AeroVironment Inc Q2 2026 earnings call

Thank you, and good afternoon, ladies and gentlemen. Welcome to AeroVironment Q2 Fiscal Year 2026 Earnings Call. My name is Denise Pacioni, Head of Investor Relations for AeroVironment. 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, December 9, 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 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 Q2 Fiscal Year 2026 Earnings Conference Call. I'll 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. I'm pleased to report excellent quarterly financial results while setting new records in multiple areas of our business. Despite the challenges posed by the elongated U.S. government shutdown, we delivered excellent financial results and achieved several strategic milestones that we believe position AV for strong, sustained growth well into the future. During the quarter, we introduced several innovative products and secured multiple large long-term contracts, a testament to a recipe for innovation and proof that our strategy is winning. The total ceiling value of new contract awards during Q2 reached $3.5 billion, a historic record achievement by AV.

This also resulted in record Q2 bookings of nearly $1.4 billion. These achievements underscore that our strategic investments are delivering results and progressing our business to new heights. We also made significant progress on multiple programs of record that we believe will solidify our leadership in all of the domains in which we participate: air, land, sea, space, and cyber. With strong top-line growth expected on the horizon, we are executing on our expansion plans to further scale our manufacturing capacity and meet accelerating demand across several of our products and programs. Our proven execution capabilities, combined with the robust pipeline of orders and operational readiness, reinforce our confidence in achieving our industry-leading long-term growth objectives. At the same time, overall, the integration of BlueHalo is exceeding expectations, strengthening our capabilities and positioning AV as the premier next-generation defense tech company.

Let me summarize our key messages for the Q2 of Fiscal Year 2026, which are awards with a total contract value of $3.5 billion, bolstered bookings to reach an all-time high of nearly $1.4 billion, driven by key program wins that support AV's long-term growth. Second, we also achieved another record Q2 revenue of nearly $473 million. Third, we launched several new innovative products aligned to our customers' highest priorities and continue to execute on expanding our manufacturing capacity to meet accelerated demand. And fourth, we're raising the lower end of our Fiscal Year 2026 revenue guidance and now expect revenues between $1.95 billion and $2 billion. Beyond these strong results, the defense industry is at an inflection point, and AV is not just prepared to lead. We are ahead of the curve, setting the pace for everyone else to follow. Let's not forget, the U.S.

Department of War is firmly committed to shifting their procurement practices towards agile, commercially available products and capabilities, favoring companies that invest their own capital, develop disruptive solutions at speed, while transitioning them to full-rate production and scaling capacity quickly. This validates the business model AV has embraced not just in the past few years, but over multiple decades. AV's business model and strategy have always been to invest in innovative and disruptive solutions ahead of customer requirements, scale their production rapidly, and deliver decisive advantages that enable our customers to acquire capabilities quickly. Looking ahead, cost-efficient autonomous drones and counter-drone systems enabled by AI and machine learning will define the battlefield. Known for uncrewed aircraft systems and leading AI integration, we believe AV is uniquely positioned to capitalize on this transformation.

AV Halo, our open architecture software platform, is designed to unify command and control, intelligence analysis, synthetic training, and autonomous targeting across all domains, creating advanced communication among critical assets during conflict. By integrating AV Halo into our portfolio and other platforms, we're delivering a powerful hardware-agnostic ecosystem that enhances the speed, autonomy, and interoperability of AV's platforms for our customers. Moreover, we expect that AV Halo's ability to enable competing products to operate on a common command and control software system will play an increasingly crucial role in U.S. defense procurement decisions. Our investment and development in AV Halo is just one example of how AV is ahead of this transformation and is well-positioned within the industry. Our level of internal R&D investment and proactive CapEx strategy enable us to accelerate development and scale production ahead of demand.

Using internal R&D to advance new products allows our technology to outpace our peers and leads to a faster time to market. We believe this core competency is a key differentiator that allows us to stay ahead of our customers' needs. Unlike traditional contractors that wait for contract vehicles before building prototypes, we innovate first, bringing solutions to market faster. These forward-looking investments are not only fueling the launch of new products but also translating into significant contract wins, reinforcing our ability to capture emerging opportunities. For example, in our Autonomous Systems segment, our P550 was recently down-selected by the U.S. Army's Long-Range Reconnaissance Program, or LRR, estimated to be worth approximately $1 billion. Internal investments made on this Group 2 uncrewed solution allowed us to quickly meet the needs and requirements included in the LRR program, and we're confident that our P550 is the best solution for the U.S.

