Conference Transcript - AVAV 2026-06-11

David Strauss, Analyst — Wells Fargo

I'm David Strauss, aerospace and defense analyst here at Wells Fargo, and please have our environment here, Dr. Rob Smith. Rob is Chief Operating Officer, joined the company a couple of months ago. I actually knew you in your prior life at BWXA. I remember. Yeah. Yes. And Denise, head of investor relations. So we're we'll run through a couple of a couple of questions here over the next half hour or so. So, yeah, Rob, so you like I said, you joined a couple of months ago. I think prior to Lockheed, BWXT, a couple other stops. Maybe maybe talk about your background and what what got you to to our environment and kind of what your what your objectives are.

Rob Smith, COO

Yeah, so thanks. It is good to see you again. I appreciate the invite to come talk a little bit. You know, I think for me, I've been very fortunate. I was a government employee in the intelligence community. I've been in a small business. I was, you know, as you said, ran billion-dollar businesses, multiple billion-dollar businesses at Lockheed, Raytheon, DWXT, had been lucky enough to be across a lot of different customer bases, both internationally and locally in the domestic market so you know i bring a lot of different experiences from that and if you think about what is av today that's what we are we're a multi-billion dollar business across all domains you know we've got um you know the heritage blue halo and the heritage av coming together and we've got you know loitering munitions we've got one-way attack, we've got uncrewed systems, we've got counter UAS all phases of it from RF to laser weapon systems and soon we'll have a kinetic capability. And then you add that with the space and the cyber with worldwide operations. So what I'm most excited about is an amazing team with an amazing products and amazing leadership team. So I'm personally just really excited to be a part of that bringing the experience that I have from, you know, these other companies and, you know, continue to just leverage that and move this business forward.

David Strauss, Analyst — Wells Fargo

Denise, maybe you could dig a little bit deeper in terms of the portfolio. What exactly you guys do? You know, you added Blue Halo and some of the capabilities there. So maybe just, you know, talk about all the different places you guys are involved. I mean, everyone knows you for your heritage, you know, UAS business. But, you know, it's at the stage there.

Denise Paccioli, Head of Investor Relations

Well, Rob did a good job with a high-level overview, so I like to say that we operate in four end-user markets. So we have drones, non-lethal and lethal drones, space technologies, and then counter UAS. So I'll start with the counter UAS because we seem to be getting a lot of questions on We have a very layered defense approach to this. We have three different types of counter UAS. The first is our Titan product, which is an RF detect and defeat. The second you're hearing a lot about right now, particularly with the war in Iran, it's a directed energy, it's called LOCUST. So this is a directed energy counter UAS solution, uses a laser advanced targeting and tracking to specifically pinpoint a drone and take it down. The cost to take down a drone is less than $10. And then the third one is something we just recently won a program on last summer it's the long-range kinetic intercept so this is our freedom eagle one product it's sort of our entryway into missiles this is something we just recently put a press release out that we're expanding our facility in Huntsville Alabama to prepare for the demand that we foresee coming for that product probably in the next year and a half so the counter UAS is something that we acquired with blue halo that closed about a year ago maybe 13 months ago now Other technologies that we got from there are in space technology, cyber and mission solutions. And then on the legacy AV, which is what we're obviously known for, we've been around for decades. We have several lethal effects and loitering munition products. So the one that's most commonly known is our switchblade family of products. Started with the switchblade 300, one-man portable, you can carry it in a knapsack. Two blanched, it shoots out, it can go around it's very maneuverable it can go to high altitudes go down go up go around find the target from there we developed the switchblade 600 same type of platform larger larger warhead can take out a tank just recently last fall we came out with the switchblade 400 this was for the u.s army's lasso contract it's the best of both worlds between a 300 and 600 size of a 300 We're ahead of a 600. Other products that we have in our one-way attack or precision strike would be Red Dragon. This is one of our higher growth programs. And most recently, we introduced our Mayhem. So I think that Mayhem is something that's very underestimated right now. It's got the capabilities of a loitering munition, but you can swap out the payload. So it does not have to carry a lethal component to you. You can put whatever you want on there. in addition to being launched from the ground it can also be launched from a helicopter or a manned or unmanned aircraft so I think that covers sort of the full gamut of everything that we offer we're a leader in innovation we spend a lot of money on internal R&D I think it's important to note that compared to our peers we do spend more on internal R&D clearly more than our larger defense primes and just because of the way the landscape of drone technology is moving in order to stay ahead to keep up with everyone you have to stay ahead so that's been a focus for the company for the last several years yeah you were asking about you know

