AeroVironment Inc (AVAV) May 13, 2026 Conference Transcript

So Waheed and Sean, thank you for joining us. You know, we've got Waheed Nawabi, is that right? That's right. And Sean Woodward. Waheed's the CEO. Sean's the CFO of Air Environment. So thank you for making time today to talk with us. Thank you. Thank you for having us.

Yeah.

And for those that don't know, Sean's the new CFO of Air Environment. So welcome aboard. Thank you. Thank you for working with you. So maybe just a broad question to start. How's business?

Busy as heck. Good busy. There's a lot of dynamics going on in our industry that we're ramping up production. We had a, you know, I can't talk about the specifics of Q4 because we're in a quiet period. But, you know, it's a very critical quarter for us. We must execute and deliver. we're going to share those results and outcomes in a month or so a month and a half two months and uh but besides that there's a lot that's going on in the industry in general as you know the budget dollars that were appropriated and authorized uh late january early february that is just making its way to the department of war and a lot of those are going to be obligated into contracts so last month or so plus the next three to four months is going to be very busy in my view for us and then right after that there's a lot of discussion and attention on fiscal 27 budget the one and a half trillion dollar and a step function massive increase in our areas which is the autonomous systems the wars of drones basically they're asking for about 75 billion dollars worth of funding to spend in the areas that were like the number one number two player and everyone categories those things. So, busy. And then at the same time, we're trying to ramp up production. We're trying to support the U.S. government on active conflicts that are going on in Ukraine, as well as in a program or the initiative called Epic Fury, the Persian Gulf. And then, of course, there's an emerging potential threat that's happening in the Pacific that U.S. has to get ready. So we don't have time for any leisure activities.

Maybe quickly, how are you thinking about, because you mentioned the $70 billion, how are you thinking about the Defense Autonomous Warfare Group and what that means? And does that change anything?

Yeah, so I believe this is part of the department's strategic goal to consolidate the decision-making for these areas into one bucket of funding, number one, and two and one authority that can drive strategic decisions on allocate where the gaps are, how to prioritize those things, and how to execute against them. Still, majority of the execution is going to happen within the services and the program offices and contracting offices that is designed to support the Army, the Navy, the Marine Corps. but the dog we've been involved in very heavily they are incredibly active in lots of different areas that you know directly relates to our stuff and it's i believe uh under secretary or deputy secretary feinberg's vision and intent to try to have this realignment and focus and direct line of responsibility and authority to be able to execute and command and drive the ship and we support it it's been very very actually i think it's a good change that is going to hopefully help

move things faster in the next 12 months gotcha gotcha um and when we think about you mentioned your current kinetic events going on in the world like ukraine yeah iran it does seem like one of the things at least it speaks to me that's come out of iran is the vulnerability of civilian targets to unmanned systems so can you speak to what that means for our environment sure in terms of an opportunity and so i mean this is like our moment if you ask me the reason why because four or five years ago every military leader you met within the building or outside the building or in the world they thought i need more f-35 times airplanes i need more aircraft carriers

