AeroVironment Inc Q4 2026 earnings call

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

This afternoon, we also filed a slide presentation with our earnings release and posted the presentation to the investor section of our website under Events and Presentations. The content of this conference call contains time-sensitive information that is accurate only as of today, June 29th, 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. Sean Woodward. We will now begin with remarks from Wahid Nawabi. Wahid?

Thank you, Denise. Welcome, everyone, to our fourth quarter and full fiscal year 2026 earnings conference call. I will begin by summarizing our quarterly and full-year performance, followed by Sean, who will review our financial results in greater detail and then discuss guidance for fiscal year 2027. After this, Sean, Denise, and I will take your questions. I am pleased to report record fourth quarter results across several key financial performance metrics, delivering AV's strongest financial performance to date. We reported fourth quarter revenues of nearly $642 million, with increased funded backlog of $1.2 billion. Strong adjusted EBITDA of $140 million and bookings of $572 million. For the full fiscal year, we delivered revenue of nearly $2 billion ahead of our most recent quarterly guidance, in line with our initial guidance from about a year ago, and bookings of $2.7 billion.

Full-year adjusted EBITDA of $286 million came in above the high end of our most recent guidance range. Non-GAAP EPS was $3.31 per share, well above the higher end of our guidance. With demand for our solutions continuing to rise, our work over the past year has positioned AV as a stronger, more resilient, and diversified company. Before outlining several opportunities and key growth drivers that will help us reach our strategic goals for fiscal year 2027 and beyond, let me first cover some key highlights from the fourth quarter and full fiscal year 2026. First, we achieved record fourth quarter revenue of $642 million and record full-year revenue of nearly $2 billion. Organic revenue growth for the quarter was 31% and 30% for the full fiscal year.

Second, we delivered strong fourth quarter adjusted EBITDA of $140 million, or 22% of revenue on higher sales volume, demonstrating AV's profitability potential with increased volume. Third, we developed and launched several new products, won several key program awards, and made strong software advancements that will strategically facilitate growth for AV into the future. Fourth, we successfully diversified our portfolio with the transformational acquisition of BlueHalo, nearly doubling in size and adding additional capabilities in counter-UAS platforms, space technologies, cyber and advanced solutions. Fifth, looking ahead, we're establishing fiscal year 2027 revenue guidance to between $2.125 billion-$2.225 billion. Adjusted EBITDA guidance for fiscal year 2027 is set between $305 million-$325 million. Our confidence in fiscal year 2027 is grounded in the momentum we built this past year and the significant wins we have achieved across our platforms.

In lethal drones, we introduced several new products, including Switchblade 400 and MAYHEM 10. Our new one-way attack solution, Red Dragon, was awarded several contracts. We're preparing to bring additional Switchblade production online at our Salt Lake City facility at the beginning of next calendar year. Our non-lethal drones reached several successful milestones as well. AV P550 was selected for the U.S. Army's long-range reconnaissance program. JUMP 20-X secured multiple contract awards. VAPOR CLE won a significant award for the U.S. Army's medium-range reconnaissance program. In counter-UAS, orders for our Titan family of RF detect and defeat systems more than doubled this year, while demand for this differentiated solution continues to rise. Our LOCUST laser weapon system achieved a series of key milestones that are setting the stage for significant future contract awards. These wins reflect the core strengths that AV is set apart from others.

We believe there are several important differentiating factors that best position AV to capture a significant portion of the anticipated rising demand in our served markets. We have a strong install base that is unrivaled across several of our product lines. For decades, our customers have confidently relied on AV to deliver best-in-class solutions while giving them an advantage over our adversaries. Our solutions are battle-proven in today's critical conflicts. This dependability, along with our ability to quickly scale manufacturing, differentiates us from many of our competitors, especially new entrants. In fiscal year 2027, we are investing additional capital to further increase our manufacturing capacity across several products and platforms to meet anticipated rising demand. We are sensing strong customer indications that our solutions will receive significant contract wins in the next 12 to 24 months.

