Earnings Call Transcript - AVAV Q2 2025

Jonah Teeter-Balin, Vice President of Corporate Development and Investor Relations

Thanks, and good afternoon, ladies and gentlemen. Welcome to AeroVironment's fiscal year 2025 second quarter earnings call. This is Jonah Teeter-Balin, Vice President of Corporate Development and Investor Relations. Before we begin, please note that certain information presented on this call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve many risks and uncertainties that could cause actual results to differ materially from our expectations. Further information on these risks and uncertainties is contained in the company's 10-K and other filings with the SEC, in particular, in the risk factors and forward-looking statement portions of such filings. Copies are available from the SEC on the AeroVironment website at www.avinc.com or from our Investor Relations team. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation to the Investors section of our website under Events and Presentations. The content of this conference call contains time-sensitive information that is accurate only as of today, December 4, 2024. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. Joining me from AeroVironment are Chairman, President and Chief Executive Officer, Wahid Nawabi; Senior Vice President and Chief Financial Officer, Kevin McDonnell. We will now begin with remarks from Wahid Nawabi. Wahid?

Wahid Nawabi, Chairman, President and Chief Executive Officer

Thank you, Jonah. Welcome everyone to our second quarter fiscal year 2025 earnings conference call. I will start by summarizing our quarterly performance, followed by Kevin, who will review our financial results in greater detail. I will then provide our expectations for the remainder of fiscal year 2025. And finally, Kevin, Jonah, and I will take your questions. I'm pleased to report another strong quarter with results in line with our fiscal year expectations. Our key messages, which are included on Slide number three of our earnings presentation are as follows. First, second quarter revenue rose to $188 million, representing a new second-quarter record for the company. Second, our Loitering Munition Systems segment continues to drive growth for the company with record second-quarter revenues of nearly $78 million, a 61% year-over-year increase. Third, funded backlog continues to grow and is now at a healthy $467 million. And fourth, given our strong execution, key contract awards, robust pipeline, and 95% visibility to the midpoint of our guidance range, we reaffirm revenue, adjusted EBITDA and non-GAAP EPS guidance for fiscal year 2025. Our strong second quarter results, coupled with other key achievements in the quarter, clearly position us to continue creating value for all our key stakeholders. For example, we were awarded two large sole-source Switchblade IDIQ awards, representing a record $1.7 billion in contract ceiling. While the funded amounts under these awards were expected for this fiscal year, the long-term visibility and demand for Switchblade has improved even further. In addition, we launched our latest market-leading Uncrewed Systems solution, the P550. This new Group 2 UAS further strengthens our portfolio and fills the gap between our Puma and JUMP 20 ISR platforms. The P550 offers unmatched payload capacity, endurance, flexibility, and adaptability for our customers' most demanding missions. This solution is performing well in the US Army's Long Range Reconnaissance competition, which is valued at approximately $1 billion over the next decade. We're also receiving multiple additional domestic and international interest for this industry-leading solution. We believe the P550 will become another global franchise product similar to our Raven and Puma solutions. With an expanding pipeline of opportunities and growing backlog, we continue to focus on increasing our production capacity and throughput to meet our customers' needs. We remain on track to achieve the production goals we shared last quarter. And last but not least, we took a major step towards achieving our future state when we announced our agreement to acquire BlueHalo, a defense technology leader operating in several key franchises in space, counter-UAS, cyber and electronic warfare. This acquisition will enable us to become an even stronger and more diversified defense technology provider, delivering highly innovative mission-critical solutions with enhanced speed and agility. We believe our combined portfolio will provide us with industry-leading positions in Space Communication, Unmanned Aerial Systems, Counter-UAS, Loitering Munitions, Electronic Warfare and Cybersecurity, all enabled by the best-in-class autonomy and AI software suite. On a pro forma basis, the combined company is expected to deliver approximately $1.7 billion in annual revenue. We continue to work diligently towards completing this transaction and expect it to close in the first half of calendar year 2025, subject to regulatory and shareholder approvals and other customary closing conditions. We're confident that as a combined business, we will leverage our strengths and deliver even better outcomes for our customers, employees and shareholders. With that, I'd like to now discuss results from each of our three business segments, starting with Loitering Munition Systems or LMS. As we stated previously, LMS was once again our strongest revenue growth driver for the quarter as expected. Revenue increased by more than two times from the same period last fiscal year. Revenues totaled about $78 million, a new second quarter LMS record. Our Switchblade products are performing very well in the field and have become the global standard for Loitering Munitions. Our customers value Switchblade's unmatched ability to operate in heavily contested environments with very high success rates. Switchblade's 300 and 600 continue to strike very high-value targets in a cost-effective manner, presenting an incredible value proposition for our customers. Additionally, demand for both Switchblade 300 and 600 continues to grow as evidenced by our most recent multiple US DoD IDIQ awards. These