Rob Smith, COO

some of our priorities and what we're looking at doing over the past year we've increased our capacity for production by about 300 percent and we have a plan the next 12 months to do another 500 so you know we've got a lot of tailwinds in the markets we're you know we're working with suppliers we're buying long lead materials and we're really enhancing there also with the business coming together we're looking at continuing to do more solutions where we're providing multiple products even potentially other people's products to be able to deliver capabilities for the customer and i think that's really important as we go forward it's something that the heritage blue halo and the heritage jv couldn't do without coming together i kind of talked about hey look at we're in all the domains many markets many different customers to be able to bring all that knowledge together to deliver is you know really important it's something we're going to continue to leverage and lastly we're spending a lot of time on looking at how we continue to do things more cost effectively you know we've got a really robust planning process called psyop and we which is a piece of it we're looking at bringing the best practices from heritage blue halo as well as you know, AV, bringing those best practices together from, you know, key performance indicators. And we're also now moving and we're looking at a strategy that says now that we have all this data, how do we layer, you know, artificial intelligence? How do we do additional autonomy to be able to continue to drive our margins higher and also be able to give the customer a better price point?

David Strauss, Analyst — Wells Fargo

Bring it back to a high level. Maybe talk about the budget picture. You know, there's a lot of money in the fiscal 27 budget. We don't know exactly how it's going to play out. I mean, there was like 50 some billion for the dog. And so just how you, you know, what you see in the budget in terms of areas that are, you know, are right there for you guys to tap into.

Rob Smith, COO

Well, we clearly have key programs of record. I mean, if you look at the what's happened, whether it's Iran or whether it's Ukraine, you see the future of warfare. You know, we're always going to need exquisite systems. So I don't think that's going anywhere. And it's clear the power of what drones and technology can do and the importance to counter that. We're in those markets, along with many others. But, you know, you were asking me specifically about DOG. So Defense Autonomous Working Group, DOG, they have a $50 billion request in the president's budget. And it's for one-way attack, counter-UAS, you know, all the markets that we were just talking about that we are in. I don't know how much will come through on that. You know, we'll see, but it's likely to be, you know, a very large market. You know, just kind of stepping back, you said taking the big picture. Renaissance did a study in 2025, and they looked at the counter-UAS market, and they looked at the directed energy market. And they said, what is that likely to be in 2030? And the answer was the counter-UAS market, 17 billion with 8% or 9% growth, and then the directed energy market, 4 billion with about the same amount of growth. And that was before I ran. So I have to believe that if that study was done again, that those numbers would be even higher. there. And again, we're just talking about a part of our business. We're just talking about the counter UAS and the drone business, not the cyber or the space and all the other areas that we're in, which also have a significant amount of growth and we're primarily positioned in. So it's hard for me to say what's going to happen. Do I think it'll be 50 billion? Probably not. But will it be something significant? It looks like it will be. And that's just a really nice tailwind for us as we you know move forward and that money gets executed you know and and i'll just let me also add this we are putting ourselves in a position where we're buying long lead materials at risk ahead of time so when the customer funding comes this is what department war wants they want to be able to put you under contract and have it delivered and we're strategically thinking through where we want to do that so when the money comes and the customer says who can deliver this to us in the next three months we can say we can do

David Strauss, Analyst — Wells Fargo

that and move forward supply chain I mean you touched on that a little bit but kind of you know terms of what you need you know what are kind of any potential key choke points or I mean how are you addressing talking about the capacity expansion you're putting in place however how directly are you going at

Rob Smith, COO

the supply chain side of it it's a critical component we obviously buy a lot of components from a lot of suppliers so we're doing a couple of different things one we're looking at where we should be consolidating suppliers and you know we have small contracts that we want to bring those together have larger contracts to have more you know buying power and you know be able to do better negotiations there and we're looking at places where we have sole source and we need additional capacity and we're looking to dual source in some cases we're working with our major suppliers on it we have 18 month forecast on what we're going to need and we're working with them and putting in long-term arrangements so that they can facilitize for that capacity we're really enhancing our ability and our capability to be able to do supplier quality So we're spending a lot more time with suppliers, having a more robust supplier qualification process, and then working with them to make sure that what we get has the quality we need at the scale that we need. So supply chain is going to be really important, and it's something that we're continuing to look at.

