we're going to go ahead and lock down the design and we're going to convert that into a product that we can produce and deliver to our customers. That will take about a year or so time frame. . And at the end of that, we will have a product just like a Switchblade or just like a Puma or just like a JUMP 20 with a whole bunch of different features and functions and a price tag and a lead time that our customers can procure. We do not have to engage in back where they have to actually watch over us on how we develop the solution and how much progress we make every day on that design effort. It is all going to be within our control. We want that because it allows us to go fast. It allows us to design the best solution for our customer. So success would look like that in the next 12 to 18 months. And I believe that the need continues to actually grow rather than shrink. And the urgency in our customer is increasing, not decreasing. It is a very high priority for the U.S. Space Force to solve this problem and address the problem with the solution. And we are well ahead of everyone else. We just need to get it done and deliver the solution as a commercial item.

Next question comes from the line of Michael Leshock with KeyBanc Capital Markets.

I wanted to follow up on your commentary on the conflict in Iran, and particularly the Switchblade portfolio, given that the industry has evolved since the start of the Russian-Ukraine war and there have been some new entrants into the UAS market. How might the possibility of boots on the ground in Iran, be similar or different versus several years ago? And then what do you view as the biggest differentiators of the Switchblade family from other competitive offerings?

Well, so we have several competitive differentiators than anyone else, right? We're already battle proven. We're already relevant. We've already validated that it works against those kinds of threats. The type of drones you see such as Shahed and others that Iran is firing, we have faced those already in the battlefields of Ukraine. And we're also the one that could produce them today, reliably and at that scale. Lastly, as the enemy lines move, our systems are going to be more relevant because of the ranges that you have to reach and hit, and the offensive side. On the defensive side, we've got the best solutions in the market that is actually working today, right? Both in the RF detect and defeat jammers, the Titan. I mean, literally, we can't make those fast enough. We are ramping production as fast as humanly possible, while keeping the quality high. I want to emphasize we want to make sure that our product is always of highest quality when it gets to our customers' hands. That is how we built our reputation, and we're not going to compromise on that. And lastly, I want to mention the LOCUST Directed Energy. The number of drones and one-way attack drones that Iran is firing at us and our allies in the region is quite, quite overwhelming, right? And we need solutions such as LOCUST to be able to fight this economically and protect us. Our ships, our bases, civilian sites, critical infrastructure, oil refineries, power plants, the grid, all of these things need to be protected, and they are all phenomenal candidates for our solutions. So I expect that demand to increase probably more than even the supply that we have. But I think we're going to get a very good share of this demand if there were boots in the ground or if there was no boots in the ground.

Our next question comes from the line of Austin Moeller with Canaccord Genuity.

We'll miss you here, Kevin. So I guess just to start off, on BADGER, so I mean the system was designed to be modular and built out of tiles. So how difficult will it be, I guess, to reformulate it into a more commercial solution with the smaller form factor since that's what the Space Force has indicated they wanted. And I guess, you said, I think, on the last question that you think it will take 12 months to produce a product?

Yes. So Austin, about 80% to 90% of what we've already developed and designed is going to be applicable to the modifications that we want to make. The modifications are essentially to do two things: To simplify the solutions in its manufacturing processes, a; and b, to make it more cost effective. So we can actually achieve the overall program objectives for the customer, which is [indiscernible], right? And so those two things mean that almost 80% plus of what we've done in the tile architecture of the Phased Array of the BADGER is reusable, if not more, if not more. What we're trying to do is to reduce the parts count simplify the design, shrink it to a smaller size, reduces complexity, make it more of a viable commercial product while utilizing 90% or so plus of the existing development and architecture and design that we've already done. It's not really -- we don't have to invent new technologies or new designs to achieve that. Really, those risk factors have already been burned out. Now is the time to execute on transitioning to production and lower cost and reliability, so we can scale.

And thank you, ladies and gentlemen. This concludes the Q&A session. I will pass it back to Denise Pacioni for closing comments.

Thank you once again for joining today's conference call and for your interest in AV. 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 enjoy the rest of your evening and we look forward to speaking with you again following next quarter's results.

This concludes our conference. Thank you for participating, and you may now disconnect.