contracts enable our customers to procure greater quantities of our products more quickly. The US Army announced a five-year sole-source IDIQ award with a ceiling value of nearly $1 billion and we've already received an initial $128 million task order under this contract for the US Army's directed requirement for lethal unmanned systems. We also received a separate sole-source modification to an existing contract from the US Army, which increased the contract ceiling for Switchblade 300 and 600 by nearly $750 million. Under this US Army IDIQ, we have received a task order value at roughly $55 million of Switchblade 600 and 300s. Both IDIQ awards contain beneficial new terms that allow for progress payments, which will significantly improve our cash flow and working capital usage. These orders should also facilitate a faster procurement process for key additional domestic and international opportunities. In addition to increasing domestic demand and orders, our Switchblade product line continues to see more international demand. As part of the $55 million award I just mentioned, we received FMS orders from three additional allies, Lithuania, Romania, and Sweden. Moreover, Taiwan and Greece have also publicly announced their intention to purchase significant quantities of Switchblades in the near future. Looking ahead, we have even more countries in our pipeline planning to add Switchblades to their other AV offerings to create a comprehensive family of system solutions set. Additionally, we're pleased to share that we delivered our first tranche of Switchblades to the US Marine Corps under the Organic Precision Fires-Light program, or OPF-L. We expect additional Switchblade task orders under the existing contract umbrella in the coming quarters. In support of all this growing demand, we remain focused on further scaling manufacturing to support more than $500 million in annual Switchblade product revenue by the end of this fiscal year. We have also selected an additional new location where we will expand our Loitering Munitions manufacturing beyond fiscal year 2025. In the meantime, AV's track record of delivering Switchblades and high-quality, high-reliability, and high-volume remains unmatched in the industry. Finally, we continue to invest in new Switchblade variants and upgrades to current products. We hope to announce further details on these new offerings at a future date. In summary, we're very confident about the growth trajectory of our LMS business and we anticipate continued momentum that goes well beyond fiscal year 2025. Now on to our Uncrewed Systems segment. Revenue for the second quarter was nearly $86 million, reflecting another quarter of solid performance. Our Uncrewed Systems segment remains a strong revenue and profitability driver for the company, largely due to our Puma and JUMP 20 platforms. That said, we strengthened our portfolio with the P550, our latest Uncrewed Systems product, which we showcased at the Annual AUSA Conference in Washington DC in early October. Consistent with our track record, we expect this solution to be the gold standard for Group 2 UAS and create another global franchise in Uncrewed Systems for the company. The P550 is part of our recently submitted proposal for the US Army's Long Range Reconnaissance Program, or LRR, and we hope to receive an update on our submission in the coming months. We also anticipate strong global demand for this product beyond the US Army's program record with additional interest coming from the US Marine Corps, US Navy, US SOCOM, and multiple international customers. The P550 demonstrates our continued commitment to provide innovative, intelligent autonomous platforms that ensure operational superiority for our customers and we expect this platform to be a significant contributor to this segment's future growth. In addition, we're seeing continued momentum in our JUMP 20 system. We now have a sales pipeline of more than $0.5 billion and hope to share additional details on at least two expected wins soon. Additionally, we remain engaged with the US Army's FTUAS program office to potentially compete for upcoming tranches. Given favorable feedback on our Puma, JUMP 20, and now the P550 platforms, we anticipate domestic and international demand for our UXS solutions to remain healthy in 2025 and beyond. Moving now to our MacCready Works Segment. MacCready Works continues to make solid progress on its key opportunities with the goal to provide solutions and capabilities that meet our customers' evolving needs, especially through the development of novel platforms and autonomous capabilities. As an example, this past quarter, we continued our flight test program with the defense variant of our HAPS Sunglider, which demonstrated the ability to fly at high altitudes while providing persistent and reliable surveillance. As part of this flight test program, we flew a state-of-the-art Synthetic Aperture Radar, or SAR, Payload and demonstrated advanced surveillance capabilities. Additionally, our efforts with the US DoD are continuing to progress and we were recently awarded another $7 million follow-on contract to continue the HAPS defense flight test program. We remain convinced that our HAPS platform is another unique and game-changing capability for our customer's current and future missions. MacCready Works continues to play a significant role in the overall development of AV's new and innovative solution offerings. We look forward to sharing more exciting announcements from this business segment in future quarters. In summary, our strong execution, key contract awards, and robust pipeline gives us confidence in the remainder of fiscal year 2025 and beyond. Our solid performance to date, healthy backlog, and recent orders have increased our visibility to 95% of the midpoint of our revenue guidance range, but we still see some risks with order timing, especially given the continuing resolution environment and change in administrations. Therefore, we are reaffirming our fiscal year 2025 revenue, adjusted EBITDA, and non-GAAP EPS guidance, and now expect third-quarter revenue to represent about 40% of second-half revenues.