I need more tanks, I need more armored vehicles. And that's been the story of defense for the last multiple decades. These two conflicts have shifted the paradigm dramatically. Ukraine basically put an exclamation mark that you've got to deal with drones that are armed, and how do you make a lot of them, and how do you defeat them? And then now the conflict in Iran where U.S. is actively involved and the other one where we're indirectly involved, this one we're directly involved, has shifted the paradigm even further because we thought, okay, they may have like 20 or 30 or 50 of these shahids, but there are thousands, thousands of them. And who knows if Iran can do thousands and thousands, China could probably do hundreds of thousands, if not millions. And so we don't have the capability to, A, defeat that many and do it in an economic way. And so the war of drones has become now the defense against drones in the counter-UAS world. And these areas are the areas that were the number one or number two player in the world. And so we're positioned phenomenally well. And I think this story and this strategy is going to continue to gain more momentum in terms of spending dollars being more aligned towards these capabilities because U.S. doesn't have it. And I can give you several examples of the areas that we play in. That'd be good. So first of all, if you look at our portfolio, it's a very diversified portfolio of first non-lethal drones. We're the number one player in the world on Group 1, 2, and 3, which is by far the lion's share. A group one is small quadcopter, the DJI size, all the way up to group three, which is a shothead drone. We are the leader in small UAS and medium UAS. Our Jump 20 system and Jump 20X is the world leader. We have won seven consecutive program records internationally in the last 12 months alone. These are five 10-year programs that our European allies are coming to us and they're actually procuring these systems. We compete and we won every single one. We lost one out of the eight, and that was because of our own fault. We submitted a noncompliant bid. But the other seven, we won. And then we get into the lethality systems. This is loading munitions such as Switchblade and our one-way attack drones such as Red Dragon and Dragon Family. And then the latest product that we announced called Mayhem and the Switchblade Family. That, we're the world leader. We're the largest producer of these systems in the world, and we're the dominant player there as well. And then on the counter-US side, we have a layered approach to the solution set. We do not believe there is a one solution that fits all. There is going to be a layered approach to defending against these drones. And the first mechanism is RF jamming. We have the world's best RF jammers that is the most successful, the most predominantly used one in Ukraine as well, and called the Titan Series. And that business is doubling every year, literally. And that's one. so you apply that but shy heads are actually immune to that then chinese drones are going to be immune to that because they don't have rf signals and so then you have to go to the next layer which is the most economical it's called the directed energy laser weapon systems we've got the world's best performing most reliable direct energy system called the locust series and we announced our newest product like a couple months ago uh called the x3 x3 is basically putting a system on top of a striker or jail tv that allows you to go you know you'd be driving down the road you can detect the drone and you can defeat the drone while you're driving it and the key milestone for that is the first ever historic program record for the u.s army called e-health emerging or emergent high energy lasers they need to make it they are planning on making a decision within the next 30 90 days and that will be the first ever production level program record for a laser weapon system in the u.s military's history and we're competing for that and so that should open the floodgates and then the third layer for us is a kinetic kill so if you can't defeat it with jamming you can't defeat them with laser weapon systems then you're going to use a missile or a kinetic kill like a switchblade that is not the cheapest and the solution that u.s has today is only one The solution that we have is every time a Shahid comes to us or something small in a Shahid, we use a $2 million to $3 million missile, and we're depleting our inventory of missiles that's supposed to be used against ICBMs and big airplanes and other things. So we have a program of record that we're competing with the U.S. Army called NGCM. That is the next-generation counter-U.S. missile. There was two players. It was us and RTX, and we were down-selected. We were awarded the contract. We're now going to be delivering 80-some-odd systems. It is the first ever missile that is going to be developed specifically to a target and defeat group one through three drones. And it's going to do it at a fraction of the cost of a missile. It's in the $150,000 price target, not $3 million targets. So our solution said, as you can see, it's a very layered approach. We're focused on the long-term war, not the short-term battles. and we're making sure that we progress in every single category as we go forward and then i mean if we can just maybe pull on that string a little bit more how do you think about civilian targets because something that jumped out at me was when the burge got hit you have this high profile civilian target is there a world and i don't want to like kind of get too out there but where every single high profile civilian target has some sort of protecting system absolutely there's a scenario and i firmly believe that i hope it doesn't get to this it's very unfortunate it would be very unfortunate there's a real catastrophic event you talk about olympics world cup music festivals and nfl games uh you know we were on an airplane uh the story that nfl now has no major late baseball league has a person who is looking after how do i protect stadiums and gatherings against drone uh you know attacks so they're just starting hiring one person to lead this effort within the entire mlb and that's going to happen in all these places and most likely the most obvious solution so so first is golden dome which is about military sites and critical infrastructure for the national security and it's domestic mostly but after that it's going to be every nuclear power plant every hydroelectric dam every uh water sanitation site every stadium every musical data centers these sites are all going to have to be protected because three or four people can cause a lot of havoc internally and so you may not see a x3 uh high energy laser but you will see definitely a titan jamming system and at the lower end you probably see a five kilowatt smaller size locust system installed at these critical sites the market for that is basically tens of thousands of sites not a hundred site and we're kind of getting ready and positioning ourselves for that the biggest hurdle there are going to be just uh regulations and i have one piece of great news where the u.s uh department of defense and faa just announced that our product locust has been now proven to be safe and operationally deployable domestically. That was a major announcement that just came out literally last month or two. And that's going to most likely open up doors for the adoption of these things in the next couple of years.

