AIRO Group Holdings, Inc. (AIRO) Q3 2026 Earnings Call Transcript

Thank you for standing by. My name is Erica, and I will be your conference moderator today. At this time, I would like to welcome everyone to the ARO Q3 2026 earnings 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, please press star one to raise your hand. To withdraw your question, press star one again. Thank you. I would now like to turn the call over to Jack Senth, Investor Relations at Aero. Please go ahead.

Thank you, Operator, and good morning. Welcome to the Arrow Group Holdings Incorporated Third Quarter 2026 earnings call. 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. Cheranjeev Kathuria, our Executive Chairman, Captain Joseph Burns, our Chief Executive Officer, and Dr. Maria Pilipib, our Chief Financial Officer. 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 ARRO's 2026 outlook. 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 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 the company's most recent annual report on Form 10-K and other filings with the SEC from time to time. 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. We have also posted our earnings presentation on the Investor Relations section of our website. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalent is available in our earnings release. Additionally, we plan to discuss drone segment backlog and opportunity pipeline, definitions of which can be found in our earnings release. With that, I'll turn the call over to our executive chairman, Dr. Cheranjeev Katheria.

Thanks, Jack, and thank you all for joining us today. Arrow delivered another strong quarter with results exceeding our expectations despite the anticipated sequential decline from the second quarter. Strong execution across the business and continued customer demand. Drove better-than-expected performance, reinforcing the momentum we're seeing across our portfolio. Looking ahead, and as Maria will discuss in her section, we are reaffirming our full-year revenue growth guidance of 15% to 25%, though now guiding towards the lower end of the range. We are also seeing solid growth in our drone's backlog, growing to more than $200 million, including U.S. drone backlog. We also announced that our total opportunity pipeline across all four segments now sits at $1.5 billion. On the U.S. side. Aero secured its first U.S. orders for the RQ35 and RQ70, both important milestones as we continue expanding our presence in the U.S. market. We also continue to advance our broader product roadmap. The RQ70 remains on track to enter production in January 2027, while development of the JC250 and the JX250 continues to progress. Combined with the RQ35 and the Zentra camera suite, these programs support our strategy. of building a more diversified, vertically integrated, unmanned systems platform. Third quarter was another quarter of solid execution. And we believe the progress made during the period positions us well to continue expanding our customer base, diversifying our revenue streams, And driving long-term growth. With that, let me turn it over to Joe to discuss our strategy and operational highlights.

