Prepared remarks
Good day, everyone, and welcome to AeroVironment's Third Quarter Fiscal Year 2026 Earnings Call. This conference is being recorded. I would now like to turn the call over to the Head of Investor Relations, Denise Pacioni. Please proceed.
Thank you, and good afternoon, ladies and gentlemen. Welcome to AV's Third Quarter Fiscal Year 2026 Earnings Call. My name is Denise Pacioni, Head of Investor Relations for AV. 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, 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, March 10, 2026. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Joining me today from AV are Chairman, President and Chief Executive Officer, Mr. Wahid Nawabi; and Executive Vice President and Chief Financial Officer, Mr. Kevin McDonnell. We will now begin with remarks from Wahid Nawabi. Wahid?
Thank you, Denise. Welcome, everyone, to our third quarter fiscal year 2026 earnings conference call. I will begin by summarizing our quarterly performance, followed by Kevin, who will review our financial results in greater detail and then discuss guidance for fiscal year 2026. After this, Kevin, Denise and I will take your questions. This past quarter's results came in below expectations, primarily driven by revenue timing and adjustments made in our space business. Given industry-wide delays in government funding along with the shutdown, several orders we anticipated to receive in the third quarter have shifted to the right by a quarter or two. Recognizing we fell short on expectations this quarter, we are now more than ever focused on leveraging our unique operational and execution capabilities and driving long-term value creation. We have a track record of delivering strong results and our core strengths in product innovation, deep customer relationships and manufacturing scalability will enable us to capture increased demand in this high-growth market. Strong order flow increased our funded backlog in the third quarter, which is positioning us for record fourth quarter revenue and a solid start to our fiscal year 2027. Before providing details on our progress to achieve our growth targets, let me cover key highlights from the third quarter. First, we achieved strong orders and grew our funded backlog to $1.1 billion with year-to-date total awards of $4.6 billion. Second, we announced several key program awards and bookings in high-growth markets where AV holds a competitive advantage over our peers. Third, we're transitioning certain programs to commercial product solutions that are aligned with customer expectations, leading to improved long-term profitability and broader market adoption. And fourth, looking ahead, we're adjusting our revenue guidance range to between $1.85 billion and $1.95 billion and adjusted EBITDA to between $265 million and $285 million and remain on track for record fourth quarter revenue. You're going to hear a lot about what we have underway and what's behind our strong forecast. Let me start by outlining exactly what drives our confidence in our fourth quarter and fiscal year 2027. The demand for cost-efficient AI-enabled autonomous non-lethal and lethal drones and counter drones are unprecedented, and AV is well positioned to capitalize on this generational opportunity that is in front of us. Our products and solutions are helping shape the newly defined battlefield with a full suite of loitering ammunition offerings, long-range one-way attack drones, advanced radio frequency-based counter UAS solutions, Group 1 through 3 uncrewed aircraft systems and space, cyber and directed energy platforms and technologies to support our U.S. defense and international allies. Producing in high volume and continuously scaling production ahead of demand are key differentiators that allow us to stay ahead of our customers' needs. During this past quarter, we progressed the build-out of our new manufacturing facility in Salt Lake City, Utah, and we expect it to be operational about a year from now. This 140,000 square foot facility has the potential to produce more than $2 billion worth of Switchblades or other AV products annually. In addition to expanding our manufacturing footprint, we continue to evaluate the strength of our supply chain by identifying long lead items and ensuring all suppliers can scale along with increased demand. Taken together, these actions reflect our company's strategy and focus that have guided our business for more than a decade, investing capital into the business, developing commercial products, building out capacity slightly ahead of demand and most importantly, ensuring we are delivering best-in-class solutions that meet our customers' mission objectives. We remain in active discussions with the U.S. Space Force regarding the BADGER phased array antenna system to support the SCAR or Satellite Communication Augmentation Resource program. We appreciate that the contract was temporarily paused while we work together on a firm fixed price contract that provides a commercialized product solution. As of this morning, we could not come to a mutually acceptable agreement with our customer to modify the existing contract and resume work. Therefore, the U.S. Space Force has concluded to terminate our existing contract for convenience, pay us for our allowable incurred costs with a fee and enable AV to recompete for the program with their revised requirements and our proposed solution. I must emphasize that we remain fully committed to delivering this innovative capability to the market