And then maybe switching to Sean real quick. As you've come up to speed on the company and started talking to analysts, investors, is there anything that jumps out at you that are potentially misconceptions people have about the business and the business model?

Yeah, great question. Looking at the portfolio that we have right now and the key products and franchises that we have current and soon to be rolling out, I think just the understanding of the market sizing for that and the ability for us to bring these to market and win is not quite understood. And we've done a lot of communications, a lot of explaining of what the new portfolio looks like, but I think we're going to continue to hound that message. And ultimately, I think that's where, you know, looking at the models, we'll be able to see for the growth and adoption of these commercialization strategies and the key franchises that we acquired.

And maybe as a follow-on, and maybe you haven't seen it enough yet, but is there anything you'd want to change in people's models where if you see an outside model, you're like, that's just not right? Is there anything that jumps out at you like that?

Yeah, I think just looking at the ability for us to deliver and grow profitably has been undervalued from a multiple perspective compared to our peers. You look at a lot of our peers, the multiples are much more favorable and they're losing money or they're just starting up in their ramp on volume. We've been doing this for years. We understand what it takes to bring products to the market and be successful in it, and we think our multiple is really kind of undervalued.

Got it, got it. And then, you know, Wahid, how are you thinking about the balance between, you know, the smaller UAS and the larger ones and procurement priorities? And maybe you might add on there, I'll make it a more complicated question. And then how do you reconcile that with some of the other competitors in the market and the Europeans are going to this market?

