Earnings Call Transcript - RCAT Q4 2025

Operator, Operator

Greetings, and welcome to the Red Cat quarterly earnings. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ankit Hira, Investor Relations. Thank you, Ankit. You may begin.

Ankit Hira, Investor Relations

Good afternoon, and welcome to Red Cat's Fourth Quarter and Full Year 2025 Earnings Call. Joining us are Red Cat's CEO, Jeff Thompson; COO, Chris Ericson; and CFO, Christian Morrison. Please note that certain information discussed on the call today will include forward-looking statements regarding our future events and Red Cat's business strategy and future financial and operating performance. These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict and may cause actual results to differ materially from those stated or implied by those statements. Certain risks, uncertainties, and assumptions are discussed in Red Cat's SEC filings, including its most recent annual report on Form 10-K and other SEC filings. These forward-looking statements reflect management's beliefs, estimates, and predictions as of the date of this live broadcast, March 18, 2026, and Red Cat undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. In addition, our comments on the call today will contain references to non-GAAP financial measures such as adjusted EBITDA and key business metrics. Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures as well as definitions of the key business metrics referenced and management's reasons for including the non-GAAP measures and key business metrics referenced may be found in the press release. Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link available on the Investor Relations section of the company's website at ir.redcatholdings.com. With that, I'll now turn the call over to Jeff.

Jeffrey Thompson, CEO

Thanks, Ankit. Good afternoon, and thank you for joining Red Cat's Q4 2025 Earnings Call. I'm going to let Chris Ericson, our COO; and Chris Morrison, our CFO, discuss last year's extraordinary Q4 results, which annualized would be over $100 million. I am going to cover Blue Ops, Black Widow work in Ukraine, drone dominance, and guidance. A year ago on the same call, we announced our new mission, Maritime USVs. We found a management dream team in the early summer to build this division. The new team spent many weeks in Europe to learn how these boats were so successful against the Russian Navy. By August, we had preliminary designs. And by December, we had a boat in the water driving autonomously and out-of-the-box ATAC capable. We found a boat factory in Georgia, signed a lease for 155,000 square feet. That factory just went operational approximately 1 month ago, and we'll have full rate production tooling later this month. We believe and are confident that they can build over 100-plus USVs in 2026 as we ramp up production capability to thousands. Blue Ops is a strategic and important part of Red Cat's family of systems. It opens the rest of the globe for Red Cat. Our family of systems was limited to 30% of earth. With our new Variant 7 and other hulls, we can now launch from 100% of the globe. We believe that our Blue Ops USVs can keep our warfighters out of harm's way and make them more lethal. We believe Blue Ops could be very helpful in Venezuela, in the USVIs, the Gulf of America, Cuba and urgently in the Strait of Hormuz. Blue Ops demonstrated partners on Innovation Day that was timely. We demonstrated short-range and long-range counter drone capability. For short-range, we have the ACS Bullfrog on the front of the Variant 7 that can shoot down FPV drones up to 1,500 yards and can do the same to a Shahed-136. For long-range, we have the Aeon's Zeus that can travel 20 kilometers and take out Shahed-136 at a very low cost. The two weapon systems combined on the Variant 7 controlled miles away can deliver a potent deadly deterrent for short-range and long-range counter-drone operations. Let's move on to recent work in Ukraine with the Black Widow. Last fall, we deployed a team to Ukraine in hopes to get them a drone to replace the Chinese ISR drones and to verify the drones we are delivering to soldiers would work in an actual battlefield. The team received an MOU, an LOC, and recently a letter of request. I'm going to have Chris Ericson, who just got back from Ukraine last night, give more details on this mission. I also want to thank the Red Cat ICC team for this hard and dangerous work. Drone dominance. As you know, we did not make the cut at drone dominance Gauntlet I. I have a lot of excuses, but I'm not going to go there. We are preparing for Gauntlet II and hope to have better results. But we believe even if we lose every stage of the Gauntlet, we will still be one of the larger beneficiaries of the program. There's going to be a total award of 350,000 FPV drones. Going by the Ukrainian ratio of 20:1, that requires 17,500 ISR drones or 8,750 SRR systems. Sensor shooter requires a sensor, and that's what the Black Widow is. We will support the Drone Dominance program in any way we can. Guidance. We are not currently ready to offer official guidance. We want to have our government contracts in hand before we give guidance. We do not want a replay of last year during the continuing resolution. Fortunately, we have a budget for 2026, which also just received an additional $150 billion, and it looks like we'll be getting another $50 billion for Iran. We don't have to wait until the next quarterly to give an update on guidance. And as soon as we have the contracts in hand, we will update the market. And with that, I will hand this to Chris Ericson.