while aligning to our customers' needs and transitioning our phased array solution to a commercial offering and business model. The need for this capability gap has become more important and more urgent than before, and we believe we have an innovative and compelling solution that is unmatched in the industry. By developing our solutions as a commercial product and recompeting for this program's revised requirement, it will enable AV to build a more flexible and profitable business in the long term while meeting our customers' critical needs. This is a recipe and strategy that AV has successfully demonstrated and achieved multiple times in our history. Additionally, we're actively working to transition several of our other new and disruptive capabilities towards commercial products across our Space and Directed Energy segment. These include our LOCUST directed energy counter UAS solution, our laser communications terminal for space command and control and our laser communication gun system. By transitioning these offerings to commercial products, we can quickly scale manufacturing to meet accelerated delivery schedules, improve margins and broaden our customer base while also satisfying our customers' desire for a firm fixed price and commercialized off-the-shelf solutions. Again, this is a recipe that AV has demonstrated successfully several times in its history over the last two decades. This is precisely our strategy with BlueHalo solutions. We are confident that this is a new approach and a win for our customers and a win for AV. I would like to now walk you through Q3 achievements within each of our segments as well as near- and long-term growth and profitability initiatives that will help us reach our strategic growth objectives. Our Autonomous Systems segment continues to drive revenue growth for the company, making up 68% of our overall revenue for the third quarter. Even though the government shutdown in early November caused a delay in funding and shifted the timing of certain orders, revenue for this segment still experienced significant growth compared to the same quarter last year. We expect additional delayed orders from the third quarter to be booked in the fourth quarter of this year and first quarter of fiscal year 2027. Several commercially developed and mass-produced products in our Autonomous Systems segment are key growth drivers for the company, including our Group 2 Puma AE and P550 UAS systems, our Group 2 JUMP 20 and JUMP 20-X systems, all variants of Switchblade, our Red Dragon family of one-way attack drones and our counter UAS solutions, including the Titan family of AI-enabled RF jammers and Freedom Eagle-1 or FE-1. These are all key strategic products that AV has developed, successfully transitioned into commercial solutions and scaled production to meet increased customer demand. During the third quarter, we were awarded an additional 5-year sole-source IDIQ contract worth $874 million from the U.S. Army for our UAS and counter UAS product lines to support Foreign Military Sales or FMS demand. This contract enables our allies to procure a range of AV Group 1 through 3 unmanned aerial systems and counter UAS systems, including Vapor, JUMP 20, P550, Puma, Raven and other counter UAS solutions. In addition to this large award, we received a $168 million task order from the U.S. Army for Switchblade 300 Block 20 and Switchblade 600 Block 2 loitering munition systems. This additional delivery order represents the U.S. Army's first procurement of AV's next-generation Switchblade product line and was issued under the U.S. Army's existing 5-year IDIQ contract for lethal unmanned systems in August 2024 with a total ceiling value of $990 million. Looking ahead, we anticipate continued strong demand for our Switchblade family of products from both domestic and international customers. Domestically, we are currently working to increase capacity at our new Salt Lake City facility in preparation for an increase in demand, including from the Low Altitude Stalking and Strike Ordnance or LASSO program for our new Switchblade variant, the Switchblade 400. Internationally, we're engaged with several allied nations, including Taiwan, Japan and South Korea on autonomous systems, namely the Switchblade 600 to support their national security needs. Turning to our counter UAS capabilities. The use case for AI-enabled RF detect and defeat counter UAS continues to rapidly expand both domestically and abroad. In fact, just last week, we were awarded a $23 million contract from the U.S. Marine Corps for additional deliveries of our Titan SV. With demand on the rise for our Titan family of products, we are actively increasing manufacturing by more than four times this year with additional plans to increase by more than ten times current levels by fiscal year 2030. Titan is the leading AI-enabled counter UAS solution for RF detect and defeat at home and globally. Our Titan family of counter UAS solutions, which was part of the BlueHalo portfolio, is one of AV's strongest revenue growth drivers in the coming quarters and will contribute greatly toward future margin expansion as well. We're also making progress on our FE-1 program with the U.S. Army, which, as you may recall, was awarded a $96 million contract last fall for the U.S. Army's Long-Range Kinetic Interceptor program. We are progressing on that development contract and moving towards flight testing in late fiscal year 2027 or early fiscal year 2028. We're seeing continued strong growth with our