AV is very well positioned for these unprecedented levels of demand in our served markets. I will turn to segment performance for the quarter and full fiscal year. Our Autonomous Systems segment, or AxS, continues to drive revenue growth for the company. During the fourth quarter, AxS contributed $492 million, or 76% of total company revenue, and for the full fiscal year, AxS contributed $1.3 billion, or 69% of total company revenue. This is a strong validation that our solutions are well-positioned for the current needs of our nations and our allies across the globe. Our Group one through three uncrewed aircraft systems operating group won several key awards during the quarter and made progress on several key initiatives. For example, AV's VAPOR CLE unmanned helicopter was awarded a nearly $15 million US Army company-level UAS directed requirement Tranche 2 production contract.

This is a significant win, we believe it opens the door for additional future long-term awards for the medium reconnaissance program. Just after the quarter closed, our P550 Group two drone was awarded a $117 million contract by the US Army under the Long Range Reconnaissance, or LRR program. We believe that these two key contract wins will help set AV up for future contract awards on large program of record within the US Army. In addition to these successes, our Group three medium UAS solutions, namely JUMP 20 and JUMP 20-X, continue to make significant strides both operationally and with new demand. Our JUMP 20-X successfully demonstrated two special missions in Yuma, Arizona, and is deployed in support of Operation Epic Fury. Our precision strike and defense systems operating group continues to drive growth for the company.

During the quarter, our loitering munitions team made significant progress in several strategic areas of the company. For example, the Switchblade 400 received a key award from the US Army for its Low-Altitude Stalking and Strike Ordnance, or LASSO program. Built specifically for this program, the Switchblade 400 combines the contact attributes of our Switchblade 300 with the warhead capabilities of a Switchblade 600. During the quarter, we debuted our latest multi-role Launched Effects system, AV's MAYHEM 10, which is built on the foundation and success of our Switchblade family of products. Designed for the US Army's Launched Effects program of record, MAYHEM 10 has the ability to fly autonomously and has a versatile forward payload option that can accommodate lethal and non-lethal payloads up to 10 lbs. Our MAYHEM 10 addresses a significant capability gap for the US Army.

It can be launched from the ground, in maritime conditions, or from a manned or unmanned aircraft. These unique features positions MAYHEM 10 as a very compelling solution for the future needs of our customers. Slightly over a year ago, we announced our one-way attack solution, Red Dragon. Red Dragon most recently received a $17 million production contract for the US Army during the fourth quarter. We anticipate significant increased demand for this product and are expanding production levels to ensure we can meet our customers' anticipated needs. Progress continues on our Salt Lake City manufacturing facility, which has the potential to produce more than $2 billion worth of Switchblades or other AV products per year. We're on track to begin production in the spring of calendar year 2027. As a reminder, two of our counter-UAS products we acquired with BlueHalo reside in this operating group.

Our RF jamming detect and defeat family of counter-UAS solution, Titan, continues to play a critical role in the company's growth. In fact, Titan sales more than doubled this past fiscal year on a pro forma basis. We expanded production rates during the fourth quarter and anticipate demand for this product to rise through 2027 and beyond. In addition to this counter-UAS offering, we're also making progress on our Freedom Eagle-1 or FE-1 program with the US Army, which as you may recall, was awarded a $96 million contract last fall for the US Army's long-range kinetic intercept program. We are progressing on that development contract and moving towards flight testing in approximately 12 months. This program represents close to $1 billion of market opportunity for AV over the next several years, with an even larger opportunity in the years that follow.

We're among one of the very few new missile producers in the last 30 years and are confident that our cost-effective solution will be well-received by our customers. The momentum behind this program is building, with Congress increasing funding to accelerate production due to a gap in low-cost missile production. Given these demand signals, this past quarter, we announced efforts to expand our manufacturing facility in Huntsville, Alabama, to scale production of this groundbreaking capability in anticipation of increased demand. We're also seeing increased traction in our space, cyber, and directed energy segment, which represents an important new phase of AV's multi-domain growth strategy. The segment reported revenues of $150 million for the quarter and $619 million for the full fiscal year.