Christian Ericson, COO

Thank you, Jeff, and good afternoon, everyone. With that intro, I'll skip ahead a little bit and talk about the most interesting part of my script. Yes, I just returned from Ukraine yesterday. My first overarching impression is that I was in awe of the spirit of resiliency of the Ukrainian people. They continue to show how David could stand up to Goliath, and my favorite retort to that comment was only comparable if David wasn't given a sling and rocks. We have now established an office in Kyiv and have a fabulous team. We are building the business and relationships to most effectively, one, test our equipment at the front and obtain true feedback; two, identify new product and integration partners with battle-proven technology; and three, use this knowledge to increase the efficacy of our unmanned systems. I'm happy to report that we have tested multiple systems at the front and proven that our tech works and works really well. This has now resulted in Red Cat receiving a letter of request from Ukrainian forces to provide our systems to begin replacing the use of Chinese-made ISR drones. Black Widow's compact rugged design and secure communications architecture has proven invaluable in real-world deployments, which will contribute directly to mission success for our defense customers. And finally, this past week, we entered into a joint development agreement with a Ukrainian state-owned partner to bring new battle-proven technology to our USVs. This agreement is a huge step forward as we are the first non-governmental entity to successfully enter into this type of deal, which will enable the future transfer of battle-proven technology to us and our allies. So let's change directions a little bit and talk about how the factory is the weapon. We have quickly learned through current global conflicts how important factories and capacity are critical infrastructure in supporting a country's defense. Over the past year, we focused on acquiring talent, improving processes and tools, transforming from a fast-moving start-up to a repeatable, high-reliability production enterprise that can deliver quantity and quality and stability to our customers. Our operational performance in Q4 2025 reflects the successful execution of our multi-domain strategy and our ability to adapt rapidly to the evolving defense technology landscape. We achieved remarkable production scalability while maintaining the quality and security standards our defense customers demand. This represents our ability to search production capacity, demonstrating the operational agility that sets Red Cat apart in the defense contractor community. We remain on track to scale Black Widow Drones output to 1,000 units a month in the first half of 2026, and our USV boat manufacturing will have first deliveries expected in Q2 of 2026. The regulatory landscape shift following NDAA Section 1709 implementation has fundamentally changed how we operate, creating unprecedented opportunities while requiring enhanced focus on supply chain security and domestic sourcing. We responded by strengthening our American manufacturing capabilities and expanding our network of trusted domestic suppliers. Our NDAA-compliant supply chain has become a significant competitive differentiator, allowing us to capture market share from foreign competitors who can no longer serve defense and government customers. Our manufacturing expansion has been transformational with overall facility square footage increasing from 36,000 square feet last year or two years ago to 254,000 square feet in Utah and across new locations in Florida, Georgia, and California. Our Salt Lake facility now operates at an impressive capacity, having produced 50 Black Widow drones per day, proving the ability to produce 1,000 drones per month on a single shift. The facility has room to triple the manufacturing lines and add additional shifts. Our FlightWave facility in Torrance can produce 125 Edge 130 drones per month using only one-third of its available space. Additionally, our Valdosta, Georgia facility provides 155,000 square feet dedicated to our expanding Blue Ops maritime production capabilities and room to produce more than 100 boats per month. This strategic expansion positions us to meet accelerating customer demand while maintaining our commitment to quality and security standards. During the quarter, we triumphed when faced with the challenge of rapidly scaling production to meet accelerating customer demand and still maintained our rigorous quality standards. This record quarter. We also expanded our manufacturing partnerships, most notably with Hodgdon Shipbuilding to ensure the ability to quickly pivot for growing demands across all operational domains. Our expansion into maritime operations through Blue Ops represents perhaps our most significant operational advancement, extending our family of systems approach beyond the air and land domains to uncrewed surface vessels. These USVs leverage the same autonomous technologies and secure communications that have made our aerial platform successful while addressing the growing demand for maritime domain awareness and operations. The partnership with Hodgdon Shipbuilding brings proven shipbuilding expertise to our advanced autonomous capabilities, creating a unique value proposition in the maritime defense market. This operational growth has truly placed us in prime position for the future, where the factory is the weapon. I'm sure you may have some follow-on questions, but first, I'll turn the call over to Christian to discuss our financial results, after which we'll take questions. Christian?