UAS products contributing the most revenue for the segment this past quarter. We're also seeing increased interest in our newest one-way attack lethal UAS drone, Red Dragon. Red Dragon is an easily deployed lethal drone that offers modular mission integration and is complementary with our Switchblade family of products. Red Dragon is anticipated to be a key growth driver in this segment for future quarters, and we're rapidly scaling the production of this product line to meet anticipated customer demand. Just as we created the loitering munition category with our Switchblade products, Red Dragon is positioned to define the next category in autonomous one-way attack drones, an example of how we will disrupt the market once again with the creation of another category. Our Group 2 solution, Puma AE continues to see strong domestic and international growth, operating in 45 countries and remaining the dominant ISR platform, both domestically and internationally. Just this past quarter, we expanded our Puma Visual Navigation kit to our Puma LE variant. This additional capability uses advanced computer vision and onboard processing to deliver precise Global Navigation Satellite Systems or GNSS and independent navigation in degraded or communication denied environments. This is an industry-leading critical software upgrade that ensures our warfighters have successful missions in contested environments. Interest in our P550 continues to grow during the quarter, and we were awarded a $13 million contract to provide P550 UAS for the U.S. Army's Long-range Reconnaissance program, or LRR. This key initial win opens the door for additional orders that will help drive growth in fiscal year 2027 and is another platform we're currently scaling its production to much higher volumes. Besides growing demand for our Group 2 products, we're also seeing strong international and domestic growth for our JUMP 20 and JUMP 20-X, which is the best-in-class Group 2 solution offering on the market. As we stated in our last earnings call, JUMP 20 was recently added to the U.S. Navy's basic offering agreement, allowing us to compete for all applicable future U.S. Navy task orders. In addition to this, we have won five additional program of records in Europe this past year alone. Let me remind you, JUMP 20-X can operate in extreme maritime environments with long-range, long endurance multi-mission capabilities for our domestic and international maritime customers. The JUMP 20-X's unique ability to land on smaller-sized moving ships provides a distinct advantage over its larger Group 4 competitors and is offered at a more competitive price point. We have already seen significantly increased demand, and we're increasing the production capacity of this product line this fiscal year, and we plan to increase it again by three times in fiscal year 2027. Turning now to our Space, Cyber and Directed Energy segment. Revenues in this segment accounted for nearly one-third of AV's total third quarter revenue. Coming off a record second quarter for bookings, our Space, Cyber and Directed Energy segment continues to make progress on several key programs across the portfolio. Within our Space and Directed Energy operating group, we delivered two of our Joint Light Tactical Vehicle or JLTV-mounted LOCUST Laser Weapon Systems to the U.S. Army. LOCUST is a cutting-edge cost-effective solution to counter Group 1 through 3 drones. Our LOCUST laser weapon system is performing well in the field in multiple theaters, and we're preparing to commercialize LOCUST to broaden our market base while increasing production. As LOCUST moves into higher volume production to meet the U.S. Army's needs, it will be a significant revenue driver for the company in the coming years. Additionally, we have proposed our LOCUST system to the Department of War as part of the nation's Golden Dome Safeguard solution. It is currently being evaluated as part of the Golden Dome architecture, and we look forward to providing additional updates on this important initiative. Our Cyber and Mission Systems operating group continues to make strides to recover from the impact of the government shutdown last quarter and was awarded a $75 million task order, extending a contract to advance biotechnology and smart materials for the U.S. Air Force. We look forward to enhancing our capabilities in laser communications, space-related satellite communications and directed energy. Building on the achievements across our segments and profitability initiatives, we're also continuing to prudently reinvest capital into our software solutions, including AV_Halo. We do this because we believe in the future of our business and our ability to turn these investments into value creation. This open architecture software platform is designed to unify command and control, intelligence analysis, synthetic training and autonomous targeting across all domains to create advanced communication among critical assets during conflict. We are continuing to deploy critical counter UAS solutions through our collaboration with GrandSKY to establish the foundation for a Golden Dome for America Limited Area Defense architecture at Grand Fork Air Force Base in North Dakota. The Golden Dome for America initiative provides an opportunity for AV to showcase how our software, hardware and services all support their interlayer of the Golden Dome. Based on engagements with our customers, we estimate that this opportunity could represent approximately $0.5 billion to AV over the next