Despite some near-term disruptions during the third and fourth quarter due to the government shutdown and SCAR contract termination for convenience, we remain very optimistic about several opportunities within this segment, including directed energy counter-UAS, long-haul laser communications, space technologies, and other advanced solutions. During the fourth quarter, our LOCUST directed energy counter-UAS platform achieved several key milestones. As global threats continue to evolve, directed energy has emerged as an essential and cost-effective solution for countering high volume, low-cost drone attacks. At under $10 per shot, LOCUST flips the cost advantage between offensive and defensive systems and provides the warfighter with an unlimited magazine. We believe our LOCUST directed energy solution is a game-changing capability, which is at the very early stages of a large and strong market adoption cycle. Building on this foundation, we introduced LOCUST X3 during the fourth quarter.

Thank you, Wahid. Before I turn to our results, I want to address the incremental goodwill impairment charge of $89 million and the related restated third quarter 2026 results, which we disclosed last week. This was an incremental charge related to the termination for convenience of the SCAR program. This was a non-cash charge and had no impact on previously reported current assets, current liabilities, revenues, cash used in operating activities, or our non-GAAP adjusted EBITDA or adjusted EPS measures. In addition, it does not relate to updated estimates of the long-term cash flows used in the goodwill impairment analysis. The full year results we are discussing today reflect the corrected impairment. In connection with the restatement, we identified a material weakness in our internal control related to the preparation and review of the goodwill impairment analysis. We have implemented enhanced controls and review procedures to strengthen this process.

Now, I will walk you through our fourth quarter and full year performance and fiscal year 2027 outlook, referring to 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 fiscal year 2027. Fourth quarter revenue reached a record $642 million, representing 31% organic growth year-over-year. Our strongest quarterly growth rate of the year, a 30% year-over-year increase on a pro forma basis. This performance was driven by exceptional demand across several of our key franchises, including Switchblade and Loitering Munitions, Titan Counter-UAS, Red Dragon one-way attack, and JUMP 20 Group three tactical systems. With nearly $2 billion of revenue in fiscal year 2026, AV remains one of the largest and most profitable defense technology companies. Our leadership rests on a diversified portfolio of proven systems, manufacturing excellence, and next-generation capabilities.

Turning to the quarter four results, we secured bookings totaling $572 million in new authorized contract value. Our book-to-bill ratio for the quarter four was 0.9 times, reflecting the exceptional quarter four revenue performance, partially offset by some timing delays of anticipated large program awards, while our trailing 12 months book-to-bill ratio stands at 1.4 times. Funded backlog closed at $1.2 billion, unfunded backlog at $1.5 billion, which now excludes SCAR contract values following the contract termination for convenience announced in March. Slide seven and eight of the earnings presentation shows the fourth quarter and full-year revenue by operating group for each of our two segments compared to pro forma fiscal year 2025 revenue. The Autonomous Systems, or AxS segment, recognized $492 million in revenue in the quarter, which represented a 49% increase over fiscal year 2025 pro forma revenues.

The precision strike and defensive systems operating group led with $333 million in revenue in the fourth quarter, which represented an 80% increase over fiscal year 2025 pro forma revenues, driven by strong sales in our Loitering Munition Switchblade family, one-way attack Red Dragon, and counter-UAS RF Titan products. Uncrewed Aircraft Systems operating group grew 17% year-over-year, led by JUMP 20-X, Puma, and P550. The space, cyber, and directed energy segments generated $150 million in the quarter four revenue, down 8% pro forma year-over-year, reflecting the SCAR termination in March and the U.S. government funding delays that disproportionately affect Cyber Mission Solutions operating group. Within the segment, the space and directed energy operating group sales grew 23% year-over-year, driven by strong demand for LOCUST directed energy counter-UAS systems. SCAR-related revenue was $31 million during fourth quarter, totaling $121 million for full fiscal year 2026.