Kevin McDonnell, Senior Vice President and Chief Financial Officer

Thank you, Wahid. Today, I will review the highlights of our second quarter performance, occasionally referring to our press release and earnings presentation available on our website. In summary, we posted another strong revenue and adjusted EBITDA quarter. We also saw our funded backlog grow after several quarters of decline, and our outlook remains for another strong fiscal year. Given the pending BlueHalo acquisition, references to future performance exclude the impact of BlueHalo, which is expected to close during the first half of calendar 2025. As Wahid mentioned, revenue for the second quarter of fiscal 2025 was $188.5 million, an increase of 4% compared to $180.8 million for the second quarter of fiscal 2024. Slide 6 of the earnings presentation provides a breakdown of revenue by segment for the quarter. Our largest segment was Uncrewed Systems, or UxS, which combines small UAS, medium UAS, and UGV businesses. UxS generated revenue of $85.4 million in the quarter, down 36% from last year's total of $132.8 million, primarily due to a decrease in Ukraine revenue of $54 million. Puma demand remained strong, accounting for 71% of UxS revenue, with meaningful contributions from our UTV products, Jump 20, and Tomahawk during the quarter. Our Loitering Munition Systems segment recorded revenue of $77.7 million, a 157% increase from $30.2 million in last year's second quarter. The LMS undefinitized Contract Actions were definitized in Q2, leading to an approximate $10 million increase in revenue and gross margin. Revenue from our MacCready Works segment was $25.3 million, a 42% increase from $17.8 million for the second quarter of last fiscal year, primarily due to HAPS revenue from both SoftBank and the US Department of Defense for Stratospheric flight testing. Slide 6 also breaks down product and service revenue. In the second quarter, Product revenue accounted for 80% of total revenues, aligning with the previous year due to strong Product revenue from our small UAS, LMS, and medium UAS products. We expect product revenues as a percentage of total revenue to remain above 80% for the foreseeable future. Moving to gross margins, Slide 7 shows the trend of adjusted product and service gross margins, while Slide 12 reconciles GAAP gross margins to adjusted gross margins, excluding intangible amortization expense. In the second quarter, consolidated GAAP gross margins were 39%, lower than last year due to a higher-margin UxS mix in the prior period. Adjusted gross margins were 41%, down from 43% in the same period last year because of changes in the sales mix. We expect adjusted gross margins for the second half of the year to be between 38% and 40%, ending the full year between 40% and 41%. We anticipate exiting the fourth quarter at the higher end of the second half range. Adjusted product gross margins for the quarter were 44%, compared to 47% in the second quarter of last fiscal year. We expect these adjusted gross product margins to decline in the coming quarters due to expected increases in product revenues from LMS. Adjusted service gross margins were 28%, consistent with the same quarter last year. For adjusted EBITDA, Slide 13 shows the reconciliation of GAAP net income to adjusted EBITDA. Adjusted EBITDA for Q2 was $25.9 million, down from $39.5 million in last year's Q2. Last year's first half was strong because of Ukraine revenue. While year-over-year revenue is slightly up, higher SG&A and R&D expenses have resulted in lower adjusted EBITDA for the first half compared to last year. However, these increased expenses align with our guidance for the year, and I'll provide more detail shortly. We expect adjusted EBITDA for Q3 to be slightly down from Q2, but Q4 is projected to be significantly higher than any of the first three quarters. We also incurred $3.7 million in acquisition-related expenses in Q2, which we expect to continue for the remainder of the fiscal year and likely into next fiscal year. Due to the unpredictability of transaction expenses affecting GAAP net income, we are only providing revenue, non-GAAP EPS, and adjusted EBITDA guidance. SG&A expenses, excluding intangible amortization and acquisition-related expenses for the second quarter, were $33 million or 18% of revenue, compared to $26 million or 14% of revenue in the previous year. This increase was partially due to heightened sales and marketing expenses, primarily from increased bid and proposal activity, as well as employee-related costs related to a rise in average headcount to support anticipated growth and operational expansion. We expect SG&A as a percentage of revenue to decrease in the next two quarters, landing in the 15% to 16% range. R&D expenses in the second quarter were $29 million or 15% of revenue compared to $22 million or 12% of revenue in the prior year, driven by key development projects including our Group 2 UAS, the P550 introduced at AUSA, the meritization of the Jump 20, and the integration of the Tomahawk controller into several UxS products. Additionally, we continued developing several Switchblade variants. Our R&D investment peaked in dollars and as a percentage in Q2, and we expect sequential decreases in dollars and percentage in Q3 and Q4. We project R&D to be in the 12% to 13% range of revenue for fiscal year 2025. Now, regarding GAAP earnings, in the second quarter the company achieved net income of $7.5 million, down from $17.8 million recorded in the same period last year. This decline of $10.3 million is attributed to several factors: a $9.8 million increase in SG&A expenses, including a $2.6 million rise in deal and integration costs, a $6.7 million increase in R&D investments, and a $1.7 million decrease in gross margins. These factors were partially offset by a $2.9 million decrease in other losses, a $2.4 million increase in equity investment activities, a $1.4 million decrease in taxes, and a $1.3 million reduction in interest expense. Slide 11 displays a reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company reported adjusted earnings per diluted share of $0.47 for the second quarter of fiscal 2025, compared to $0.97 for the second quarter of fiscal 2024. Turning to the balance sheet, at the end of the second quarter, our total cash and investments totaled $91.2 million, down from $103 million at the end of the first quarter of fiscal '25. Unbilled receivables decreased by $15 million during the second quarter compared to the first quarter but remained elevated, largely due to our LMS business schedule. Although our new payment terms on LMS contracts did not impact the second quarter, we anticipate these terms will positively affect our unbilled receivables starting in the third quarter, leading to improved working capital for the rest of the fiscal year. We also secured a $200 million revolving credit facility with four banks during the quarter, which involved paying off the remaining term loan balance and drawing $15 million from the revolver. In conclusion, our funded backlog at the end of the second quarter of fiscal 2025 stood at $467.1 million, an increase of $94.2 million or 25% compared to the first quarter of fiscal '25, driven by recent LMS domestic and foreign military sales awards. Additionally, we currently have $1.8 billion in unfunded backlog.

