Operator
Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to Arrow Q2 2025 Arrange Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Dan Jensen, Executive Vice President of Investor Relations. Please go ahead.
Thank you, Operator, and good morning, everyone. Welcome to Arrow Group Holdings Incorporated's second quarter 2025 earnings call, our first as a publicly traded company. We appreciate you joining us today and look forward to sharing an update on our progress and performance. With me on the call are Dr. Chiranjeev Kuthuria, our Executive Chairman, Captain Joe Burns, our Chief Executive Officer, and Dr. Maria Pilipiv, our Chief Financial Officer. Replay information for today's call can be found in our earnings press release issued earlier this morning. Today's call will include forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements relating to estimates and forecasts of financial and performance metrics, the intended use of proceeds from Arrow's IPO, the development, expected capabilities, potential customers, and regulatory approval of the jaunt cargo drone, Arrow's operational landscapes, demand for Arrow's systems and products, Arrow's plans for a manufacturing and engineering development facility, expectations concerning future products and developments, the market acceptance and opportunity of Arrow's products and services, and other statements that are not historical fact. In addition to our prepared remarks, our earnings press release, SEC filings, and a replay of today's call can be found on our investor relations website at investor.thearrowgroup.com. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. Forward-looking statements represent our management's beliefs and assumptions only as of the date made. Information on factors that could affect the company's financial results is included in its filing with the SEC from time to time, including the section titled Risk Factors in the company's final prospectus filed with the SEC on June 16, 2025, and the company's upcoming quarterly report on form 10 q for the quarter ended june 30th 2025. in addition during today's call we will discuss non-gap financial measures these non-gap financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with gap reconciliations between gap and non-gap financial measures and a discussion of the limitations of using non-gap measures versus their closest gap equivalent is available in our earnings release. With that, I'll turn the call over to our Executive Chairman, Dr. Chiranjeev Katheria.
Thank you, Dan, and thank you all for joining us. Today marks an exciting milestone, not just our first earnings call as a public company, but an opportunity to formally introduce Aero to the investment community and share the foundations of who we are, what we've built and where we're going. In a few minutes, Joe will share the progress from the quarter and more recently, and Maria will cover our financials. But first, a little bit about AeroGroup. We built an integrated aerospace and defense platform to serve the future of mobility, security, and training across high-growth markets. Our mission is to deliver disruptive, dual-use technologies through unmanned systems, pilot training, avionics, and electric air mobility, segments that are individually compelling and collectively transformative. Our platform is structured around four synergistic business segments, drones delivering fully autonomous GPS-denied unmanned aerial systems for military and commercial ISR missions. Avionics, a 20-year heritage business through Aspen Avionics, delivering over 14,000 systems with patented displays, sensors, and cockpit integration for both manned and unmanned aircraft. Training. Elite military and commercial pilot training with a focus on closed air support, ISR, and adversary air missions. We are a trusted contractor under the DoD's 5.7 billion CAF and CAS IDIQ. Electric Ear Mobility, pioneering eVitals and hybrid cargo drone solutions through our Jaunt Ear Mobility brand, using our patented slow rotor compound technology for safe, efficient, and scalable flight we currently operate across nine locations with over 151 employees 61 000 square feet of operational space and maintain iso 9001 and as 9100 certifications We are strategically located to serve both U.S. and international defense markets, with headquarters in Albuquerque, New Mexico, and major operations in Denmark and Montreal, where we can deliver directly into NATO without navigating ITAR constraints, providing a structural advantage in cross-border logistics and responsiveness. This is a differentiated model. Our businesses aren't just adjacent, but deeply integrated, sharing technologies, supply chains, and operational capabilities. This creates a tangible advantage in cost structure, speed to market, and platform development. this interconnected structure enables several key advantages. One, shared R&D and manufacturing capabilities across drone and E-Vital platforms. Two, cross-segment technology applications such as avionics, which