three years, and we expect that we will create a model which can be replicated across other critical U.S. national security sites. We're also successfully integrating BlueHalo and are realizing meaningful synergies from the acquisition. Before turning the call over to Kevin, let me summarize with key following comments. While results were below expectations, we are extremely confident in the top line growth on several of our key programs and product lines in the fourth quarter and beyond and are on track for a record fourth quarter and record fiscal year. We're focused on scaling manufacturing to meet rising demand on several of our product lines in high-growth markets. We recognize the once-in-a-generation opportunity we're part of, and we will continue to drive results. The current conflict in Iran is a reminder that our country and our international allies rely on our defense, aerospace and space capabilities. AV's innovative portfolio is very well positioned to meet this demand and support our country and our allies' critical defense needs. We're confident that we are well positioned to deliver high-priority multi-domain solutions due to our scalable manufacturing, differentiated technology and innovation and strong customer alignment, which enables us to meet our customers' evolving needs. Before I turn the call over to discuss our Q3 financial results in more detail, on behalf of our Board and leadership team, I want to thank Kevin for his contributions to the company since 2020. Over this period, AV's market cap increased from approximately $1 billion to over $10 billion today. As we previously announced, Kevin will retire at the end of July and will stay on to support our new CFO with a smooth transition in the coming months. We wish him all the best in his retirement.
Thank you, Wahid. Today, I'll be reviewing the highlights of our third quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on our website. I will briefly comment on our results for the quarter and then turn to guidance for the remainder of FY '26. While the third quarter did not meet our expectations on several fronts, and we are lowering our expectations for the year slightly, we continue to be well positioned for continued high growth as many of our products move from the test and evaluation phase to full adoption by the U.S. military and its allies. The best example of this is our LOCUST counter UAS directed energy product, which we expect to be a significant growth driver in the coming years. It has proven to be the leader in this extremely important category for national defense. In addition, our mature product categories like UAS and Switchblade provide significant growth, resulting in AV organic growth of 38% year-over-year in the third quarter. At $1.6 billion of revenue in the last 12 months, AV is one of the largest, most profitable defense technology companies. We are the leader in defense technology with a diversified portfolio of proven and emerging products. The well-publicized stop work order for the SCAR program did have a negative impact on the quarter, and this is in part the reason we are lowering our full year guidance. This resulted in a noncash $151 million goodwill impairment as the evaluation of the acquired asset, the space business, was triggered by the SCAR stop-work order. The reevaluation resulted in a reduction in the acquisition date value of the acquired space business of approximately 17%. We do not expect any further adjustments to the impairment as a result of the notification of the customer to terminate the contract for convenience. It is important to note that even with the SCAR program changes, we are still confident in our growth trajectory as a result of the diversified business model and the strength we're seeing in other product areas. Now turning to the quarterly results. We ended the quarter with $1.1 billion of funded backlog and approximately $3 billion of unfunded backlog. I should note that approximately $1.5 billion of the unfunded backlog relates to the SCAR program for which we were under contract at the end of the quarter. We expect an adjustment to the unfunded backlog as a result of the intent of the customer to terminate for convenience and the resolution of the customer's obligations under the current contract. As Wahid mentioned in his remarks, revenue totaled $408 million in the third quarter, which represented a 143% increase over the prior year as reported or a 6% increase on a pro forma basis. As mentioned previously, legacy AV organic growth was 38% in the third quarter. Slides 6 and 7 of the earnings presentation show the third quarter and year-to-date revenue by operating group for each of the two segments compared to pro forma FY '25 revenue. The AxS segment recognized $279 million in revenue in the quarter, which represented a 25% increase over FY '25 pro forma revenues. Uncrewed aircraft systems composed of groups 1, 2 and 3 UAS led revenue growth for the segment with more than a 50% increase compared to the pro forma FY '25 third quarter results. Uncrewed systems without Ukraine revenues grew 54% year-over-year, driven by Puma, JUMP 20 and the Tomahawk family of systems. Precision Strike and Counter UAS products improved more than 21% from the pro forma results for the same quarter last year. Switchblade 600, Switchblade 300 and Titan sales continue to be very strong in the third quarter. The Space, Cyber and Directed Energy segment recognized $129 million of revenue in the third quarter, a pro forma 19% decline