Wahid Nawabi, Chairman, President and Chief Executive Officer

Thanks, Kevin. Our performance in the second quarter highlights the growing significance of our products and solutions for our customers. There is a rising global demand for our autonomous AI-enabled Uncrewed Solutions, and we are well-prepared to provide innovative products in both volume and quality to meet our customers' changing needs. We believe we are positioned to take advantage of the US Department of Defense's budget priorities and we look forward to collaborating with the new administration. We are also optimistic about the increased international demand, particularly for our Switchblade and JUMP 20 solutions. Additionally, we feel the inclusion of BlueHalo will establish us as a leading provider of next-generation defense technology focused on our global customers' essential mission objectives and priorities. We recently held our Technical Interchange Meeting, or TIM, where we welcomed participants from 24 countries. The main aim of our TIM event is to educate our customers about our market-leading solutions and gather their feedback and needs. A significant shift is occurring in war strategy, which requires more Uncrewed Aerial Systems and Loitering Munitions than ever before. We are witnessing a new wave of procurements worldwide. Customers are seeking sustainable partners with the experience, proven track record, and resources to deliver innovative and cost-effective solutions quickly. These elements, along with the successful performance of our systems in combat, particularly in Ukraine, position us to seize a fair share of this growing opportunity. Before we proceed to questions, I want to summarize the main points from today's call. First, revenue for the second quarter of fiscal year 2025 reached $188 million, marking a new second-quarter record. Second, our Loitering Munitions Systems segment remains the key growth driver for the company. Third, our funded backlog stands at a robust $467 million. Fourth, we reaffirm our revenue, adjusted EBITDA, and non-GAAP earnings per share guidance for fiscal year 2025 and expect to set new records this fiscal year. Before taking questions, I want to express my gratitude to our customers for their trust in our company and products to meet their high standards and support their critical missions. I also want to acknowledge our talented team at AV for their commitment and hard work, which have enabled the growth and adoption we are experiencing. Lastly, I want to thank our shareholders for their ongoing interest in and support of our growth strategy. It is truly an honor to serve our country and allies during this crucial time. Now, Kevin, Jonah, and I will take your questions.