Joe. Thank you, Chiranjeev, and thank you all for joining us on today's earnings call. I'm pleased to report another strong quarter with results exceeding our expectations and reflecting solid execution across the business. As we discussed on prior calls, we anticipated third quarter results would be lower sequentially than the second quarter due to the timing of the program deliveries and the inherent variability of our business. Despite this expected sequential decline, third quarter performance exceeded our expectations, underscoring the strength of demand across our portfolio and our team's ability to execute. Based on our year-to-date performance and outlook for the remainder of 2026, we are reaffirming our previously issued full-year revenue growth guidance of 15% to 25%. Maria will provide additional detail on our financial performance later in the call. Beyond this, we achieve several important strategic milestones that further strengthen our position in the U.S. market. First, the RQ35 during the quarter was selected under the framework agreement with the NATO Support and Procurement Agency, or NSPA. This agreement enables participating NATO nations to procure the platform through a streamlined acquisition process, expanding our reach across allied defense markets, and creating additional opportunities to support long-term international growth. Second, during the quarter, Arrow was selected to participate in Phase 2.5 of the Drone Dominance Program at Camp Grayling. On top of that, we also secured our first U.S. orders for the RQ35 and the RQ70, a significant milestone that validates both the platform and our broader growth strategy. Collectively, these achievements underscore the progress we are making to expand our market presence, deepen customer relationships, and drive long-term growth. On the heavy cargo drone side, our wholly owned Canadian subsidiary entered into a strategic collaboration with Vertico Mobility to support the development of autonomous cargo logistics operations in Canada using the JC 250 VTOL unmanned cargo drone. The LOI contemplates an initial deployment of 10 aircraft, which would represent an estimated value of approximately 15 million to 20 million based on current indicative pricing. Initial operations are expected to focus on supporting logistics services for First Nations communities in Quebec. We believe this collaboration demonstrates the growing commercial potential of the JC250 platform. Now let me provide an update on our portfolio and strategic positioning. At Arrow, we continue to build a diverse and expanding portfolio of products and services with the focus of capturing opportunities across the evolving drone market. We are pursuing this growth through a combination of internal product development and strategic partnerships. A key priority for us is reducing quarterly variability by broadening both our domestic and international customer base. For instance, with our RQ35 platform now Blue UAS certified, we are already seeing the benefits of this achievement, as demonstrated by a recently announced U.S. Order. We believe this certification meaningfully enhances our position within the U.S. defense market and expected to support additional opportunities in the quarters ahead. Developments such as these reinforce our confidence in the long-term growth trajectory of the business. Supporting our efforts to diversify the business and reduce revenue variability, we continue to expand our portfolio of products and capabilities. This includes the RQ70, which remains on track to enter production in January 27. As well as the Zentra camera suite in our future JC and JX 250 aircraft platforms. As these products progress through development commercialization, we expect them to broaden our addressable market, create additional revenue streams, and contribute to a more balanced and predictable business over time. Our portfolio continues to evolve as we build a more integrated and differentiated UAS platform. The RQ35 remains the foundation of that strategy. As a proven combat tested system designed for ISR missions and contested environments, the platform has demonstrated strong performance and resilience in the field. Our product portfolio was recently strengthened with the addition of the Zentra camera suite. By bringing advanced imaging and sensor technology in house. Arrow is becoming increasingly vertically integrated, allowing us to control more of the mission-critical technology stack while enhancing performance, customer value, and long-term margin opportunities. The combination of our aircraft platforms, embedded technology, and proprietary sensor capabilities creates a more compelling offering and further differentiates Arrow in the market. Looking ahead, the next major step to our product roadmap is the RQ70. Built on years of operational experience and lessons learned from the RQ35 platform, the RQ70 is designed to deliver significantly enhanced endurance, range, and mission flexibility while leveraging our existing manufacturing footprint and supply chain. Importantly, the program remains on track, and we are reaffirming our expectation to begin production in January 27, just a few months from now. Further on the horizon is the JC and JX250. On this front, we are still progressing towards first flight soon, where the team has been ramping up the supply chain and assembling the vehicle. Of note, we are being very disciplined in moderating overall spending for this dual-use platform. Importantly, the addition of products such as the Zentra camera suite, the RQ70, and the JC slash JX250 platforms expands our addressable market and creates new opportunities to diversify our customer base across both defense and commercial end markets. This diversification reduces reliance on any single customer, program, or procurement cycle and supports a more consistent revenue profile over time. The combination of our aircraft platforms, embedded technologies, and proprietary sensor capabilities creates a uniquely integrated solution set that enhances customer value and further differentiates aero in an increasingly competitive market. These new launches, combined with our already established product base, collectively demonstrate the progress we are making in building a more capable, integrated, and diversified business. While there's still a significant work ahead, these developments represent important steps towards expanding our product ecosystem, increasing customer touch points, and creating a more durable and less variable revenue profile over the long term. Turning to avionics and electronics, revenue is modestly lower year over year due to continued softness in the general aviation market. Despite these near-term headwinds, we continue to view this segment as a valuable strategic asset within aero. With our avionics operations and growing U.S. drone businesses now consolidated in Phoenix, we have established a stronger foundation for product development, operational efficiency, and collaboration across the organization. We expect this closer alignment to begin generating meaningful synergies in the coming quarters. As we expand our unmanned systems portfolio, we also see increasing opportunities to leverage our in-house avionics capabilities across multiple platforms. This supports our long-term broader strategy of deeper vertical integration, greater supply chain control, and long-term margin improvement. Lastly, we continue to assess strategic options for our training business and anticipate providing an update by year-end. We view the segment as a valuable asset with meaningful long-term potential, but one that requires substantial investment to fully capitalize on its opportunities. As we evaluate the best path forward, our capital allocation and strategic priorities remain firmly focused on growing our unmanned systems platform and advancing our position in that market. Overall, we are encouraged by the progress we made during the third quarter, delivering results that exceeded expectations while continuing to advance several key strategic initiatives across the business. From securing our first U.S. order and expanding our U.S. market presence to advancing the RQ70 toward production and further integrating our technology stack through Zentra and our avianics capabilities, we continue to execute on our strategy of building a more diversified, vertically integrated, and scalable platform. While we remain in the early stages of this journey, we believe these milestones validate our approach and strengthen our position for long-term growth. We also remain disciplined in our approach to capital allocation. We continue to evaluate inorganic opportunities that can enhance our capabilities and contribute to a more balanced and predictable revenue profile over time. With a strong balance sheet, we have the flexibility to pursue strategic opportunities when they align with our long-term objectives and create value for shareholders. In closing, our focus remains unchanged, delivering mission-ready solutions, expanding our technological capabilities, and positioning Arrow for sustainable growth. None of these would be possible without the dedication of our employees and leadership team. Their expertise, commitment, and execution continue to be the foundation of our success. And as we strengthen the organization with additional talent, we believe Arrow is increasingly well-positioned to capitalize on the opportunities ahead. With that, I will turn it over to Maria, who will walk you through our financial results in more detail. Maria?