Army. We've also prudently invested in upgrades to our Group 3 uncrewed aircraft system, JUMP 20 and JUMP 20X, which was recently selected as one of four options on the U.S. Navy's basic ordering agreement. This significant achievement allows AV to compete for specific U.S. Navy intelligence, surveillance, and reconnaissance, or ISR, task orders over the next five years in a large and rapidly growing UAS maritime defense market. In addition to these domestic achievements, we're also expanding and experiencing an increase in international demand. Within our autonomous systems segment, we were recently awarded an $874 million sole-source IDIQ contract from the US Army for international sales of our small UAS products to include Raven, Puma AE, and Puma LE. This IDIQ contract vehicle also allows for the sale of our JUMP 20 medium UAS and Titan series of counter UAS solutions.

Our strategy is driving tangible results, which is evident in the successful product launches this quarter. We recently unveiled several new offerings, including our next generation of Switchblade loitering munitions with our Switchblade 600 Block 2, Switchblade 400, and Switchblade 300 Block 20. These products were mostly internally funded and developed quickly, helping to expand the Switchblade product line and create long-endurance, multi-domain, anti-armor solutions, ensuring warfighters maintain tactical overmatch in contested environments. We also debuted our next-generation VAPOR Compact Long-Endurance Helicopter, or VAPOR CLE. This Group 2 VTOL UAV is fully autonomous and can deliver up to two hours of flight, which is double the endurance of typical Group 2 quadrotor UAV platforms. Our newly integrated NVIDIA Orin onboard computer makes the VAPOR CLE fully autonomous and enables automatic target recognition through AV Halo Vision computer vision software and AV Halo Wizard artificial intelligence machine learning AI/ML processing suite.

On our last earnings call, we discussed the significance of our software solution, AV Halo. Since then, we have announced that AV was awarded the U.S. Army's contract for Human-Machine Integrated Formation, or HMIF program. This award accelerates fielding of multi-domain robotic formations using AV's unified interface of command and control, tactical awareness, and autonomy solutions at the tactical edge. As part of this win, AV is going to be the lead software and system integrator for robotic systems on the edge of the battlefield. This award also validates the strength of our approach to software solutions, common controllers, and user interfaces, and underscores the Army's confidence in AV's ability to deliver mission-critical solutions.

We also just released two new products from the AV Halo suite, including AV Halo Cortex, a next-generation intelligence fusion and analysis environment, and AV Halo Mentor, a warfighter-readiness suite that leans on virtual and augmented reality weapons training and mission rehearsal. AV Halo will continue to roll out more products and offerings that position AV as the core and leading developer in this space. Furthermore, we recently announced a collaboration with OpenJAUS, or OpenJAWS. OpenJAWS is an open architecture for software framework that allows robots, drones, missiles, and ground vehicles to speak the same language. This integration extends AV Halo compatibility to seamlessly incorporate robotics, allowing original equipment manufacturers to integrate their platforms faster and more easily. This collaboration strengthens AV's role as a driver and leader of the industry's push towards interoperability.

In addition, AV won several key awards in our space, cyber, and directed energy segment with critical new contracts in laser communications, space-related satellite communications, and directed energy. For example, AV received a $240 million contract for our long-haul laser communication terminals, one of the largest to ever be awarded in this category. This disruptive innovation is moving from lab to orbit, a critical step for AV and the industry. Long-haul laser communications use precision optical links to move enormous amounts of data between satellites faster, more securely, and without the vulnerabilities of traditional radio frequency or RF signals. This capability is critical because it creates a resilient high-bandwidth backbone for future space networks, ensuring warfighters and decision-makers get the right information instantly, even in contested environments. This win continues to push AV to the center of innovation in space.

Additionally, AV secured a new firm fixed-price option for two BADGER phased-array systems under the SCAR, or Satellite Communication Augmentation Resource Program. This program represents a tremendous growth opportunity for AV as more BADGER systems move into production. Lastly, AV was awarded a contract valued at $499 million by the U.S. Air Force Research Laboratory to develop material technology and deploy protective solutions to the front lines to guard warfighters against exposure to harmful electromagnetic radiation. Work under this large program, known as Helmsman, will help deter against directed energy strikes in the future. We continue to set the standard in advanced protective technologies and directed energy defense, positioning AV as a clear leader in safeguarding warfighters against emerging threats. Further, our disruptive solutions continue to position AV as a leader in next-generation defense. From our family of Switchblade loitering munitions to advanced counter-UAS solutions, we're redefining the battle space.