So, I mean, we've been competing with the large primes and small startups our entire history and existence. I've been with the firm for over a decade and a half, and there's not been a single year that I don't go to a conference or to an event where there's not the concern about how are you guys going to compete with startups and how do you compete with VC-backed companies? if you recall the drone commercial drone insanity that happened like 10 years ago we started counting actually companies it was over 1 500 of them and i tend i look around now we stopped counting because there's still many and all of them shifted to defense you know we're not going to make money here that we're going to find a market in the defense market i think one or two is still in existence and they're still not profitable and they still haven't reached any level of scale whatsoever um so that's that's the fact about the last 30 years um a b we are the model that most of these companies are copying essentially the business model of investing in r&d developing products rapidly the disruption disruptive capabilities and bringing it to market and scaling is what they really all want to do so that's not a surprise the third thing is the market is growing so fast and so becoming so big that there's room for more players and it's it's obvious it's going to attract more investments because the investors look at where the puck's going and there's a lot of money to be made here and that's why they're doing it and but what differentiates us is exactly what i said and sean said which is you know there's one thing that elon musk says that i really believe in you know 10 of the effort is doing a prototype 90 of the work is when you're trying to scale that in thousands of units. How do you scale to deliver reliable quality product and thousands, if not tens of thousands, over the long term? There's a lot of work to be done there. And I have this debate with our engineers all the time because, you know, they're done. They're not done. There's a lot more work to be done to be done. And that's something that nobody can match with AV. You know, if you look at small drones, we've got the largest installed base of small drones in the military ever. You know, 55,000 plus systems. If you look at our number of customers, 55 allied nations besides the United States, every branch of the U.S. military. We are the dominant player in these categories, and we've been the number one since the beginning. Production capacity on all these categories that we mentioned, we are in full-rate production in eight or nine of these ten products. And we're making it now in volume, and we're already in second-gen, third-gen, fourth-gen product, every single one of them, right? Like Puma, we're in Puma 3, third generation. The current Puma is like nothing like the original Puma. Everything inside looks different. So we have an advantage there. And the last thing I'd say is our technology stack is incredibly a huge differentiator too. We design 90% of our subsystems ourselves. We design our structures. We design our motors. We design our autopilots. We design our autonomy package. We design our ATR package. We design our propulsion battery packs even, gimbals. So having the ability to stack up the technology and optimize the performance of the drone allows us to beat competitors when it comes to program record competitions. Because then little difference here and there makes a huge difference on the outcome. You know, I had an investor call or meeting earlier and somebody said, we have a group two drone called P550. And there's a competitor. There were the two down selects on the Army program record called LRR. But pound for pound, our product outperforms significantly. And the program record selection is going to most likely reflect that. And we'll see who's going to be the winner. But that's how we also keep a differentiation between us and everyone else. We welcome competition. It allows us to stay competitive and on our toes. But most of our worry is not competitors. most of our worry is making sure that we execute on our plans and the budget dollars flow so we can go delivery and i mean just a maybe a tangent to that is there an opportunity as the market grows and if you know if there's room for other players to be a merchant supplier like for example your gimbals doesn't it yes could you sell them to somebody else who needs gimbals or your motors because i know getting motors domestically can be tricky right a lot of that kit comes from yeah so the answer is absolutely yes in fact we are doing that today in some areas initially we got into these things because nobody else was producing them or manufacturing them or designing them there was no such company that made motors for a military-grade drone which you could buy was a rc helicopter or airplane drone a motor or servo or whatever so we designed these things ourselves now there are players that make subsystems and they're making them for us too but we still design them. Lastly, I would say that we are currently doing that in some areas already. For example, if you look at our ground control station, we bought a company four or five years ago called Tom Hawk Robotics. The concept behind that is that U.S. Army has got a program record called HMIF, Human Machine Interface Formation. Essentially, if you're a soldier, you're going to have multiple robots, ground robot, two or three drones, loading munitions. you don't want to carry five different controllers and radios and battery packs you want to carry one and you would be able to control and communicate and operate these so they competed this program and we competed in andro and others on the competitor we want and we now are providing that as a solution to a variety of different drone manufacturers in fact we ship more of that product with our competitor drones and robots than our own and the goal is obviously to stay agnostic there uh gimbals we've thought about gimbals a little bit more tricky because you have to be involved in a design phase of the product itself unless you get to our larger sizes but certainly that's another area there's areas of even propulsion motors and others that we could do that we've been so busy you know making products and producing to fulfill our own needs we haven't had the need to go beyond that but that's definitely going to be the case going forward to some extent gotcha yeah oh last thing i would say if you don't mind sorry on the autonomy and computer vision we're currently integrating our autonomy packages basically the brains of the drone and a variety of our competitors not only just drones but usvs uuvs uavs uh of many of our competitors today it's because it's the best performing and we believe in a very modular open systems architecture so you can swap any of our subsystems with anyone else's whether it's hardware or software it's it's do it's doable today and that's that's how we built architecture and truly open system because you hear an open system gets thrown a lot by some players that maybe aren't really open system but they say they're open system yeah well the best i took i completely agree with you right and open system there's a spectrum of openness to where you are. The best way that open system is being implemented, in my view, truly being open system is what the U.S. Army is doing, called MOSA. MOSA is a very robust effort by the U.S. Army to develop a strategy on how to develop product from ground up that is compliant with open modular approach where the interfaces are standardized. You share that with the customer. You disclose that. They have that. And any time if someone else has a product that meets that requirement, it could be swapped in and out. And P550 was designed from the ground up to be 100% MOSA compliant. And it is today. In fact, every module is swappable. Switchblade 400 and Mayhem is designed from the ground up to be 100% MOSA compliant. We did not go and tweak the product to become MOSA compliant. We design it from the ground up to be such, in that way. And so very much similar things can be said about Jump 20. Jump 20 airplane has 60-plus gimbals and payloads integrated into it. None of them are AV's own payloads. They're all third-party payloads. Whether it's a gimbal or an EW or a laser designator, we use a variety of different vendors' products. They're flying in the military customers today. And so we firmly believe in that, and that's open. Now, if you ask me, is the radio on our device completely open, there's only a certain level of openness that we can share there. Gotcha.

At the subsystem level, it's completely open modular. And then, Sean, another question for you. What lessons has the company learned from the acquisition of Blue Halo? My guess is that probably went a little more bumpy than...