Operator, Operator

Our first question comes from Peter Arment with Baird.

Peter Arment, Analyst

Good afternoon, Wahid, Kevin, Jonah. Wahid, can we explore the Uncrewed category a bit more? It appears that this quarter has seen the lowest revenue for that segment in the past eight quarters. Could you explain what you’re observing in terms of demand? It seems we're not anticipating any revenue from the P550 this fiscal year, yet it looks promising based on what we observed at AUSA. Can you share your insights on how you're positioned in that category?

Wahid Nawabi, Chairman, President and Chief Executive Officer

Thanks, Peter. I strongly believe that our UxS segment has been, and will continue to be, a key driver of revenue and profitability for our overall business. We see significant long-term growth and value opportunities in the UxS or Uncrewed Systems segment across several important areas. The current revenue and UxS figures are not as high as in the past due to our transition away from the increased demand related to Ukraine last year, which we anticipated. We have successfully diversified beyond that and are delivering on that strategy. Additionally, there is substantial demand for our existing Puma systems, including the Puma AE and LE, as well as our JUMP 20 system. We have a strong pipeline of over $0.5 billion in opportunities for JUMP 20, with a healthy mix of domestic and international customers. Furthermore, we expect that the demand for UxS systems, particularly non-lethal ones, will grow significantly over the next two to three years, especially with the introduction of our P550 and other products in development. I believe our current standing in the LRR competition program, which is a $1 billion opportunity, will drive another growth wave and create a new franchise product akin to our Raven and Pumas in the Group 2 UAS category. Overall, I'm very optimistic about the potential for continued growth in this business, although it may be inconsistent on a quarterly basis due to its nature. However, the long-term outlook is strong, and we are identifying numerous growth opportunities.

Peter Arment, Analyst

Okay. I appreciate the color there. And just as for my follow-up. Could you talk a little bit about where you stand on, I guess, replicated deliveries and if you've started to ship to Taiwan, and any comments that you can make on the protest that was put against the IDIQ contract?

Wahid Nawabi, Chairman, President and Chief Executive Officer

Sure. We are pleased to report that our Replicator program has been highly successful in delivering on the expectations of the US military and the Pentagon. We are a leading example of that initiative. We have already shipped a substantial quantity of products, specifically the Switchblade 600s, to our customer, and we will continue to deliver more in the future. Overall, the Replicator program has proven to be very successful for us, and we anticipate further orders along with our backlog for the expanding Switchblade business. Additionally, we are currently awaiting a decision from the Department of Justice regarding the protest, with a deadline set for mid to late December. In the meantime, the US Army has authorized us to proceed with shipping products to meet our customers’ needs. We believe our position is strong and are confident in our compliant and competent bid and award, allowing us to continue delivering products under both the Replicator and IDIQ contracts.

Peter Arment, Analyst

Appreciate the details. I'll jump back in the queue. Thanks.

Wahid Nawabi, Chairman, President and Chief Executive Officer

You're welcome, Peter.

Operator, Operator

Our next question comes from Louie DiPalma with William Blair.

Louie DiPalma, Analyst

Wahid, Kevin, and Jonah, good afternoon.

Wahid Nawabi, Chairman, President and Chief Executive Officer

Hi, Louie.

Kevin McDonnell, Senior Vice President and Chief Financial Officer

Good afternoon.

Louie DiPalma, Analyst

Have you been making progress in adding the Switchblade to the Kinesis Ecosystem? You mentioned strong growth for the Switchblade portfolio in relation to Replicator, but less so for foreign military sales. We're curious about your investments in software for Switchblade. Thanks.