year-over-year following the stop work order on the Space SCAR program and the U.S. government funding delays. The space and directed energy products declined 14% in the quarter versus the prior year pro forma, driven by the SCAR stop-work order, while LOCUST Directed energy counter UAS continued growth. Cyber and Mission Systems showed a 22% decline in pro forma revenue largely a result of programs that were discontinued and also negatively impacted by funding delays associated with the U.S. government shutdown. Moving to gross margins, slide 13 shows the adjusted product and service gross margin, including reconciliations to GAAP gross margin. Third quarter overall adjusted gross margins were 27%, which was flat for the second quarter of FY '26 but lower than the 40% third quarter FY '25 adjusted gross margin. As noted, the business landscape of the combined new company has changed significantly with higher service mix and several products in the early stage of maturation. The third quarter did present some additional challenges to adjusted gross margins. Specifically, third quarter margins were also affected by last-minute shipping and supply chain issues resulting in $40 million of high-margin revenue pushed to Q4. However, we believe adjusted gross margins should improve to the low to mid-30s in Q4. We are now projecting a full-year outlook for adjusted gross margins in the high 20s, low 30s, which is consistent with our original guidance for the year. Moving to operating expenses. As mentioned earlier, the SCAR stop-work order represented a trigger event requiring a goodwill impairment test resulting in a $151 million noncash impairment charge. Adjusted SG&A, which is net of the intangible amortization and deal integration costs was $61 million versus $33 million in the prior year. The increase is largely a result of the combination with BlueHalo. But as a percentage of revenue, adjusted SG&A in the quarter was 15% of revenue versus 20% in FY '25. Again, the adjusted SG&A levels represent a shift in the business model as we expect to end the year in the 13% to 14% range as we begin to realize synergies and achieve higher revenue levels. Year-to-date, we have largely achieved our expected year 1 synergies. R&D expense in the third quarter was $27 million or 7% of revenue compared to $22 million or 13% of revenue in the prior year. Again, this is a shift in the business model, and we expect R&D as a percentage of revenue to end the year between 6% and 7% of revenue range, which represents an increase in R&D dollars over the prior year for the combined company. In terms of adjusted EBITDA, slide 14 of our earnings presentation shows a reconciliation of GAAP net income to adjusted EBITDA. Adjusted EBITDA for Q3 was $44 million, up from last year's Q3 of $22 million as reported, primarily due to the incremental BlueHalo results and the legacy AV revenue growth organic revenue growth. Adjusted EBITDA as a percentage of revenue was 11% in the quarter, a sequential improvement from the 10% of adjusted EBITDA margin in the second quarter. We continue to forecast full-year adjusted EBITDA margin between 14% and 15% of revenue. Now turning to non-GAAP earnings per share. Slide 12 shows you a reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per diluted share of $0.64 for the third quarter of fiscal 2026, more than double of the $0.30 per diluted share for the third quarter of fiscal 2025. Moving to the balance sheet. At the close of the quarter, our total cash and investments amounted to $649 million, a $20 million sequential decline versus Q2 of FY '26, primarily driven by an increase in our inventory to support Q4 revenue. Also, our unbilled receivables continue to be at a higher level than we are targeting. However, we had significant collection activity at the end of the quarter or into the fourth quarter, and we expect that to continue throughout the fourth quarter. Turning to backlog. As noted earlier, our funded backlog at the end of the third quarter was $1.1 billion, and unfunded backlog was $3 billion, which includes the $1.5 billion SCAR-related portion, which was discussed earlier. Our visibility to the midpoint of our revised guidance range is 98%. Finally, I'd like to provide you our updated FY '26 guidance. On Slide 8 of the presentation, we provide our revised fiscal 2026 guidance. Fiscal year revenue is now expected between $1.85 billion and $1.95 billion, adjusted EBITDA between $265 million and $285 million and non-GAAP adjusted EPS is now projected between $2.75 and $3.10. The midpoint of our revenue guidance range represents 12% growth over the pro forma FY '25 results. Although the revised guidance range reflects lower expectations for the year, our confidence in the BlueHalo acquisition remains higher than ever. This combination is a force to be reckoned with within the defense technology sector and the full potential of the combination will be realized over the coming quarters as some of the BlueHalo acquired products start moving into a more commercial cadence. This is likely my last quarter as CFO. I want to thank Wahid and the AV Board for the opportunity and belief in me. I am very proud of the success of AV so far and my contributions to that success. I also value my relationships established with hundreds of investors and the many analysts who have invested in AV and follow AV. As mentioned earlier, the potential of AV as a leader in the defense technology sector and its impact on national defense are virtually limitless.