Thank you, Joe, and good morning, everyone. For the third quarter of 2026, revenue was $17.5 million compared to $6.3 million in the third quarter of 2025. This represents growth of nearly 180% year over year. Revenue for the quarter was ahead of expectations, driven by outperformance against expectations in our drone segment, partially offset by underperformance in avionics and training. Gross profit for the quarter was $9.9 million, representing a gross margin of 57%, compared to a gross profit of $2.8 million and a gross margin of 44% in the prior year period. The year-over-year improvement was driven primarily by a more favorable revenue mix, including higher-volume drone sales, which carry stronger margins. Gross margin performance during the quarter was in line with our expectations. Operating loss for the quarter was $13.1 million versus a loss of $12 million in the third quarter of 2025. As percentage of revenue, operating expense margin improved versus the same period last year, and we remain disciplined on costs while continuing to invest selectively in the infrastructure needed to support our growth. Our third quarter net loss was 12 million versus a net loss of 8 million in the third quarter 2025. Third quarter, 2026, adjusted EBITDA was a loss of $7.5 million compared to a loss of $8 million in the prior year period. Adjusted EBITDA margin improved substantially to negative 43% versus a negative 128% a year ago, reflecting strong revenue growth and improved operating leverage as we continue to scale the business. While we remain in investment mode, this performance demonstrates meaningful progress in our cost-control efforts, improving our bottom-line performance. We retain flexibility to adjust our spending pace, up or down, as conditions warrant. Right now, though, we believe the right path forward is deliberate, efficient investment to put the required infrastructure in place to support our next phase of growth. Turning to cash flow and liquidity. As of September 30th, we had $37.8 million of cash on the balance sheet and approximately $1.2 million of debt. Cash generation during the quarter benefited from collection of nearly $30 million of accounts receivable, which was partially offset by the line of credit repayment of approximately $5.5 million related to Skywatch. We continue to maintain a strong balance sheet and believe we are well positioned to fund our ongoing growth and operational initiatives. As of November 5th, 2026, our drone backlog exceeded 200 million, including U.S. opportunities. The majority expected to convert to revenue over the next 12 months. Our backlog represents business that we reasonably expect to recognize as revenue within the coming year, but we do see this as conservative estimate. Note that we are including U.S. opportunities in a drawn backlog for the first time this quarter. In recognition of the ramp-up of our U.S. manufacturing efforts, while U.S. programs currently make up approximately one quarter of our total backlog, we are still in the early stages of capturing this opportunity and see substantial runway for growth across both domestic and international markets. Beyond backlog, our pipeline continues to expand, reflecting increasing customer engagement across both US and allied defense markets, as well as growing interest in our expanding portfolio of drone solutions. As of November 5th, 2026, our total opportunity pipeline across all four segments stood at 1.5 billion, underscoring the significant long-term growth opportunities ahead and reinforcing our confidence in the demand environment discussed throughout today's call. Turning towards guidance. Based on our current visibility, we are reiterating our full-year revenue growth guidance of 15% to 25% year-over-year, though we now expect to be at the lower end of the guidance range due to revenue variability that is inherent in our business model. Let me provide some additional context on our outlook. First, some orders we had originally expected to receive in 2026 have moved into 2027 as discussions evolve towards larger contract opportunities, resulting in longer procurement timelines. And given the international nature of our business, foreign exchange remains a factor in our outlook. We are seeing greater effects headwinds in the second half, as expected, and have incorporated that impact into our outlook and remain confident in our full year guidance range. We continue to anticipate modest gross margin compression relative to 2025, consistent with the low single digit range we outlined previously. We continue to expect full year 2026 adjusted EBITDA in the negative mid to high 10 millions, with a quarterly cadence expected to broadly follow revenue. As we look ahead, we believe Aero is entering an important phase of its evolution. Over the past several quarters, we have focused on building the foundation for a larger and more diversified business through investments in new products, manufacturing capacity, and vertical integration. Those efforts are beginning to take shape. With the RQ70 approaching production, the rollout of the Zantra camera suite and additional platforms such as the JC and GX250 advancing through development. We are steadily expanding both our product portfolio and our addressable market. Over time, we expect those initiatives to create a broader mix of revenue streams, improve visibility, and reduce dependency on any single program or product. Fiscal 2026 remains an investment year as we position the company for its next stage of growth. We're investing where we see the greatest long-term returns while remaining disciplined in how we deploy capital and manage costs. We believe the combination of gross investments and operational discipline positions Aero well to capitalize on the opportunities ahead and deliver sustained value for shareholders. With that, operator, we're ready for questions.