Wahid Nawabi, Chairman, President and Chief Executive Officer

Absolutely, Louie. So it has been our plan from the beginning to continue to integrate the Kinesis common ground control station in the software ecosystem with the rest of our portfolio. It is a major driver of value to our customers' missions to simplify the operating process for them and actually achieve the stated outcomes they've got. The priority list of which product to integrate first is primarily driven by our customers' priorities. Our customers today really need to deliver products to Switchblades with the existing controllers because there's a training process that has to happen with the customer in the field with all the products that we've got deployed. We are making progress and we have plans to eventually integrate it with Switchblade as well. We're in the testing and integration phase and soon we will be able to announce that we are successfully now shipping that product, but we're not at that point yet. And that's primarily driven by prioritizing this activity with our customers' requirements and their ranked order of what they want to see first. But overall, we're very pleased with the Tomahawk controller and their business and their team. They continue to grow and make really significant wins and we're going to continue to integrate their controllers not only with our product portfolio, but many other third-party products that are out there. So we're very pleased with the progress we're making that so far.

Louie DiPalma, Analyst

Great. And along those lines in terms of integrating Kinesis with third-party products, do you feel that Kinesis will be able to provide a common operating system for the many different BlueHalo product lines as well and tie those together with the Switchblade and the Puma and JUMP 20 product lines?

Wahid Nawabi, Chairman, President and Chief Executive Officer

So, Louie, it's definitely part of our plans to provide our customers with a comprehensive view of our entire solution set, including third-party platforms and assets that may be present in the theater or on the battlefield. This has been our goal from the beginning, and we are committed to pursuing it. We are very excited about the opportunities to integrate our solutions with BlueHalo, although I cannot comment on that right now due to the ongoing regulatory approval process. We need to adhere to the rules set forth by the government and various departments, including the SEC and our shareholders. However, I can say that it is essential to our strategy to successfully offer this to our customers, as that is what they expect from us. We are fortunate to have a strong position since our solutions are widely utilized in government, and customers are pleased with how we have delivered these integrations and interoperability so far. We will continue to build on this in the future.

Louie DiPalma, Analyst

Great. And one final one. You discussed some pressure from Ukraine for the Uncrewed Systems segment. And we were wondering, how did Ukraine impact the Loitering Munitions segment? And just in general, what are the overall expectations for Ukraine funding and contributions to your business for this year and for future years, given all the discussions of a potential ceasefire there? Thanks.

Wahid Nawabi, Chairman, President and Chief Executive Officer

Yeah. So, Louie, it's a great question. I'm glad you asked the question because we feel very, very positive about the prospects of growth for our company regardless of Ukraine, regardless of any specific one conflict in any part of the world. The world is not safer than what it was before and it doesn't look like it's continuing to become any better, safer. A. B, Ukraine has tremendous existing needs for our systems and they continue to ask for more. Even if there is a ceasefire, we believe that there's going to be significant amount of buildup of capabilities to avoid another potential secondary or tertiary conflicts in that region. Lastly, I would say, our portfolio is incredibly diversified. The growth that we see in our Loitering Munitions is not fueled by one source or one particular customer or demand. It is global, it is multifaceted and it's going to continue for the next, I see, at least five years to 10 years. It's essentially become a shift in the defense strategy around the world, where small unmanned systems like our Pumas and Ravens and P550s and others as well as Loitering Munitions such as Switchblade are becoming a much, much bigger integral piece of that defense strategy for every one of the allies that we have and for the US DoD. So I think that's going to be a very strong healthy growth for us for the years to come besides and beyond Ukraine.

Louie DiPalma, Analyst

Sounds good. Thanks, everyone.

Wahid Nawabi, Chairman, President and Chief Executive Officer

Thank you, Louie.

Operator, Operator

Our next question comes from Greg Konrad with Jefferies.

Greg Konrad, Analyst

Good afternoon.

Wahid Nawabi, Chairman, President and Chief Executive Officer

Hi, Greg.

Greg Konrad, Analyst

Maybe just to start on international Switchblade. I think you called out three additional allies as part of that $55 million task order and also called out Taiwan and Greece. Can you maybe just remind us where you stand? I think in the past, you've talked about 20 potential customers just in terms of converting the rest of the international pipeline, and then also with the awards that you did get. How do you think about those kind of building over time? I'm assuming those were just initial quantities?