Christian Morrison, CFO

Thank you, Chris. I'm pleased to present Red Cat's financial performance for the fourth quarter and full year 2025, which represents a transformational period in our company's growth trajectory. For the fourth quarter of 2025, revenue was $26.2 million, up $25.0 million year-over-year and up $16.6 million sequentially as deliveries accelerated. This growth was driven by robust defense and government customer demand, our expanded program wins, and our ability to rapidly scale production for mission-critical requirements. Gross margin was 4.2%, up 85% year-over-year and down 2.4% sequentially, reflecting mix and ramp dynamics typical of our growth phase. For the full year 2025, revenue was $40.7 million, up $25.1 million year-over-year. Gross margin was 3.1%, up 332 basis points year-over-year, partially driven by scale benefits and manufacturing improvements. Gross margin can be volatile on a quarter-to-quarter basis due to revenue levels that include fixed costs reflected in our cost of goods sold and investments in productions that are not yet at scale. We are continuously implementing more efficient processes and procedures that will enable us to capitalize on the expected increased demand and growth. Our ability to deliver and perform has remained strong alongside our focus on rapidly scaling operations, reflecting our disciplined approach to cost management and the premium value of our American-made secure drone platforms. Operating expenses in 2025 were $67.8 million compared to $32.9 million in the prior year. This increase in operating expenses was focused, planned, and deliberate to enable us for the accelerated growth we experienced in 2025 and more importantly, for further growth expansion going forward. We increased our headcount by 85%, which primarily included increased engineers and corporate headquarter functional positions. Research and development expenses were $17.9 million compared to $8.1 million in the prior year. This increase in R&D investments is focused on advancing our core platforms, developing new capabilities in artificial intelligence and machine learning, and enhancing the interoperability of our family systems across air, land, and maritime domains. Our investments in the business demonstrate the inherent value of positioning and the pricing power that comes with being a trusted domestic supplier in the defense market. Regarding our investment priorities, we've made strategic investments across multiple areas to support our growth trajectory and maintain our competitive advantages. We remain focused on deploying capital across three key areas. The first area of focus is our USV division build-out, which is estimated to be a $30 million to $40 million investment to fully operationalize the division. Second, we remain focused on strategic acquisitions; and thirdly, increasing inventory and managing our supply chain to meet customer demand. One of the most notable improvements in our financial profile has been our improved cash position and working capital management. Our cash increased from $9.2 million at the end of 2024 to $167.9 million at the end of 2025, providing us with substantial financial flexibility to pursue strategic initiatives and capitalize on market opportunities. These results demonstrate Red Cat's evolution into a premier defense technology company with the financial strength and operational capabilities to capitalize on the tremendous market opportunities ahead of us. Our working capital position has strengthened considerably, driven by our enhanced cash position, healthy AR and strategic inventory investments. We increased our inventory from $13.6 million to $30.4 million during 2025, reflecting our proactive approach to supply chain management and our commitment to meeting accelerating customer demand. The strategic nature of this inventory build becomes especially important when considering the supply chain requirements and the extended lead times for specialized components in the current regulatory environment. Looking ahead to 2026, we're positioned for continued strong performance driven by several key factors that reinforce our confidence in Red Cat's growth trajectory. While we are not providing annual guidance at this time, we expect to maintain revenue momentum throughout the year. Our revenues are supported by our expanding and increasingly diversified customer base and growing international presence. When we gain additional visibility as we progress throughout the year, we look forward to updating the market. We are also being mindful of the ongoing geopolitical developments that are currently in the headlines. We are also influencing our international expansion plans, particularly in the Middle East and Asia Pacific region. While current allied relationships remain strong, changes in defense priorities or procurement policies could affect the timing or scale of international opportunities. We're also monitoring potential changes in defense spending priorities as new administrations and congressional leadership evaluate budget allocations across different military capabilities. And with that, we're now happy to answer your questions. Operator, will you please open up the line for Q&A?

Operator, Operator

Our first question comes from Austin Bohlig with Needham.

Austin Bohlig, Analyst

Congrats on the solid Q4 execution, guys, and it seems like the pipeline is really strong. Understanding you guys aren't giving kind of formal guidance, which I think is prudent, there seems to be a ton of tailwinds, everything from SRR to this bold opportunity, drone dominance now with this really unique opportunity in Ukraine. Any way you can give us some kind of different scenarios on what 2026 could look like?

Jeffrey Thompson, CEO

Yes. And we don't want to get ahead of our skis again. But, I mean, there's a range from all of you out there between $100 million and $170 million, very wild, crazy goalposts right now. We're fine. We're very comfortable in the top half of that, but we're not ready to commit to it until we get contracts in hand to give our official guidance.

Austin Bohlig, Analyst

Okay. No, that's fair. And then just wanted to dive into this new Ukraine opportunity. This seems pretty incremental. Do you guys have any idea of like how many you could be potentially replacing?

Jeffrey Thompson, CEO

Yes. I will have Chris Ericson answer that because he just returned last night and was present when they informed us.

Christian Ericson, COO

Yes. So we were there with the warfighters and the guys who are collecting all the data there, and they came back and I asked them the question, they said 350,000 ISR drones a year, Chinese ISR drones is what they're going through a year on the Ukraine front, a massive number.