are developed in-house and are being deployed across unmanned systems and advanced aircraft. Three, training infrastructure that supports our own fleet and serves as a proving ground for next-gen platforms. And four, supply chain overlap and cost synergies, enhancing margin potential as we scale. Across the board, our technologies are real, proven, and deployed. Take our RQ-35 Hedron, a battle-tested micro-ISR drone with NATO-grade capabilities. With over 500 missions per unit and operations in GPS-denied, high-threat environments, it has become a critical ISR asset for modern militaries. Backed by 200 million NATO-aligned bookings in progress and AS9100 certified facilities, this segment is scaling rapidly to meet global demand due to geopolitical events and increased defense spendings. In avionics, our Aspen avionics business provides a cockpit infrastructure for both manned and unmanned systems with 20 years of flight heritage and strong oem relationships aspen enhances safety and interoperability while supporting development of future military and civilian platforms our training division is another major differentiator with 10 years of sustained support to U.S. and allied defense contractors, including participation in the 5.7 billion Combat Air Force Commercial Air Service IDIQ program. Aero delivers elite closed air support and ISR training through our coastal defense brand. We operate six-wing aircraft and modified systems from two dedicated U.S. training centers and maintain a top-secret facility clearance, an important barrier to entry that reinforces our trusted status. Finally, in electric air mobility, we're advancing a hybrid drone and eVital strategy via our jaunt air mobility subsidiary. Earlier this quarter, we unveiled a new middle mile cargo drone at EAA Air Adventures Oshkosh and expanded into Cubex YMX Innovation Zone, a forward-leaning hub for advanced air mobility innovation. With our patented slow rotor technology, our system combines the vertical lift of a helicopter with the cruise efficiency of a fixed-winged aircraft. With this integrated platform as our key to long-term value creation, we're targeting a $315 billion total addressable market across all our business lines. We're already seeing robust adoption. Our 2024 revenues grew to 86.9 million, up from 43.3 million in 2023 and 17.1 million in 2022. We also have strong visibility with a 200 million plus bookings in progress. Our recent IPO is the natural next step in our evolution, which enhances our financial flexibility, elevates our brand with global customers, and positions us to accelerate execution across our pipeline. Most importantly, it strengthens our ability to innovate, scale, and deliver for our stakeholders. We are building Arrow for the long term. We have the right markets, the right model, and the right team, and we're just getting started. With that, I'll hand the call over to our CEO, Joe Burns.
Thank you, Chair Njeev. It's a pleasure to be with you all today. I'd like to echo Chair Njeev's enthusiasm, as this is a proud moment for the Arrow team, and I'm grateful to be speaking to you all today on our first earnings call as a public Arrow had an excellent second quarter. We made important progress across all segments, advanced key strategic initiatives, and strengthened our operational foundation as we entered life as a public company. Let me walk you through the progress in each of our core businesses. Starting with drones, our flagship R235 Hedron platform continues to grain traction globally. This quarter we announced a new U.S. manufacturing and engineering facility to support domestic demand, enable blue UAS certification, and fulfill Buy American requirements. The Hedron has now been deployed in more than 500 missions, many in high-threat GPS and comms-denied environments where its electronic warfare resistance, extended range, and elite optics deliver outside battlefield value. With strong interest from NATO-aligned nations, this is a a high margin, high growth business that we will look to expand further. We delivered over 75 million US dollars in drone related revenue in 2024, representing 167% growth and our backlog here remains robust. We're also advancing our drones as a service model, offering ISR cargo and emergency response capabilities for enterprise and defense customers. In parallel, we're building out Aerolink, a proprietary drone communication and data platform, which we view as a long-term infrastructure asset across autonomous flight operations. In training, we recently completed a specialized 90-day naval special warfare deployment and continue to operate under multiple IDIQs with the U.S. Department of Defense. We deliver elite close air support and ISR training through our coastal defense brand using a fleet of NATO-certified aircraft and maintain a top-secret facility clearance a meaningful differentiator in this space that should not be overlooked we're an active bidder on the 1.6 billion u.s dollar close air support segment of CAF-CAS contract