David Strauss, Analyst — Wells Fargo

In terms of the competitive environment, I mean, we seem to hear about new players in the drone market every day. Maybe talk about how the competitive landscape has evolved and what you're doing from a cost perspective to try and, you know, it seems like the price points are going, you know, have the potential to go lower and lower. What you're doing, you know, to be increasingly competitive from a cost standpoint.

Rob Smith, COO

Yeah, I mean, obviously cost is always going to be important. And, you know, we want to continue to leverage our fixed, you know, take our fixed costs. We've got, you know, good tailwinds for growth going forward, holding those overheads and those fixed costs to be less than what our growth will be to leverage the bottom line. And I kind of mentioned it earlier, but with our ops expansion, we're looking at, you know, moving. and we've got a facility that we're facilitizing in Utah to have low-cost manufacturing for the Switchblade 600, right? 600, for the Switchblade 600. And, you know, we're really looking forward to that, and that has capacity to do about $2 billion. So I think with our facility leverage, you know, being able to go to multiple shifts, we're looking at multiple shifts as we ramp up, the facilitation that we're doing, the focus on, you know, we have a very robust process, you know, Some people call it AP, there's lots of different things for it, but looking at how do we optimize what we're doing on the factory floor, pull the best practices across them and lower the price. So we can get some of that savings and drop that to the bottom line and customers, we continue to be cost competitive with customers.

David Strauss, Analyst — Wells Fargo

There's been some speculation, I guess, in the press about maybe for Denise the dow making investments in in the space and companies and I think that's all that's kind of been out there. We haven't heard anything else. But your your your thoughts or take on that.

Denise Paccioli, Head of Investor Relations

I'm sure I'll start and Rob can can help me out here if I miss anything. Obviously, we feel like we're in a very good position right now. We have been preparing to invest ourselves. We had a very successful capital raise about a year ago. We feel that we do have the balance sheet strength to handle this, the demand that we foresee coming. Having said that, if the government were to propose some fabulous offer, this is not something that we would turn away from. So I think it's kind of an open ended item at this point.

Rob Smith, COO

Yeah, I mean, I would just add the Department of War and the administration has been very clear in their interest to invest in tech that with businesses that are going to be growing that have a lot of tailwinds that they're doing, you know, they're doing a lot of business with and we fit into that category. And like Denise says, we certainly don't need the capital, we're well capitalized, have access to the markets. But if one of our strategic customers, which the U.S. government is obviously one, although we obviously have worldwide products sold worldwide, wants to invest in our business, that's something we will absolutely engage in the discussion around.

David Strauss, Analyst — Wells Fargo

You touched on the counter UAS market, how many questions you're getting about that. that seems to be the newest area of kind of focus for for investors and you have a number of different solutions how do you see that i mean it seems like it's kind of early days in that market we're still trying to figure out what the best solution or if there is one best solution you know how do you see that market kind of evolving i mean it seems like lasers you know directed energy is a great solution but might not work in certain situations so just your thoughts on how that market could could evolve and kind of where where we are today in terms of you know

Rob Smith, COO

that playing out yeah you want to have a layered defense and we're fortunate that we have or will have when the freedom eagle gets done products and all of the different layers if you will so let's take golden dome as an example there's two parts of golden dome there's like the theater theater ballistic missiles and those you know that's kind of the raytheon lockheeds of the world And then you've got the counter UAS layer, which is where we play. So we have a product called Halo, which think of that as a command and control system for the tactical edge that has artificial intelligence capabilities and really can command and control all of our products and candidly other products as well. and then for us specifically we've got counter RF which you know for that's think of that is the first line of defense so you use RF to knock out the drones that would be our Titan system we have two two of them we've got the surveillance Titan so you can see small drones far distance and then we've got the actual RF attack Titan then you get to laser weapon systems our locus system our x2 and our x3 x2 is really focused on group one and group two our x3 is focused on one through three and it's fielded today and it's it's it's knocking down drones you know the you can look the secretary of the army was out he went to white sands and he shot our locusts and and he tweeted about it and and how effective it was in knocking down um and taking out um uas so you'll have that And then in the future, you'll have a low-cost Freedom Eagle kinetic weapon. And the great thing about Halo Shield is it tells you where to lay down all of your assets that you have optimally. And then it helps the operators. Because when these things are happening, I don't know if any of you have ever been in these situations, things are really moving fast. There's a lot happening. There's a lot of decisions that have to be made. So our software has very advanced artificial intelligence to show the operator optimal ways to respond. And so you may choose not to respond in the typical way of RF and then laser and then kinetic. If it's a lot of swarm and advanced, you might shoot other kinetic capabilities earlier. And these are decisions that the system will tell you to make. So we integrate in with other operational platforms as well. So, you know, we can communicate at different echelons, but it's we have a full solution across all of the counter UAS. And I agree with you. You know, just look at what's happening over in Iran. These systems are going to be critical. And we we have leading capabilities in all these areas.