Austin Bohlig, Analyst

Wow, wow. So a big opportunity there. I guess kind of lastly for me and more just kind of want to touch on all businesses, the boat segment. Obviously, what's going on in Hormuz. Have you guys noticed any sort of increase in maybe RFP or interest just given the heightened conflict in the waterways or anything you could talk about there?

Jeffrey Thompson, CEO

Yes, Austin, you attended Innovation Day and shortly after, the conflict began. Our business development teams have been receiving numerous inquiries from various directions, with some people expressing urgent concerns about immediate solutions. As the situation stabilizes, we anticipate significant requests for proposals emerging from the Gulf states, and these are expected to proceed more quickly than traditional RFPs. We are also noticing a rise in interest from the Navy that was highlighted during Innovation Day. There is a strong demand for countermeasures. As I mentioned earlier, the Variant 7 has an effective counter configuration with the ACS Bullfrog, which can neutralize fast patrol boats as well as Shahed drones at close range. When combined with the Aeon's Zeus, we are moving swiftly to enhance these capabilities, which are being accelerated to serve as an effective counter solution for the Shahed drones. Unlike many Ukrainian solutions, ours do not require a pilot to engage the Shahed. While Ukraine is generating impressive technologies for countering these drones, we believe we can significantly contribute to security in the Strait of Hormuz. It’s important to recognize that although there is urgent discourse about the Strait’s present dangers, we foresee a long-term need for protection there. The situation will necessitate ongoing security measures, as it’s no longer feasible for the global community to be vulnerable due to that narrow passage between the Persian Gulf and the Gulf of Oman. Hence, we envision a strategic long-term approach that reduces reliance on massive naval escorts for tankers, favoring instead the deployment of 30 to 40 unmanned surface vessels, with 10 to 20 stationed on each side, and/or offering port protection near the Iranian shore to ensure secure operations with our counter capabilities.

Austin Bohlig, Analyst

Well, guys, keep up the great work.

Operator, Operator

Our next question comes from the line of Mike Latimore with Northland.

Mike Latimore, Analyst

Sorry, I’m in an airport, so it might be a little noisy. I apologize. Congratulations on the strong year. As you consider the full-rate production contract, do you expect to receive one main order or will there be separate tranches?

Jeffrey Thompson, CEO

Are you talking for the Black Widow with the SRR program?

Mike Latimore, Analyst

Yes, sorry. Yes, exactly.

Jeffrey Thompson, CEO

Yes, we're approaching full-rate production with the boats soon. As Austin mentioned earlier, there's a significant influx of orders related to Epic Fury. While I won't provide specific dates, we expect to receive our new OTA full-rate production contract shortly. There may be some immediate orders for Epic Fury, which could slightly delay the other contract, but we continue to make monthly progress on the ship for the SRR program. The outlook for the SRR program looks promising, especially with the funding we have for Epic Fury and the various needs we're seeing from the Department of War for Black Widows.

Mike Latimore, Analyst

Excellent. In your remarks, you mentioned expecting an order for the USV in the second quarter. Can you provide more details regarding the type of customer and the region?

Jeffrey Thompson, CEO

I'm sorry, I don't know which order in the second quarter you heard.

Mike Latimore, Analyst

I thought you mentioned something about anticipating a USV order in the second quarter. Is that correct?

Jeffrey Thompson, CEO

No, we did not say that, but we are hoping people are very interested in our USVs. There's a lot of urgency around our USVs right now. We were previously going to use our first 15 for demos only. And now hull #6, which is just coming out today, is hopefully going to be shipped to customers as quickly as we can make them.

Mike Latimore, Analyst

Excellent. And last thing on the plan to reach 1,000 drones a month. Would you consider starting to build at that rate even before securing the contracts?

Jeffrey Thompson, CEO

We're there. We're doing that now.

Operator, Operator

Our next question comes from Ashok Kumar with ThinkEquity. Looks like we lost Ashok there. I don't see any more questions. And with that, I'll pass it back to management.

Jeffrey Thompson, CEO

Great. Well, thanks, everybody, for coming on. We had about 400 people on this call today. A lot of exciting stuff happening across the globe. Chris Ericson's great news that we'll be working very hard on quickly and scaling to help fulfill all the things that are going on. Again, we will not be waiting for an official quarterly call to update people on guidance. As soon as we have our contracts in hand, we will get that information out to the market. We're very excited. We still believe that every quarter is going to be a record going forward, and we're excited to get back to work. Thanks again.

Christian Ericson, COO

Thank you, everyone.

Operator, Operator

This concludes today's webinar. You may disconnect at this time. Thank you, everyone, for your participation.