Today, I'll be reviewing the highlights of our Q2 performance, during which I will occasionally refer to both our press release and earnings presentation available on our website. I will start by commenting on our results for the quarter and then turn to guidance for the remainder of FY 2026. While this quarter presented challenges in terms of the U.S. government shutdown and our transition to new operational systems, we are very pleased with the continued business momentum and, more importantly, our revenue and adjusted EBITDA outlook for the year remains in the same range despite some of the challenges in Q2. Next, I'd like to draw your attention to slide 17 of the earnings presentation, which sets forth the definitions for our customer contracting activity. Going forward, each quarter, we'll present the report, the total contract awards, bookings, funded backlog, and unfunded backlog in the quarter.

Now, I'll highlight some of that customer contract activity in the quarter. As Wahid mentioned, we earned awards with a total ceiling of $3.5 billion, and we achieved $1.4 billion of bookings and ended the quarter with $1.1 billion of funded backlog and $1.8 billion of unfunded backlog. We're very pleased that the U.S. Department of War contract activity continued progressing despite the shutdown, and we view this as a testament to the importance of the programs we're involved in. Some of the recent key awards are highlighted on slide 10 of the earnings presentation. Both segments captured multiple large awards during the quarter. As Wahid mentioned in his remarks, revenue totaled $472.5 million in the Q2, which represented a 151% increase over the prior year, as reported, or a 9% increase on a pro forma basis. Legacy AV organic growth was 21% in the Q2.

Slide 6 and 7 of the earnings presentation show the Q2 and the year-to-date revenue by operating group for each of our two segments compared to pro forma FY 2025 revenue. The AXS segment recognized $302 million in revenue in the quarter, which represented a 15.7% increase over the FY 2025 pro forma revenues. Precision strike and counter-UAS products led revenue growth for the segment with nearly a 38% increase compared to the pro forma FY 2025 Q2 results. Strong Switchblade 600 and Titan sales led to the growth in this operating group. Uncrewed systems, including both our small UAS and medium UAS products, improved more than 8% from the pro forma results from the same quarter last year. Uncrewed systems without Ukraine revenues grew more than 50% year-over-year, driven by strong JUMP 20 revenue increase.

The space, cyber, and directed energy segment recognized $171 million of revenue in the quarter, which was similar to the pro forma results from the same quarter last year. The space and directed energy products grew more than 20% in the quarter versus the prior year, with the LOCUST directed energy counter-UAS growth being one of the key drivers. As Wahid mentioned earlier, this segment also received several large contracts this past quarter, to include a significant contract for our long-haul laser communications and two BADGERs for the U.S. Space Force's SCAR program. Cyber emission systems showed a decline in revenue, largely a result of programs that were discontinued and was negatively impacted by the government shutdown. As mentioned earlier, this segment had a strong quarter with new contracts with a nearly $500 million Helmsman award, among others. Moving on to gross margins.

Slide 13 shows the adjusted product and service gross margin, including reconciliations to GAAP gross margin. Second quarter overall adjusted gross margins were 27% versus 41% in the Q2 of FY 2025. As noted, the business landscape of the combined new company has changed significantly, with a higher service mix and several products in the early stages of maturation. In the Q2, it did present some additional challenges to adjust the gross margin. We went live with our Oracle Fusion ERP system upgrade in the quarter. As a result, we experienced some operational inefficiencies and one-time costs related to the go-live. With that said, we've made a major leap forward in our operational systems as we transitioned to the cloud to support a multi-billion dollar company.

In addition, we saw an unfavorable service product mix and unfavorable product mix, partially as a result of the government shutdown caused by delays in FMS shipments. In addition, we lost revenues in our space, cyber, and directed energy businesses during the shutdown. However, we believe the adjusted gross margins are improving in Q3 and to be in the high 30s% by Q4. We are maintaining our full-year outlook for adjusted gross margins in the low 30s%. Moving on to operating expenses. Adjusted SG&A, which is net of intangible amortization and deal integration costs, was $66.1 million versus $33.2 million in the prior year. The increase is largely a result of a combination with BlueHalo. As a percentage of revenue, adjusted SG&A in the quarter was 14% of revenue versus 17.6% in FY 2025.