and have a reliable low-cost high utilization model that makes this a compelling alternative to traditional adversary air providers we believe the growth opportunity and training is not only durable but accelerates our access to broader defense contracts and serves as a valuable R&D testbed across the platform. In electric air mobility, when we unveiled a new medium-lift cargo drone at EAA AirVenture Oshkosh, capable of carrying 250 to 500 pounds over 200 miles, the subscale platform is built on our patented slowed rotor compound technology, providing the vertical lift of a helicopter and the cruise efficiency of a fixed-wing aircraft. the cargo platform is set for commercialization in 2027 and we've already secured regulatory engagement and site access in canada's ymx innovation zone which offers a faster certification path than comparable programs in the united states this cargo first strategy de-risk our road map to passenger evtol and opens use cases in military logistics medical delivery, and last-mile air freight. Finally, Avionics continues to be the heartbeat of interoperability across aero. Aspen Avionics has delivered more than 14,000 systems to date, and we're actively advancing development of next-generation displays, sensors, and GPS solutions for both manned and unmanned aircraft. The open architecture of our systems and their proven integration of drones, training aircraft, and future eVTOL platforms creates a feedback loop of innovation that is core to our strategy. We're also pursuing upgrades that reduce installation costs and enhance flight safety, contributing to strong OEM and aftermarket demand. Aspen is an asset-light, cash-generative business with a long runway for margin expansion and category leadership. Taken together, these milestones reinforce what Aero represents, operational execution, technological differentiation, and a clear path to long-term growth. As we look ahead, we are entering a period of strong momentum and rising demand across our core markets. NATO defense spending is accelerating with a heightened focus on autonomy, ISR, and rapid response capabilities. U.S. customers are seeking domestic solutions with field-proven reliability and production flexibility, and commercial and civil air mobility infrastructures beginning to mature, particularly in areas where cargo delivery precedes passenger applications. Let me dive a little deeper into this. NATO defense budgets are expanding, with an increasing share allocated to autonomous and unmanned systems. Only 23 of the 32 member countries currently meet the 2% GDP defense spend target, and there's a strong momentum to raise this to 3% or higher. Meanwhile, the US has pushed for a 5% target from its allies. That shift alone creates a long-term multi-hundred billion dollar opportunity across our core verticals our addressable market is estimated at 315 billion dollars us spanning isr drones pilot training avionics upgrades and air mobility solutions and our platform is built not just to access that market but to expand into it quickly and credibly in 2024 we've delivered 86.9 million us dollars in revenue up from 43.3 million U.S. dollars in 2023 and 17.1 million U.S. dollars in 2022. That's 126 percent CAGR driven by real-world adoption of our technology and discipline execution across the business. We enter our public life with bookings in progress of exceeding 200 million dollar U.S. supported by strong international defense demand and near-term U.S. opportunities. We recently announced plans to expand our U.S. footprint by adding a new manufacturing and engineering development facility dedicated to producing our flagship drone product the rq35 hedron here in the u.s this new site will enable arrows to scale production efficiently compete for american-made defense and commercial opportunities and serve as a hub for future innovation in both commercial and military markets as part of our u.s expansion plans we are currently in the process of blue uas certification which will enable us to manufacture and sell the rq35 hedron to the department of defense we conservatively estimate that the full process to take six months but recent announcements by the department of defense expect to significantly expedite this timeline we've already completed the framework process and are near complete with the foundry and on-ramp stages we anticipate obtaining certification as soon as this year and are eager to begin selling our battle proven drone platform to the u.s military In the second half of 2025, our priorities are clear. Complete blue UAS certification and expand U.S. drone production. Convert backlog to revenue with continued program delivery. Accelerate strategic partnerships, particularly in training and air mobility. Maintain disciplined investment across research and development, manufacturing, and certification. And finally, to deliver on the promise of our public listing with consistent execution and transparency. With that, I'll turn the call over to Maria to walk through the financials.