We're one year in now. It's been one year since we closed. On May 1st of last year was our closing date. I've been part of the company for almost 16 years. I've been part of every M&A that we've done up to this point. Every other one was a tuck-in or bolt-on. This one was transformational, and we were very aggressive with that. We were intentionally taking parts of that business and reorganizing ourselves into to-do operating segments to ensure that we had the product capabilities, the go-to-market, the synergies of our technical teams working together to really set us up for the way we wanted to be projected in the next few years. That was a lot of effort to go under. We were doing that at the same time that we were rolling out a lot of digital infrastructure changes in our own legacy company. So a lot of people changes, tool changes, process changes, but we did it intentionally and aggressively. So lessons learned is we're building on this. We're going to continue to be acquisitive. We're going to find other targets, and we're creating playbooks. We're getting more ahead of plans on how we're going to roll people into the company. But this was kind of transformational, the Blue Halo deal.

Is there any change to how you're thinking about when you diligence an asset?

We go through diligence on many different companies every year. We assess the contracts. We assess the pipelines, all the normal diligence. We do QOVs. We look through all that. I think we have a pretty robust process there on the diligence side.

Yeah, and I think one of the strengths of having Sean in this role is because he's got 15 years plus of experience with AV. He is very aware and knowledgeable and deep into the business processes that we have. The digital transformation that he's referring to, we have basically gone massively invested in our ability to upgrade our ERP system to Oracle Fusion. We are basically the poster child of Oracle when it comes to Oracle adoption fusion for airspace and defense industry. And we're now starting phase three. We're already done with phase one and phase two. And so that's, Toronto's been instrumental in that. There's a lot of lessons learned in this area, as you mentioned. But we're not doing this slow. We're doing it to build that one AV company long-term that is truly, truly integrated, diversified, and it's got automation and a lot of what I call business process improvements in almost all of our processes. I know.

So kind of back to the beginning of a conversation where we're talking about the dog, right? The way the budget process is coming together for fiscal 27, it seems kind of complicated. Right now, there's talk of a third reconciliation. If reconciliation doesn't come through, and a lot of the funding per dog is in that, how do you think about that? What's that mean for you guys? What does it mean for the industry?

Sure. I'm not an expert in this area, but we have some experts within our company that knows us really, really well because they come from the Pentagon and from the legislative branch. Essentially, what I see is the following. So I'll share with you what I believe based on what I've learned. And I think the department is trying to consolidate the decision making in a lot of these areas. That's why they've taken a whole bunch of line items from a variety of different programs and line item budget. and putting it all into one big bucket called the, you know, the autonomous systems drones unmanned, $75 billion. The likelihood of them getting that money is very high. If they get it all in one bucket or not, I don't know. So the reason, the question is why do they get all that put into one bucket? And the reason for that has to do with the fact that the secretary and secretary, undersecretary, Deputy Secretary Feinberg would like to have direct oversight and decision-making authority over what is being decided and how are we moving forward with that decision. A. B, they really don't know what they're going to buy. They could be buying 1,000 Switchblade 300s or 5,000 Switchblade 400s or 2,000 Red Dragons. The number in these quantities of what flavor of what across the portfolio of all these systems is not really well known because they're developing requirements and playbooks as they're going forward. And so their argument to the Congress is, I need to have some level of flexibility. And that is counterintuitive or anti-desire of the Congress. They would like to have line item specificity as to what you're going to buy and why and how many. And that is going to be a little bit of a battle between the department and the congress but overall it is bipartisan support both houses of congress and the entire administration that we need to fund defense at a much bigger levels i think the one and a half trillion dollar is real not unreal and if they even get somewhere close to that number is a significant amount of money yeah and they're going to have a difficulty spending it fast enough rather than can they actually get the money. And you know that we already have a record of them having this problem, and what makes it even more complicated is that there is this election cycle coming up, and if Democrats believe that they're going to pick up some seats and they're going to have control of one of the houses, that will incentivize them to just not cooperate right now. And I think the likelihood of a CR is probably not low, it's high. However, they're going to eventually get the money, I believe, because the need is there, the support is there, and the question is how much, where, and what form, and when.

Yeah, that makes sense. When you think about the international demand, how durable is that? And how much do you worry about, you know, as Europe goes up, as they invest in an industrial base and they build out their own industrial base, does that feed into your overseas sales? How do you think about the durability of it?