Wahid Nawabi, Chairman, President and Chief Executive Officer

Sure. As I mentioned during the call, one of the task orders related to the $55 million under the IDIQ links contract involved initial orders for Lithuania, Romania, and Sweden. Additionally, Taiwan and Greece have publicly stated their intention to purchase significant amounts of Switchblade. These are the initial orders we've received, and the list of countries looking to acquire both the Switchblade 300 and 600 continues to expand each quarter. We believe the growth outlook for Switchblade, including all variants, is very promising, not just for this year but for the years to come. For that reason, we are investing to increase our production capacity, aiming for a run-rate capacity of about $0.5 billion by the end of this fiscal year. We are also planning to establish another site to support business growth beyond this fiscal year and into fiscal '26. Our plans and expectations are solid. Over the next three to four years, we anticipate a large number of international customers will continue to place orders for Switchblade, establishing it as a strong long-term franchise for us. Lastly, we are investing in new variants of Switchblade, further expanding our portfolio. This represents a new category for the defense industry, where we are the leading provider with a significant head start over competitors. Our proven performance indicates a very positive outlook for growth in this business.

Greg Konrad, Analyst

And then maybe just to clarify one remark you made in the prepared ones. I mean you talked about the risk due to a change in administration, 40% of H2 revenues in Q3, but said you had 95% visibility for the year. I mean, how do you think about that risk materializing? And is that captured in the current guidance? How much of that's in the order front and how does that materialize?

Wahid Nawabi, Chairman, President and Chief Executive Officer

We have executed our first-half plans incredibly well, and I am very proud of what our teams have achieved so far. We are on track with our plans and setting new quarterly records while also anticipating a new record based on our current guidance. With 95% visibility at the midpoint of our revenue guidance, we are looking really strong historically. This is why we reaffirmed our guidance on the top-line and our profitability numbers. To exceed our expected performance, we acknowledge some risks due to the change in administration, the ongoing CR condition situation, and the timeline involved in converting backlog to revenue due to supply chain production and customer acceptance processes. Given all this, we reaffirm our guidance, and we expect another record year with strong profits and top-line growth, which will leave us with a very healthy backlog extending beyond fiscal '25. Our goal remains consistent with the past: to continue delivering top performance across all metrics we measure ourselves against and hold ourselves accountable to.

Greg Konrad, Analyst

Thank you.

Wahid Nawabi, Chairman, President and Chief Executive Officer

Thank you, Greg.

Operator, Operator

Our next question comes from Pete Skibitski with Alembic Global.

Pete Skibitski, Analyst

Hi, good afternoon, guys.

Wahid Nawabi, Chairman, President and Chief Executive Officer

Hi.

Pete Skibitski, Analyst

Wahid, I want to ask about a couple of Army programs that I don't think you were involved in, and just maybe you can give us some context. The first was this Army short-range reconnaissance program. I think it's a program of record; I believe Red Cat won. But you guys didn't really talk about it as far as I can recall, so it leads me to believe that maybe you didn't compete for it at all. Maybe you could validate that and give us a sense of why you chose not to invest or compete there? And then I have a follow-up.

Wahid Nawabi, Chairman, President and Chief Executive Officer

Sure, Pete, we intentionally chose not to compete for that program. It is a different set of capability that we strategically decided a while back that that's not a market that we're going to go very strongly on initially. There are several factors on the reasons why. A, making money in that market and that business is not an easy thing. And if you look at the financials of some of these companies, it's very evident in that regard. B, we see that we can deliver a lot more value for our customers and our shareholders by focusing on much larger and more systemic areas of demand globally that we can deliver a lot more value to all of our customers as well as shareholders. So we did not compete in that opportunity. At the same time, I just want to underline that we continue to monitor those specific capabilities and market niches. And we always have an option to come back in later if we needed to. And the customer also has not had a really good sort of successful outcome so far in terms of executing on that program. As you know, that program has been around for a long time, and still, the customers are trying to find the right set of capabilities to execute on that program even further. But you are correct, based on my readings publicly and the announcements of the customer, that Redcat Holdings has actually been awarded the next tranche of the SRR program.

Pete Skibitski, Analyst

I appreciate all that information. I have a follow-up about the Army's recent award, which I believe was for company-level UAVs. Andrew received one award, but I need to check on the other company involved. This appears to be a possible non-program of record effort with a quick turnaround. Could you provide some insight into what the Army's intentions are? Will this niche evolve into a program of record, and does it pose a threat to the LRR program? I’d like some context on this. Thank you.