Thank you, Joe, and good morning, everyone. For the second quarter of 2025, revenue was $24.6 million USD, an increase of 151% compared to $9.8 million USD in the prior year period. Growth was driven by continued execution across our core segments, drone, training, and avionics, as we extend existing contracts and begin to scale with platforms. Growth profit for the quarter was $15 million, up from $5.8 million last year. Growth margin was 61.2%, reflecting a favorable product mix and disciplined operational execution. We reported net income of $5.9 million USD compared to a net loss of $5.6 million in Q2 2024. The second quarter EBITDA was $18.9 million USD, a record for error. Adjusted EBITDA was $4.7 million USD compared to $0.6 million USD in the prior year quarter. We continue to remain focused on execution as we invest in innovation, infrastructure, and growth. On a segment basis, we continue to see significant revenue growth in drones driven by increasing interest for our RK35 Hadron platform. Given recent announcements around accelerating drone deployment, particularly in the U.S., we have strategically decided to focus capital on scaling our drone business in response to growing market demand. For training, we recorded high revenues due to a specific government contract related to ground target vehicles. We also believe there are opportunities to grow our training revenues by acquiring additional aircraft to conduct new programs. For avionics, we experienced softer sales given the strategic decision to delay investments in R&D and higher margin products for the general aviation and multi-engine aircraft markets, while prioritizing resources towards our drone segment. However, we expect to resume investments in both our training and union business now that we have completed our initial public offering. Looking ahead, we expect positive momentum headed into the second half of this year due to increased defense spending globally, particularly for drones and drone-related technologies. Turning to free cash flow and liquidity, we recorded positive net income for Q2 2025, which was affected by non-cash adjustments related to debt extinguishment and fair value adjustments of contingent consideration in world liabilities. Free cash flow were also impacted by increases in working capital related to growing our business. As of June 30, 2025, we had $40.3 million USD in cash and cash equivalents. Following our IPO, we have significantly reduced our total debt and have positioned our balance sheet to support continued execution and growth. I want to briefly discuss the visibility we have across our drones and training businesses, which will contribute significant revenues in the years to come. As we have mentioned before, we have a line of sight to approximately 200 million of NATO bookings in progress, which will be converted into revenue over the next 18 months. Commercial agreements with individual NATO member countries, many of which we have strong relationships through demonstrating the high performance of our RT-35 hadron. We continue to see strong demand for our drone platform and believe there are significant opportunities to grow our bookings by expanding into uncertain markets, introducing new drone products and services and improving upon our existing platform on the training side we have been selected as one of seven companies for the 5.7 billion idq contract to provide pilot training services for various branches of the us military specifically we are focused on 1.6 billion of that contracts related to close air support services looking forward we remain focused on scaling our operations converting our bookings to revenue and driving long-term shareholder value with that
i'll turn it back to joe thank you maria i want to leave with a few closing thoughts arrow is a purpose-built company designed to drive innovation and support emerging markets we're serving real customers and real world requirements in markets where reliability performance and trust are non-negotiable we've built a platform that is both agile and scalable and we're executing a strategy that combines near-term performance with long-term vision. Our public debut marks the beginning of a new chapter, but our mission remains the same, to deliver the technologies, systems, and training that define the future of aerospace and defense. Thank you again for joining us today, and we look forward to keeping you updated on our progress in the quarters ahead. With that, operator, we are ready for questions.
At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad we will pause for just a moment to compile the Q&A roster your first question comes from the line of calling Canfield with Cantor your line is open hey thank you for the question maybe going through the qualified drone pipeline is you kind of talk about how you see demand shaping up in the US versus Europe appreciate that the blue UAS certification commentary, but where do you think kind of demand signals are the strongest in terms of the next incremental orders as we look forward?
Thanks, Colin. And maybe Joe, if you wanna take that.
Hey, Colin, good morning. So, you know, demand signals, to answer your second question first, highest demand has been, I think we've seen so far for small and medium class tactical drones, primarily for ISR. intelligence surveillance reconnaissance missions particularly from the nato expansion orders and and other allied defense programs europe so far continues to lead to current revenue contributions but the u.s demand is accelerating and we've sold our units to both asia pacific as well as north america but the pipeline does remain strong we have active bookings across nato customers other European defense agencies in some new U.S. defense opportunities. We've seen incremental inbound interest from U.S. agencies following DOD's slide 10th announcement about drones. And Europe continues to lead to current revenue, but as I mentioned, U.S. demand is accelerating. And we've also sold units into Asia Pacific as well as North America.