We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brett Lindsey with Mizuho. Your line is open. Please go ahead.

Hey, good morning, all. I wanted to come back to the $1.5 billion total opportunity pipeline. I guess as you look across those opportunities, What is the win rate you're assuming or expecting going forward? And I guess what was historically observed? And then is there any way you can drill down on the composition of that pipeline between the U.S. region and the international markets?

Hi, Brad. Good morning, and thank you for the question. Right now, 1.5 billion has been, as we discussed with Backlog, we are not breaking out different segments of pipeline, but in terms of a pipeline overall, it's a company-wide that includes our products and opportunities we're chasing. From what we're seeing currently, we expect US market volume to be equal to the rest of the world, and our growing pipeline is made up of the opportunities that we expect to reasonably convert to backlog. So if you think about the staging, this is our visibility in the next 12 to 24 months.

Okay, great. Thanks. And then the $200 million of drone backlog is obviously substantial relative to the revenue basis. As we think about converting that into revenue, how much additional manufacturing capacity do you need to serve and monetize that? Can the existing footprint support it at these levels? Is there a step up in more investment? And then, Marie, if you could just clarify the high team's million dollars. Mixed comment you made and what that pertains to.

Good morning, Brett. It's Joe. I'll address the first part of the question, which is the capacity. We have spent the last several quarters building our factory capacity up so we could handle this volume of orders. For instance, in Arizona, we can produce 100 airframes per month. So the capacity is there to produce everything that we've discussed on the phone today.

And then, Brad, in terms of conversion with our backlog, our backlog right now includes U.S. opportunities, and therefore, it's harder to determine than win rate. However, we've seen a good conversion of our pipeline to backlog with our international markets, and therefore, our numbers are more conservative when we look into U.S. side opportunities.

And I'd like to reiterate, too, what Maria said earlier about the U.S. size versus the international size. Obviously, we started out as an international company with our manufacturing in Denmark and have moved into the U.S., somewhat in reverse of most drone companies. We think that gives us a pretty amazing advantage for capturing areas outside of the U.S., but we're very excited with the U.S. order frame as we've, you know, been for the last, what, nine months or so have been doing exceptional amount of demos for the U.S. government, getting our name out there and getting obviously the blue U.S. certification and securing our order stream. So we're excited about the growth potential in the U.S. as well as the international.

Got it. Thanks so much. I think your comment was about the mid-teens. I was relating to our adjusted EBITDA guidance on dollar basis. We will be tracking similar guidance that we've had so far.

Okay, got it. Thanks so much. Best of luck.

Thank you. Your next question comes from the line of Craig Irwin with Roth Capital Partners. Your line is open. Please go ahead.

Good morning, and thanks for taking my questions. First, I should say congratulations on the solid results this quarter. It's nice to see the healthy margins and the good revenue production. I wanted to ask specifically about the $54.5 million in orders booked this quarter. Can you maybe give us a breakdown of U.S. versus international in that mix? And then, can you maybe comment about the contribution from the RQ70? You know, you did mention last quarter that it was a very small piece of the existing backlog. Your backlog's grown substantially, and I guess we're approaching the start of production there. And then, any other color as far as other business lines that you might be able to offer us regarding these bookings this quarter?

Greg, thank you for the question. We're currently not providing a breakdown per product or in more detail on this segment. However, roughly 75% of our backlog comes from international drone sales, and about 25% is coming from expected U.S. deliveries.

Okay, indeed. Greg, I'm sorry, go ahead, Greg.

Sorry, Maria, do you have a number for last quarter, with the 163?

We also were not breaking it down at that point.

Okay, and I apologize, Joe, I interrupted you.

No, no problem. I appreciate that. I just want to give a little color on the RQ70. You know, that is included in our first U.S. order, so we're excited about that opportunity. Clearly, we see the RQ70 product line is a whole new differentiated product line for us where we can get out and really compete against some of the longer flying time, higher-end ISR platforms and compete in a very substantial and meaningful way against some of those that are out there. So I'm particularly very excited about the RQ70 and what we're going to be able to do with that in the very near future.

Excellent. And then, Joe, I wanted to ask a little bit about the commercial opportunity for the Aero, right? So... The fire departments, police departments all across the country are looking for ways to give their services to local communities in a more efficient manner. Fire departments could use intel to more appropriately fight wildfires or surveil different districts and then obviously look for lost people when they're hiking in the mountains or something. You know, in police departments, you know, drones would be a much easier and cheaper way to help bring in suspects, reduce risk to the population. What are you seeing as far as the opportunity there? I mean, can you maybe update us on your engagement approach? How do you see this market taking shape for Arrow Group?