Wahid Nawabi, Chairman, President and Chief Executive Officer

I'm glad you asked that question, Pete. The situation you're mentioning does not pose a threat to the Long-Range Reconnaissance program. In fact, it complements the LRR program. We are confident in our strong position within the LRR, which has robust support from customers and addresses significant needs from the warfighter’s perspective. Additionally, it represents nearly $1 billion in opportunities for AeroVironment or the market over the next five to ten years. Regarding the company-level ISR UAV that you referred to, the US Army is currently experimenting with a few other platforms to determine the best solution for a potential Medium-Range Reconnaissance program. This initiative is still in its early stages, focusing on experimentation with limited funding to assess performance and operational capabilities. We are monitoring this situation and plan to compete for the MRR program, and we are confident we can perform well, as we have in many previous engagements. Our primary focus right now, however, is the Long-Range Reconnaissance program, and we anticipate updates from the customer in the next couple of months, where we believe we are performing strongly in the ongoing competition.

Pete Skibitski, Analyst

Okay. Thanks so much for the color. Appreciate it.

Wahid Nawabi, Chairman, President and Chief Executive Officer

You’re welcome, Pete.

Operator, Operator

Our next question comes from Andre Madrid with BTIG.

Andre Madrid, Analyst

Wahid, Kevin, thanks for the question. I know previously, you guys have called out that Ukraine was roughly about 40% of sales at some point. Could you maybe call out roughly how much attributed to this past quarter sales?

Wahid Nawabi, Chairman, President and Chief Executive Officer

Historically, in fiscal year 2023, our 10-K filings indicated that approximately 40% of our revenue originated from Ukraine. This demand surge for Pumas occurred when Ukraine had none available, and subsequently, the US Army provided a significant quantity to them. Recently, we anticipated that Ukraine would reach a level of operational resource tempo, and they have shown a strong preference for Pumas. They continue to acquire more to support their existing fleet, and the performance of Puma remains unparalleled in Ukraine. About 1.5 to 2 years ago, we made a strategic decision to diversify our revenue mix to ensure continued growth, even if demand from Ukraine for Pumas and Switchblade were to diminish. We are witnessing considerable new demand for our solutions, which has allowed us to maintain top-line growth. I believe that irrespective of the situation in Ukraine, the demand for small UAS, including Pumas, P550s, Ravens, JUMP 20, and our loitering munitions, will persist well beyond Ukraine, even in a scenario where global demand halts. There are strong drivers for demand and a robust pipeline for these products beyond Ukraine. As previously mentioned, we've announced several new countries, numerous new platforms, and several new program records that are emerging, which gives us confidence in our position in both small UAS and loitering munitions.

Andre Madrid, Analyst

Perfect. That's helpful. And on your final remarks on the number of countries you announced, I asked about this last quarter. You previously had said something around half a dozen plus different countries in which you're actively engaging with and kind of in the red zone with, so to speak. Where does this number stand out now? Have there been additions with some of those that we've seen finalization with? How should we think about how many we have in the red zone right now?

Wahid Nawabi, Chairman, President and Chief Executive Officer

Sure. So I think you see just today, I reiterated two of the five countries, Lithuania, Romania, Sweden, those three actually placed initial orders with us. We just received their initial orders. And then Taiwan and Greece are asking for and are requesting, and they have an active case. In addition to these countries, we have another half a dozen plus list of countries, which is in different phases of their acquisition process. The process takes time. It also requires quite a lot of effort from the US government and state department side besides the customer side. And I believe that within the next several years, the list of countries is going to continue to grow. And the list of customers and installed base for Switchblade is actually going to continue to grow. I foresee in the next two to three years that the loitering munitions business is going to have a robust set of international customers almost equivalent to our domestic business and very similar to our small UAS franchise that we have in 55 countries internationally. We should have a fairly large list of countries internationally for Switchblade as well. Switchblade is just the gold standard around the globe now with all of our allies in terms of loitering munitions. And we are thrilled because our strategy to invest in this segment and to deliver that capability has worked. And I think we're going to benefit from that and our customers are going to benefit from that in the next decade or so.

Andre Madrid, Analyst

Really appreciate the color. Thank you, Wahid. I'll jump back in the queue.

Wahid Nawabi, Chairman, President and Chief Executive Officer

You’re welcome, Andre.

Operator, Operator

I'd now like to turn the conference back to Jonah for closing remarks.

Jonah Teeter-Balin, Vice President of Corporate Development and Investor Relations

Thank you, and thank you once again for joining today's conference call and for your interest in AeroVironment. As a reminder, an archived version of this call, SEC filings and relevant news can be found under the Investors section of our website. We hope you have a good holiday season and look forward to speaking with you again following next quarter's results.

Operator, Operator

This concludes today's conference call. You may now disconnect.