Got it. And then maybe focusing on avionics, if you could just talk a little bit about the growth engine there, specifically maybe Maybe talking through kind of how we should think about the partnership with Joby, as well as by extension, the relationship with L3Harris, as we kind of think about not just selling into like scaling platforms, right, but the concept of doing more kind of like prime outsourcing type work as we get through the next kind of years and few years of growth. sure you know our avionics growth is is being driven by both the oem integration that is you know selling to brand new manufacturing and new platforms as well as retrofit we've traditionally sold bulk of our equipment into retrofit programs and we are as you referenced
working with jovi aviation we had an announcement on that earlier this week that really positions us as a trusted outsourcing partner for mission-critical avionics systems, and it opens opportunities in larger defense and advanced air mobility markets as well, beyond just the Joby positioning.
Got it. And then maybe, Maria, if you could talk through the working capital building blocks through the year and kind of how we should think about the split of working capital consumption versus production in the next kind of six months.
So our working capital needs are expected to increase in the second half of the year, and just due to a high accounts receivable from around Q3 and Q4 for SkyWash deliveries. And we will expect inventory buildup to support drone and avionics production for our new facility. The management of our accounts cable will be aligned with supply terms and cash input.
Operator
Your next question comes from the line of Andre Madrid with BTIG. Your line is open.
Hey, good morning, guys. How are you? Good, thanks. You know, with the strong second quarter performance, I guess just how should we think about things trending through the bounce of the year more broadly? Can you provide any outlook update or anything?
Andre, I think, you know, we can have maybe Joe and Maria. Joe gave on the earnings, his earnings call, what he thinks are the priorities. And Joe, if you want to take that and then maybe follow up by Maria, just Joe in general.
I mean, we're going to be putting near-term CapEx, it's very targeted right now, and the largest of our investments are going to go to our new manufacturing facility, which is going to serve for U.S. drone manufacturing and U.S. engineering help for that as well. We have other spend, though, directed to facility upgrades. We're looking at new tooling for drones, drone production, and also sending money into our selective, you know, dollars into the training division to really qualify for more and more of the IDIQ task orders. And that would be aircraft that are NATO-certified and allow us to operate with more vigor into some of these IDIQs. Most of the gross investment is still going to be reflected in R&D rather than large-scale assets. It allows us flexibility to scale to meet the backlog of demand. We're continuing to target investments in some core areas with drones, midsize models for DOD applications, and then obviously to become blue UAS certified to meet the compliance for that on the avionics side we're going to spend uh invest into systems that really put us into higher-end general aviation and multi-engine platforms and we also as referenced early have secured a a contract for a large evt evtol oem then the electric air mobility side it's really about focusing on our cargo platform our hybrid cargo drive and that would be the development and certification of that. So those all kind of lead into, hopefully that answers some of your questions, Andre.
Yeah, and then I think, Maria, did you want to maybe add on actual financial targets that we should kind of be thinking about? I mean...
Andre, certainly we're not giving guidance in terms of the, for the market with our financials.
Yeah, yeah, yeah, no problem. And then I guess just focusing on the build-out Sorry, there's a feedback I got. You know, with the build-out at the Phoenix facility, I mean, how many drones do you reckon you could actually produce this year? And how are things progressing currently, and is there any possibility that Blue UAS certification might be able to pull to the left a bit?
It's a great question. A lot of the Blue UAS certification depends on what sort of the new process is. I think everybody on the phone is aware there was an announcement here about a month ago. about revamping the whole process to streamline it so there's always that possibility we certainly would welcome any changes that could pull it into the left just a little bit but you know you mentioned the phoenix facility and we just we just announced a 10q that we we did secure phoenix facility to allow us the space our intention is to to make that both an as9100 facility that does take some time we've done it before there are other processes in our other facilities but But we will make that an AS-9100, and it allows us to manufacture, you know, at least a majority of the airframe for drone production in the United States so we can sell within the United States as well. You know, this will help us with the compliance for U.S. mandates and further support all that Blue UAS. So we have already started the Blue US process, and we are underway with sort of a framework around that. And then bringing the manufacturing here should help us expand into that area quite a bit. So it depends on what the new compliance matrix looks like. We know what the old one is, and we think this one will be even a little bit more flexible than that.