David Strauss, Analyst — Wells Fargo

So you touched on this is going to be part of Golden Dome. Are there any other places potentially in Golden Dome that the company would play in?

Rob Smith, COO

um that's the big place where we would potentially play you know in the counter uas i mean there's other niche things there's space we do a lot of space technology you know we do we have some of the best laser communications technology in the world particularly for what i call long haul so there's a lot of there's a lot of companies that have laser communications that are you know shorter like for a leo or meo we really focus on the geo where you need very precise you know electronics to be able to close those links over such large distances and that's really our secret sauce in that market so there will be other places where we play peripherally but in my opinion the largest piece that the largest potential for us is in that counter UAS okay Denise maybe just going

David Strauss, Analyst — Wells Fargo

going back to scar the program and what what happened what exactly happened there and how much is it contributing and kind of the the fiscal 26 revenue that won't be there in in 27 and what is the path forward on that on that

Rob Smith, COO

program or that technology you being kind to me because I'm a new guy you've only been here kind of give her the hard hard question it was at the heart but

David Strauss, Analyst — Wells Fargo

But you weren't here, so I was going to give it to you.

Denise Paccioli, Head of Investor Relations

So I can just give you a little bit of background, I'm not going to comment too much on it. So the SCAR program was part of the Blue Halo acquisition that came over. It started off as a cost plus, it was moving to a firm fixed price. In January, there was an announcement that there was going to be a stop work order, we were taking a pause. Then later in March, it was announced that there was going to be a termination for convenience. So related to that right now, we still feel very strongly that the technology is very important to the U.S. government as well as perhaps other customers. We are still going to work through this product. We are going to invest in this product. There will be a recompete with the Space Force, and we have said that we are going to participate in that. so i mean at this point i think that's all that we can say we do feel like that we have um very good technology in this area um we do think that it's very important um it makes a lot of sense so this is something that we are going to continue to pursue yeah i mean i appreciate you know why

Rob Smith, COO

you would ask the question and i think it's still on investors minds it is it is and it makes sense and tenise's tenise's point it was a termination for convenience there were some requirements changes given new information for the government which was not initially anticipated to be in the system and it was driving a lot of additional cost and the government made the decision to take a pause to re-look at the program and then to come out with a new acquisition we're continuing to invest in that technology on irad and continuing to mature it because we believe that it's an important product and you know we're interested to continue work with the government see what what happens over the next 18 months we're talking about the recompete in 18 months and like denise said you know our intent today is to move forward and to bid on that and you know we'll see where this goes over the next 18 months two years okay um the opportunity for margin improvement i mean

David Strauss, Analyst — Wells Fargo

blue halo kind of brought the margins you know the margin for the entire company down a bit but just how do you think about the opportunity for for margin improvement yeah well with the tailwinds

Rob Smith, COO

we have from the revenue side you know we're in a good good position to leverage our fixed costs and you know be able to drive you know margin expansion which you know is in our plan so you know i don't know we can talk more specifically about things um you know the also i just will also note that you know when you look at some of the counter uas which is now in our segment one that did come with the blue halo acquisition so i would just encourage investors to recognize that when you're looking at our segment one and segment two, it's not equal to the old Heritage AV and Blue Halo. Some very nice products from the counter UAS came over, which have a very nice margin profile moved over. That said, we're looking at all, we're investing a lot in some new products over in the CMS, our cyber admission systems business, which we expect to expand. And right now they're investments that should turn over the next couple of years and we're looking at i've already mentioned this but you know when and denise said it as well looking at second shifts looking at utah these are all ways to better leverage our fixed costs as our production goes up because right now we are investing i mean i already mentioned 300 this year 500 i mean 300 last year 500 this year we are building that infrastructure we will sell and grow into that and get the revenue associated with that, and that will do a lot for the bottom line.

David Strauss, Analyst — Wells Fargo

That capacity expansion, that's on the UAS side?

Rob Smith, COO

That is, well, the one in Salt Lake is for, yeah, it's for switchblade.