Thanks, Kevin. Before turning the call over for questions, I would like to reiterate the positive momentum we have entering the fourth quarter of fiscal year 2026. First, despite challenging headwinds in the quarter, we achieved third quarter revenues of $408 million, up 38% organically year-over-year. Second, our funded backlog grew to $1.1 billion, and we have recorded $4.6 billion worth of total year-to-date awards, which is another record for the company. These results have positioned us to achieve another record fourth quarter financial results. And third, overall demand and business momentum remains strong across many of our product lines as evidenced by our robust and growing funded backlog, supporting our strong growth well beyond fiscal year 2026. We remain focused on execution. This includes transitioning more commercial products and business model approach in the BlueHalo portfolio while scaling manufacturing to meet growing customer demand and improving profitability. The long-term prospects for growth and value creation for the company have never been better. I would like to thank our employees, shareholders and customers for their continued commitment to AV and our mission. And with that, Kevin, Denise and I will now take your questions.
Questions and answers
It comes from the line of Andre Madrid with BTIG.
And Kevin, thank you so much for everything. It's been a pleasure to work with you and best of luck with everything ahead.
Thank you.
I want to start by discussing the long-term prospects of SCDE now that SCAR is no longer a factor. How should we approach growth in the business going forward? Additionally, could you provide some insights on margins? I understand that SCAR significantly influenced your EBITDA expectations for that segment this year. What other factors might contribute to support going forward, not just in 2026 but beyond?
Thanks for the question. The situation with the Space Force and the SCAR program is evolving daily. I was in Albuquerque, New Mexico yesterday, meeting with key decision-makers and program leaders of the SCAR-BADGER program at Space Force. We started negotiations with the customer to resume work, but unfortunately, we could not reach a mutually acceptable solution for a win-win outcome. Consequently, the customer chose to terminate for convenience, and we are entitled to recover our allowable legal costs and a profit fee. We remain more optimistic than ever about the Phased Array BADGER system and believe it is the best-in-class technology that is crucial for our country's needs and for the constellation of geosynchronous satellites operated by the U.S. military. The urgency for addressing this capability gap and the need for our solution is stronger now than ever. Space Force has indicated that they will invest more money in this area because it is necessary for the country. Our efforts will continue as we are dedicated to developing this solution as a commercial item, applying our proven strategies. We believe we have a head start of 3 to 3.5 years over competitors. If Space Force is successful in recompeting, we will be eligible to participate. Our ultimate goal is to sell the solution to them as a commercial item, which we believe is more beneficial for both the customer and us financially and operationally. We do not expect the SCAR program to significantly impact our growth profile beyond this year; we still anticipate a growth year this year, with record performance in the fourth quarter and fiscal year in terms of both revenue and profitability. We are positioned for strong growth next year and beyond. Several other products and technologies within our Space & Directed Energy business are in high demand and are transitioning to commercialization. This includes our LOCUST system, directed gunsight, and laser communication terminals, all expected to experience rapid growth over the next 2 to 3 years. We are very optimistic about this segment and confident in our acquisitions and overall business in this area. We are more committed than ever to accelerating our progress. This is something we have done successfully in the past, yielding positive business outcomes for ourselves and value for our customers.
I appreciate the insight, Wahid. Let's shift our focus to the Autonomous Systems business. Looking at the $990 million IDIQ contract, you've recently delivered an order worth $186 million. In less than two years, you've already surpassed $700 million for that vehicle. Have there been discussions with the customer about the possibility of increasing that amount? Is that a topic that frequently comes up in your conversations?