Cyber Mission Solutions revenue declined at 26% pro forma, primarily due to discontinued programs and funding delays from the government shutdown. Moving on to gross margins. Slide 14 shows the adjusted product and service gross margins, including reconciliations to GAAP gross margin. Fourth quarter overall adjusted margins, gross margins were 34%, the highest quarter of fiscal year 2026, and 730 basis points above quarter two low, demonstrating strong sequential trajectory. This is lower than 40% in the fourth quarter of fiscal year 2025. As noted on prior earnings calls, the business composition of the combined new company has changed significantly with higher service mix, increased flexibly priced contracts, and several products in the early stages of maturity.

Quarter four adjusted product gross margins were solid at 44% due to the strong finish of the year in terms of sales volume, whereas quarter four adjusted service gross margins were lower at 2%. The reason for the decline in quarter four service margins was related to our Cyber Mission Solutions business, in which a service contract funding was delayed, and within our Precision Strike and Defensive Systems business, which experienced a one-time forward loss and EAC revision related to a legacy BlueHalo contract following the organizational indirect rate alignment tied to our integration strategy. Full year fiscal 2026 adjusted gross margin landed at 30%, in line with our original guidance. Moving on to operating expenses. Adjusted SG&A, which excludes intangible amortization and deal and integration costs, were $72 million versus $37 million the prior year. The increase is largely the result of the combination with BlueHalo.

As a percentage of revenue, adjusted SG&A in the quarter was 11% of revenue versus 13% in fiscal year 2025. Full year fiscal 2026 adjusted SG&A was 13% of revenue, down from 17% in fiscal year 2025, and in line with our projection reflecting BlueHalo synergy realization and operating leverage at scale. Quarter four R&D expense was $31 million, or 5% of revenue, compared to $25 million, or 9%, in the prior year. Full year fiscal 2026 R&D totaled 6% of revenue, down from 12% in fiscal year 2025, as projected. In terms of adjusted EBITDA, slide 15 of our earnings presentation shows the reconciliation of GAAP net income to adjusted EBITDA. Quarter four adjusted EBITDA reached $140 million or 22% of revenue, more than doubling from $62 million in the prior year quarter, driven by BlueHalo accretion and strong organic growth.

This represents significant margin expansion from 11% in Q3. Full year fiscal 2026 adjusted EBITDA totaled $286 million, exceeding the high end of our revised guidance range with a 14% margin. AxS segment adjusted EBITDA was $289 million for the full fiscal year 2026, with a 21% adjusted EBITDA margin reflecting strong revenue and gross margin contributions. This was partially offset by SCDE segment adjusted EBITDA, which was negative $3 million. Following lower revenue and the resulting under-absorption of fixed costs in both the Space SCAR program and the Cyber Mission Solutions business. Turning to non-GAAP earnings per share. Slides 13 and 16 show the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. Adjusted EPS reached $1.84 in Q4, up from $1.61 in the prior year quarter.

Full year fiscal 2026 adjusted EPS was $3.31, above the high end of our guidance range, and compared to $3.28 in fiscal year 2025. Moving to the balance sheet. At the close of the fourth quarter, our total cash and investments amounted to $713 million, a $65 million increase versus Q3 of fiscal year 2026. AV total debt composed solely of zero coupon convertible notes was $747.5 million, and a net leverage ratio of 1.2 times adjusted EBITDA. Cash flow rebounded in Q4 with $73 million of free cash flow, driven by strong operating performance throughout the quarter. This marks AV's first positive free cash flow quarter since quarter 1 of fiscal year 2025. During fiscal year 2026, working capital needs scaled with revenue growth, and our cash conversion cycle was extended, in part by the acceptance testing process of our Switchblade products.