Yeah, I mean, you see from our track record, right? We're a poster child of a success story about being able to successfully become a real significant player internationally. In some years before Blue Halo, 50% of our revenue came from international sales or customers and products. So we are very good at it. We've been increasing the number of countries. A, it's a legitimately significant part of our business. It's part of our diversified portfolio and customer base. And lastly, I do believe this whole European demand could be a little bit overinflated. If there is a recession, as we know, and the countries that are claiming they're going to spend as much money, A, they want to do it domestically to some extent, so they have a lot of incentives to make sure that companies like us become more local and we that's part of our plan we've been aggressively attacking that and we continue to expand internationally but i believe that the demand might be a little bit overstated too um it may not be realistically realizable for them regardless again the same scenario applies internationally as domestically the categories that we're in it's not like buying more tanks it's buying the stuff that they have none of not money at all and it's going to be a step function increase even if they spend half of that much or one third of the amount they're claiming and their problems are real i mean the russian the threat in europe is not going to go away the chinese threat in the pacific is not going away and both of those two theaters have got a lot of vulnerable countries that need to do something about their you know national security and we are really good because the solutions that we make is phenomenally more affordable than getting another F-35 or a F-22 or something like that. And we not only fit the strategic need, we also meet the economic equation very effectively because they can get more stuff with our stuff. I mean, think about like Jump 20, right? There's a great example. You can have a group four, five drone that costs $20, $30 million, and the operating cost is massive. It's more vulnerable, and it requires a full runway to operate, and the infrastructure is huge. Or you can have a drone that takes off from the back of a small little fast ship. That's Jump 20 that flies for 10 to 20 hours. And that solution, it does 80% of the missions of that bigger drone. And it has lethality, it has ISR, it has EW, it's SIGINT, all these missions you could fly. And that's why Jump 20 has been so successful. Because we knew that there's a sweet spot that addresses the problem very effective. effective and so those solutions are going to become more and more relevant because that's the most this most logical this you know decision for a customer fraction of the price fraction of the price fraction of the logistical footprint so much easier to retrofit a ship to put that on board than a fixed airplane huge huge advantages safer you know autonomy built in and these things are things that we've been working on knowing that this is this this moment is going to end up happening happening eventually and so that that's that those are the kind of examples that we're into and then maybe just as you wrap up here a question for both of you i mean how do you think about product development spending i mean what for an innovative company what is the right level of r&d spend what is the right level of product development what yeah shouldn't you be spending how should we think about that i would say this there's always more demand and appetite for investments in r&d and company and our av then i've always been in the case we have so much not only just the viable opportunities but real legitimate cases i think it's part of our success strategy in our business model and this is why it's being copied with by hundreds of companies if not thousands of other competitors now they're getting into the space which is we've always believed in developing products at an agile space ahead of the requirements and delivering solutions to the customer's problems way ahead of even a program record and then working with the customer to tweak it to make it perfect for the solution and that's how our franchises were born historically we've been between 10 to up to 18 percent of revenue you know as low as eight nine percent as high as that the blue halo acquisition brought the percentage down because the revenue went up, and their R&D was much lower. We're like 7%, 8% now. But I think 8% to 9%, 10% is where we're going to be. We intentionally are not increasing EBITDA margins as we grow because we're going to continue to invest because we don't want to miss out on the growth. There's a significant growth coming our way. We need to develop these products and bring them to market so we can capture the opportunities. And there's a dozen different billion-dollar programs that we're like the best contender for and so that's why we're investing in things we've been launching new products every quarter if not you know more than two or three times a year we've got to jump 20x we've got switchblade 400 we've got mayhem we got x3 we've got titan 4 these are all products that come out five six products in the last 12 months alone and that's where our money is going and we're winning programs with them and we'll continue to you know grow our business so i think that is not going to change anytime soon in my my i agree yeah and yeah say that call it nine percent just yeah picking that out of there how much of that's customer funded and how much of that is just you guys your sweat equity so the nine percent is a hundred percent ours okay yeah if you add the customer funded r&d on top of that it'll probably almost get to 15 gotcha yeah but our own money alone is about nine irad internal r&d is about eight to nine percent of you yeah THANK YOU VERY MUCH, THANK YOU FOR HAVING US. THANK YOU.