Yes, we're actively in discussions with the customer. They recently awarded us a contract exceeding $800 million for our family of products, primarily for FMS sales. This gives them considerable flexibility. We have two significant contract awards and platforms for the customer to purchase from. The customer can also increase the limits on these contracts and has the option to extend their duration. We've done this several times before. I believe we are approaching a point where the customer may need more products than current limits allow, and we are exploring various options with them. This is why we are optimistic about expanding our production capacity beyond this fiscal year and into fiscal year 2028, potentially constructing another factory that could generate an additional $2 billion worth of our products. We feel very confident about this momentum.
Our next question comes from the line of Louie DiPalma with William Blair.
Kevin, congratulations. It was great working with you. For my first question, how much revenue does AV expect to recognize from SCAR for fiscal 2026, considering the termination fees and other fees related to ending the contract?
We don't get the specific forecast for each product, but it's included in our guidance. We've factored that all in. And so we feel comfortable, even though this was late-breaking news, we're very comfortable with the guidance for the year.
Yes. I was wondering from the perspective of investors are going to be wondering how they should be modeling fiscal 2027 if this contract ended? And so is there a ballpark in terms of is it like 5% of total revenue? Or is it less than 5%? Or how should we be thinking about that for fiscal '27?
It will be less than 5%. It's not an insignificant amount next year. That was factored into all of our modeling for the goodwill impairment that all stays intact. But I'd say it's less than $100 million.
Great. And Wahid and Kevin, you recently announced the $186 million Army order for the directed requirement involving the Switchblade 600 and the Switchblade 300. Four of your competitors have made contract announcements recently for the Army LASSO program and the Marine Corps Organic Precision Fires-Light. How has AV progressed with both of those programs? And what's the timing in terms of when you expect your awards and the timing for a potential production award, I think, for LASSO, you are using your Switchblade 400. So yes, what's the sense of timing for those programs?
So Louie, we are actively working with the U.S. Army on multiple aspects of the Switchblade family products. You are correct; we have recently been awarded a $186 million contract for production delivery of our second-generation Switchblade 600 Block 2 and Block 20 Switchblade 300, which are the first orders for the next generation of these products. Regarding the LASSO program, over a year ago, we received several task orders from the U.S. Army for what were known as directed requirements, which were part of the LASSO program. We were the only company to receive those awards at that time, while most other competitors did not secure any. This puts them in a position to catch up and earn some awards to ensure fair competition for LASSO. Additionally, our Switchblade 400 has been specifically designed for the LASSO program, tailored from the ground up to meet its needs. It's likely that both LASSO and OPF Marine Corps will require more than one solution for their mission needs, and we feel confident about our position. This past week, we had a program review with the Army at our offices, and we are performing well; our products are excelling, and we are delivering on our commitments. There has been an increase in demand from them, as they want us to produce more because they plan to buy more. That’s the message we are receiving from the U.S. Army. While I can't speak on behalf of our competitors, I can say that we are in a solid position regarding these programs. We are dedicated to these efforts, believe we have the right solutions, and have been consistently delivering, which we expect will lead to substantial order opportunities in the future.
Great. And one final one, do you see the Iran war accelerating the timeline for your Freedom Eagle-1?
Absolutely, yes, Louie. We have seen an unprecedented amount of requests and demand for proposals and quantity and ROMs, Rough Order of Magnitude quotes from both domestic U.S. customers as well as international customers, not just for the Freedom Eagle-1 but also for our suite of our product line. The conflict in Iran is another example of how well we're positioned on the type of solutions that we've got that means the desperate need of our customers, the U.S. military and our allies. I just read a press release or a report this week that Iran has launched close to 1,400 one-way attack drones into UAE alone in one week. The need for LOCUST, the need for our RF jammers, the Titan series, the need for our one-way attack drones such as Red Dragon, the need for Freedom Eagle-1, and the need for our JUMP 20 and P550 is starting to look better and better, and I expect all this to convert to some additional demand in fiscal year '27 and beyond. So I do believe that this is a good critical moment to showcase our capabilities. And also, we're the only ones or one of the very few that can actually produce in volume and deliver a battle-tested proven technology or capability to war fighters today. Most players are talking about production capacity 2 to 3 years from now. And manufacturing sites they're going to build that's going to produce whatever number later. We're doing that today across several of our product lines.
One moment for our next question, please, it comes from the line of Jan Engelbrecht with Baird.