David Strauss, Analyst — Wells Fargo

Yep, yep, but that's specifically for that part of the business.

Rob Smith, COO

We could bring other products in there as well, but it's primarily done for switchblade.

David Strauss, Analyst — Wells Fargo

Yeah. Denise, I guess, what what is the maybe some of the misconceptions you you think that are out there in terms of what's going on with the business or the financial profile of the business, you know, that you would want to debunk?

Denise Paccioli, Head of Investor Relations

you know i think right now there's a lot there's very strong demand signals and i think that sometimes some of the newer investors to our story are a little frustrated over the pace at which some of these awards come in we do feel very strongly that drone warfare is is it's changing the landscape right now this is this is going to be the wave of the future it will be drones it will be counter drones we don't need to win a the lion's share of what's out there to be successful and I think that you know over the the course of the next couple years you're going to see a lot more come our way and to our peers way I don't think it's a zero-sum game on winning these contracts I think that there is enough money out there for us and for our peers I do think it's something that not a lot of people understand is we did have the first mover advantage um we are continuing to work on that we do spend money on r d so that we are ahead of technology that we are leading um technology with our drones and our counter drones um and i think that there's uh there's a fear right now that there's too many new entrants um and that that primarily is in the fpv space where we don't operate right now we're group one through three we're not in the nano drones we're not in the five thousand and under category um so i think I think, I mean, if people could just be a little patient and hopefully some awards come through and I think it would sort of appease everyone's insecurities right now.

Rob Smith, COO

And once customers get products that work, which we have product, obviously, as you know, these products are all out in the market, including the laser weapon systems. They're out in the market working today. You know, get trained on them. You know how to use them. They work. They work well. I mean, of course, there will be other folks that are selling stuff in, but we're in a great position to be able to leverage that and talk to the customers, understand what they need, make modifications to our product, solve challenges that they have. And, you know, I really like where we're sitting today. And given, you know, it's always nice when you have a strong tailwind in the markets that you're at and you have great products.

David Strauss, Analyst — Wells Fargo

Yeah. So we touch on UAS, counter UAS. What do you guys do in space? What is your business in space? I think Blue Halo brought some capabilities on the space side.

Rob Smith, COO

Yeah, we do some components. We do some mirrors. We do some pinpoint, you know, accuracy. The big one is the laser communication system I already talked about. You know, we're kind of differentiated there. and you know i was talking earlier to some investors and i was saying a lot of the technology that makes our space so work so well with just you know when you think about when you're trying to close the links over long distances in space it's the most important thing is to be able to have the beam go over very large distance even small errors in your transmit means you don't you can't receive it so you have to be very very precise and that's where our sweet sauce is so So we're in geo, we're in long links, we don't really play in the LEO or the MEO as much. And actually, I said this earlier too to some folks, that that is also what makes our laser systems so special. Because a lot of people think about it's all about power. Well, power is important, but that's not the only important thing, because it's beam size and it's the ability to be able to hold that beam on the target at the exact same spot. and that's the same basic technology of what you have to do in space to be able and so that's the reason why our laser weapon systems are so effective we hope we can hold the beam we've got a very tight beam and therefore we can we're very very effective even at lower powers than other companies at much higher power and when you have the lower power systems you can put them on you know home v's you can you put them on other you can you know you can man you can see much easier to move them around so it creates a market that's that's much better you know recently we we announced we were on a ddg with the navy and that's a tough mark that's a tough place to put a laser weapon system because the boat's moving and yeah and even then we were 100 successful with the targets that the navy thread their 18 target and we successfully defeated all 18 we're the only company that we know of that has done that so that just again it just goes to show where we are in technology and how advanced we are and the laser weapon system and why there's you know a lot of interest in our product and we expect to be selling a lot of these in the near term so the is this optical communications that you're talking about in space lasers lasers but more on the geos

David Strauss, Analyst — Wells Fargo

because i i know there are a number of players on kind of the leo side but you're talking about geos even longer longer distances 150 000 kilometers plus yes yeah that's that's really where our

Rob Smith, COO

sweet spot is there's a lot of technologies for the the shorter links and I mean that's important I'm not minimizing that but that's not where that's not where we want to play that's more competitive there's more there is there's more companies there it's more you know you can select a little bit more on price we want to be at the high end where you need the performance and

David Strauss, Analyst — Wells Fargo

and that's that's where we focus well with that we're we're approaching our time. Rob, Denise, thanks very much. Thank you. Appreciate it. Thank you.