During Q4 of fiscal year 2026, we've worked closely with the U.S. government to streamline the Switchblade acceptance process. We believe this procedural improvement will shorten our cash conversion cycle and improve working capital efficiency going forward. Turning to backlog. Funded backlog totaled $1.2 billion at quarter end, with $869 million or 73% attributable to the AxS segment, and $314 million or 27% to the SCDE segment. Unfunded backlog finished the year at $1.5 billion, which now excludes $1.5 billion related to the SCAR program, with $1.25 billion or 86% attributable to SCDE and $209 million or 14% to AxS. It's important to note that our unfunded backlog figures exclude ceiling values from sole source IDIQ contracts, such as the remaining balance of the $990 million U.S. Army Switchblade contract and the remaining balance on the $874 million UAS and counter-UAS FMS contract.

These contracts, amongst others, represent significant additional contract capacity beyond our reported unfunded backlog. Turning to fiscal 2027 guidance. Before I walk through the numbers, I want to emphasize that we manage our business on a full year basis. Given the nature of our contracts, award timing and customer acceptance testing can create significant quarterly variability that does not reflect the underlying business performance. We encourage investors to focus on our full year guidance and multi-year trajectory rather than quarter-to-quarter fluctuations. I also want to frame our fiscal 2027 outlook in the context of deliberate strategic investments we're making to capture long-term market expansion. We're accelerating commercialization across our product portfolio, expanding international sales capacity, and building production infrastructure to meet rising global demand for autonomous systems. We expect that these investments will drive revenue and EBITDA growth of approximately 10% year-over-year.

With that context, on slide nine of the earnings presentation, we provide our fiscal year 2027 guidance. As Wahid mentioned in his remarks, fiscal year 2027 revenue is expected to be between $2.125 billion and $2.225 billion, or 10% growth at the midpoint of our fiscal year 2026 results. This excludes any SCAR-related revenue. Adjusted EBITDA is expected to be between $305 million and $325 million, and non-GAAP adjusted EPS between $3.02 and $3.34. Near-term non-GAAP adjusted EPS remains relatively flat year-over-year due to the higher anticipated depreciation and cloud amortization expense from the significant capital deployed in fiscal years 2026 and 2027. Depreciation and cloud amortization expense is projected to increase by approximately $37 million or 77% year-over-year. A few details on the revenue cadence, adjusted EBITDA profile along with non-GAAP EPS distribution.

Thanks, Sean. We are encouraged by the strong level of funding for our opportunities and priorities in the defense budget. That said, the timing of that funding, particularly given the reconciliation process, remains uncertain. As a result, our revenue guidance reflects that we're not assuming funding arrives early in the government FY 2027. As stated earlier, we are initiating our FY 2027 revenue guidance between $2.125 billion and $2.225 billion, with adjusted EBITDA guidance between $305 million and $325 million, an adjusted EPS of $3.02 and $3.34 per share. In closing, we're very pleased with several results from this past quarter and the full FY 2026. We delivered a record fourth quarter and a solid fiscal year, capping a transformational year for AV.

We secured a series of marquee program wins, including LASSO, LRR, MRR, LRKI, and received several additional orders for franchise programs such as Red Dragon and Long Haul Laser Communications, each representing opportunities that could be more than a half a billion dollars in revenue for AV over time. We remain focused on execution, including advancing a more commercially oriented approach across the portfolio, while aggressively expanding capacity and scaling manufacturing to meet a growing demand that will drive profitability. Taken together, record financial results, a pipeline of significant and growing opportunities, and the manufacturing capacity to deliver on them. The long-term opportunity for growth and value creation has never been stronger for AV. We hope you will join us at our Investor Day on July 8th, where we will outline our growth priorities and long-term goals in greater detail.

I would like to thank our employees, shareholders, and customers for their continued commitment to AV and our mission. With that, Sean, Denise, and I will now take your questions.