And, Andre, just to give you a summary of what, you know, Joe and Maria were talking about, I think you saw our results were better than expected, and a lot of that is driven by the geopolitical macro environment that Joe spoke about with increase in NATO spending to 5 percent, new executive order, and, you know, the U.S. beginning to focus on building out their drone capabilities. And as you mentioned, our facilities, increasing our manufacturing capabilities in the U.S. So, you know, I think we're very well positioned, you know, going forward to grow all the segments of our business. I think, you know, our Q2 was, you know, our performance was better than expected. based on the global, you know, geopolitical and macro, you know, aspects of where we are and our performance of our HQ35 drone business. And now we're continuing to really build for the future. And as, you know, as Joe mentioned, I know our priorities are also strategic partnerships for training and air mobility, focusing on the John cargo.
Got it. Got it, Charanji. Very, very helpful. And then one more really quick question, if I could just squeeze in. Can you just give an update on the exact number of nations that you are currently selling to or in the process of trying to work with?
Joe or Maria? Yeah, I'll start in a little bit, Maria. But as mentioned earlier, there are 32 NATO countries right now, and we are selling our RQ35 directly into those NATO countries. Um, uh, possibly 20, 25 of them are, you know, upping their, their contribution level for their GDP into, into producing and, and, and, and acquiring more aircraft. So, uh, we've got, uh, we've announced there are public, there have been public announcements about multiple countries already. I'm not sure of the detail, uh, 100 that we're allowed to get into because some of the stuff is classified, and once the governments release information, we certainly can talk about it and we'll have related, but there are multiple NATO countries that we're currently involved in. Maria, do you want to talk about any more of that?
I would just add that outside of NATO countries, we are focusing on Asia Pacific. We already started selling there, as well as looking to North America. We've got an order from North America, and we're actively working on increasing things at the end of the year, especially having a facility in the U.S.
Got it. Very helpful. I'll leave it there.
Operator
Thanks, Andre. Your next question comes from the line of calling Canfield to Cantor. Your line is open.
Hey, just one quick follow-up. Maybe talk through – you mentioned avionics as a growth engine for the business. Maybe kind of talk through how you think about TNSS versus GPS and essentially how the team is participating or how the team thinks about alt-PMT as kind of a driver of both the OE side of that demand algorithm as well as the retrofit side of it. Thank you.
Thanks, Colin. I'll field that one. So GNSS, actually GPS is sort of the U.S. branded name run by the U.S. DOD for the original navigation technologies. GNS is sort of the global award for GPS, amongst other systems that are out there, Galileo, Baidu, et cetera. So we have multi-constellation receiver set that can pretty much look at every nav signal that's available. So we have a broadened horizon. It's a great question because, as we see right now in the Ukraine conflict and in our operations there, the entire country of Ukraine is pretty much either jammed or spoofed from GPS. So alternative signals are really important. We have one of the few products that can actually navigate through that system in that challenged environment without any real issues on our airframe. So having that capability, and that is truly alternative PNT, as we call it. So PNT stands for position, navigation, and timing for those on the phone that weren't sure of that. But we're very, very engaged in that through high-level engagements with the U.S. government as well as foreign agencies and have a technology that can receive multiple receiver sets. And as with anything that's jammed or spooked, the more satellites and constellations you look at, you have a better chance of getting a good solid signal. And our current GPS receiver set is really a true GNS receiver set where it actually looks at multiple constellations. So we've got a fantastic product. We've proven in battlefield deployments that we can fly through a lot of those types of environments. So really excited about the future in that because it is where, you know, we see all sorts of signaling going. So we're in a good, strong position to be able to, you know, build products that can really kind of look through all the noise and give you good navigation and timing signals.
Great comment. Thank you.
Operator
Ladies and gentlemen, that concludes today's call. Thank you for joining. You may know this could not.