Again, these adjusted SG&A levels represent a shift in the business model, and we expect to end the year in the 12-13% range as we begin to realize synergies and achieve higher revenue levels. R&D expense for the Q2 was $36 million, or 7.6% of revenue, compared to $28.7 million, or 15.2% of revenue in 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%-7 of revenue, which represents an increase in R&D dollars over the prior year for the combined company. In terms of adjusted EBITDA, slide 14 of our earnings presentation shows the reconciliation of GAAP net income to adjusted EBITDA. Adjusted EBITDA for Q2 was $45 million, up from last year's Q2 of $25.9 million, as reported, primarily due to the incremental BlueHalo results.

EBITDA as a percentage of revenue was 9.5% in the quarter. Despite some of these one-time costs and impacts from the government shutdown, we continue to forecast the full-year Adjusted EBITDA between 15%-16 of revenue. Now turning to non-GAAP earnings per share. Slide 12 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per diluted share of $0.44 for the Q2 of fiscal 2026 versus $0.47 for diluted share for the Q2 of fiscal 2025, slightly lower due to the same reasons as stated previously. Moving to the balance sheet. At the close of the Q2, our total cash and investments amounted to $669 million. As reported last quarter, we now have a completely new balance sheet as a result of the BlueHalo transaction and the convertible debt equity financing completed in Q1.

Consequently, many of our balances are not comparable to the prior periods. For instance, our over time revenue recognition has increased from 41% to 75 year-over-year, driving up unbilled receivables. With that said, unbilled receivables continue to be at a higher level than we are targeting. Turning to backlog. As noted earlier, our funded backlog at the end of the Q2 was $1.1 billion, and unfunded backlog was $2.8 billion. Our visibility to the midpoint of the revenue guidance range is now 93%. I should note that this is consistent with past practice that we include within our visibility revenue from long-term contracts we expect to perform during the fiscal year, but which have not been funded as of this date. Finally, I'd like to provide you with our updated FY 2026 guidance. On slide 8 of the presentation, we provide fiscal 2026 guidance.

Fiscal year revenue is expected to be between $1.95 billion and $2 billion. Adjusted EBITDA remains between $300 million and $320 million, and non-GAAP adjusted EPS is now projected to be between $3.40 and 3.55. The midpoint of our revenue guidance range represents nearly a 15% growth over the pro forma FY 2025 results. The lower non-GAAP EPS range is a result of a higher full-year projected tax rate, largely driven by the Q2 update of the purchase price allocation of the BlueHalo acquisition. With the government shutdown impacting both our fiscal Q2 and Q3, we have seen delays in some of the orders and therefore a shifting of projected revenues to the right. Second-half revenues should be split approximately 45% in Q3 and 55% in Q4. The adjusted EBITDA shift will be more pronounced, with 70% of the second-half EBITDA coming in the Q4.

I'd like to close by echoing Wahid's remarks. We are very well aligned with the U.S. Department of War priorities and those of our allies, and we are excited about our prospects. Despite some of the challenges in Q2, we are confident of meeting our guidance for the year. Now, I'd like to turn things back to Wahid. Thanks, Kevin. Before turning the call over for questions, I'd like to reiterate some of the positive momentum entering the third Q3 of fiscal year 2026. First, record Q2 awards with a total contract value of $3.5 billion bolstered bookings to reach an all-time high of nearly $1.4 billion, driven by key program wins that support AV's long-term growth. Second, we also achieved another record Q2 revenue of nearly $473 million.

Third, we launched several new innovative products aligned to our customers' highest priorities and continue to execute on expanding our manufacturing capacity to meet accelerated demand. And fourth, with 93% visibility to the midpoint of our guidance range, we are raising the lower end of our fiscal year 2026 revenue guidance and now expect revenues between $1.95 billion and $2 billion. Our strong Q2 results reinforce our confidence in AV's future and our role in shaping the next era of defense. With integrated capabilities across multiple domains of modern warfare, advanced technologies, and the ability to scale rapidly, we believe we are well positioned to meet the Department of the War's highest priorities and sustain significant growth in a demand-driven market. The Department of War has reiterated sharpened focus on speed, scale, and commercially driven procurement strategies, all of which plays directly to AV's strengths.