Thanks for the question, Craig. It's a great one. Obviously, I'm excited about that, doing some part-time work in volunteer fire work myself. So it's an area that touches home for me. We are in active discussions with several groups within fire at this point in time, and also with police departments to expand our product coverage into the commercial market. And what that does, obviously, is it also sort of levels out our quarterly revenues as well. So we're excited about all those opportunities. But you mentioned some of the key ones, right? Lost people type of tracking identification, security support for large events, spotting wildfires, for instance, keeping the RQ35 platform in the air continuously, rotating airframes for up to three hours per flight. Be able to spot wildfires is something that we've had a lot of agencies and civilian agencies actually discuss interest in this product. So it's exciting times for that. This fits right into the model as the traditional quadcopter, sort of the short flight time duration, has always been a little bit of a hindrance. We know what we're capable of doing with, say, the RQ35. So it's a fantastic time to jump in, feet full ahead, and we are having those discussions as we speak.

Okay, excellent. And then last question, if I may, a couple of investors have asked about the impact of the JC and JS250 as far as profitability on the company, or at least the spending impact on the profitability. So when I look at your R&D this year, you're tracking for roughly $30 million in R&D spend up from less than 18 last year. You know, there's a material increase. I don't know if you're willing to break out roughly what portion of that R&D spend is for the JC and JS250s, but would you expect fundamentally the business to be something that should be profitable, would be profitable with anticipated growth in 2027 if you weren't investing on some of these high-potential longer-term platforms?

Greg, thank you for the question. It's excellent. So, I'm not, we're not disclosing currently the breakdown between the segments. However, if we were to stop investing into JCG access, that would provide a significant reduction to our cash burn. Our current plan with JC and G access is our first flight that we're actively progressing towards. And per plan, we're anticipating commercialization of those drones in the later half of 2027. Which should significantly increase our product portfolio mix. We already have some LOIs that we disclosed and also contribute to overall revenue mix. I'm happy to answer any additional questions of this.

No, that's perfect. I'll take the rest of my questions offline. Congratulations on the progress.

Thank you.

Thanks, Craig.

Your next question comes from the line of Andre Madrid with U.S. Bancorp BTIG. Your line is open. Please go ahead.

Hi, good morning. This is Will Cooper on for Andre. Thanks for taking my question. I just want to ask about U.S. sales both next year and beyond. What portion of revenue could the U.S. ultimately represent long-term with these new opportunities?

Well, thank you for the question. So as we disclosed, currently, in terms of our backlog of 200 million, about 25% is coming from US. However, we see a very meaningful sales opportunities in US that are to convert to backlog. And then the next step would be conversion to revenue. So that will be a significant portion of our sales opportunities going forward.

And this is Joe, just a good morning, Will. The future in the U.S., obviously, as we've stated in industries guiding towards, is that the U.S. market is, you know, substantially about the same size as the international market combined. So for us, we do see a trend towards more of a 50-50 split in the long run between the U.S. and international orders, which makes our international piece so critical that a lot of other companies have sort of just focused on the U.S. I think our reverse focus, as I mentioned earlier, about going from international into the U.S. is really key towards having a more solid and robust revenue mix overall.

Great. Thank you. That was very helpful. And then kind of switching gears to the certification or blue UAS certification for both the RQ70 and the camera suite. What is the progress and timeline look on those? And what key milestones need to be hit for those to achieve blue UAS certification?

Sure, I'll take that one. So Blue U.S. certification has been achieved, as we had released several months ago, for the RQ35, which is... It's incredibly helpful for getting into the U.S. marketplace. While it's typically not a hard and fast requirement, you need to do it as a default to sort of validate several things. Number one, you validate that the factories can produce the product according to standards in the U.S. You also validate the supply chain through the NDA compliance of components. And then finally, you validate the actual airframe itself. So, yes, we fully intend to certify the RQ70 underneath the Blue Certification Program. And to do that, obviously, we need to have the commercial version kind of rolling out to do that. So that is underway, and it's something that we anticipate having in time for some of these larger U.S. programs. You mentioned the Zentra camera suite, and while indeed we produce our cameras in-house, the suite itself would not be blue certified. That's really for an aircraft system, but it would be certified under NDAA compliance.

Great. I appreciate you taking the questions.

This concludes today's call. Thank you for attending. You may now disconnect.

Thanks, everybody.