Congratulations on your retirement, Kevin. I would like to get an update on the Directed Energy portfolio, specifically the key programs and milestones we should expect for the remainder of calendar year '26 and into '27, as well as any recent developments. There was a laser weapons test in Albuquerque this past weekend, and you received an RFI from the Air Force for a new laser weapon system last Friday. Can you provide any updates on your specific programs regarding FPIC, AMP, or JLTV integration? How should we approach this, given that it seems we are approaching a significant moment for laser weapons, particularly in light of the situation in Iran?
So Jan, thank you for the comments on the question. And it is really important for our investors and our audience to recognize that the situation that we saw 3 to 4 years ago in Ukraine, where it was a showcase of our loading munitions, one-way attack, reconnaissance drone led to a significant shift in the market in terms of demand for those capabilities and higher rate production and more orders and more growth for us. I believe we're in an inflection point with both our RF counter UAS systems as well as our directed energy LOCUST systems. I was in Albuquerque facility where we manufacture these systems, and our customers would love to have a lot more of them. In fact, most of our customers are behind the eight ball as an analogy, if I may use that in terms of having systems in their hands. So we are building systems currently not only for that particular conflict today, but I believe that is going to transition into additional long-term demand in these categories which we are clearly not only the leader, but we're the only game in town that actually has a solution that works, and it's been performing in the field today. It is actively involved and engaged in theaters, multiple theaters and the customer is extremely satisfied with its performance. And we have an unprecedented opportunity and position in the market, which we are really trying to scale production and go forward. Exactly how much that demand it is and means for next year, I can't quantify right now. It is going to be strong demand, and we expect that to eventually turn into a similar situation as it was in Ukraine, even if the conflict stops tomorrow because LOCUST was developed specifically for Group 1, 2 and 3 drone defensive solution. It is the only directed energy solution that I know of, in this size and range that achieves the mission outcomes for our customers successfully, and we're delighted about being able to help our customers.
Perfect. Very helpful. I have a quick follow-up. If this conflict with Iran becomes extended in the coming weeks, are there any systems you would highlight that could be deployed quickly by the DOW or included in the $50 billion emergency munitions package mentioned last week? Are there specific programs or platforms you can point out that might fit this scenario?
Yes. Jan, in particular, I would highlight a very strong imminent demand for accelerated adoption of our one-way long-range attack drones such as Red Dragon and its family. Our Directed Energy Systems called LOCUST, and our Titan series of RF detect and defeat solutions as well as our reconnaissance drones such as JUMP 20 and P550. Those five products, specifically, I expect those to have an increased demand going into fiscal '27 and then hopefully beyond.
One moment for our next question, please, it comes from the line of Ken Herbert with RBC.
Congratulations, Kevin. I would like to discuss the updated guidance for adjusted EBITDA. Could you clarify how much of that is attributed to SCAR? Additionally, are there other factors that have been shifted in relation to the adjusted EBITDA? I'm also interested in understanding how we can transition from fiscal '26 to '27 regarding the potential margin upside for adjusted EBITDA.
Some of this is clearly connected to SCAR, which is essentially a drop in revenue. The majority of the revised EBITDA guidance stems from this lower revenue projection and an increase in R&D for the year. Regarding expenses, we are on track, though we are slightly higher than anticipated given the revenue decline. However, our business model remains strong. As we consider the commercialization efforts, particularly regarding LOCUST and other initiatives in the Space & Directed Energy segment, we anticipate achieving higher gross margins next year compared to this year, which should lead to continued EBITDA growth likely exceeding revenue next year.
Okay. Could you provide an update on the Switchblade now that the 400 model is officially part of the product family? How do we consider capacity for that program? It seems that this franchise continues to be positively received by customers. What is the capacity mix for the 300, 400, and 600 models? How do you anticipate scaling in the next 6 to 12 months?
I continue to see significant potential and revenue growth for our Switchblade 300 Block 20 and Switchblade 600 Block 2, as we have just begun our initial shipments to the U.S. Army. The demand for these two products, regardless of the LASSO program of record or the U.S. Marine Corps OPF program, is expected to be very strong both domestically and internationally. We do not plan to reduce or slow down production. I believe demand will persist and continue to grow. The Switchblade 400 has been specifically developed for future growth and adoption of this product line. It is mainly designed to capture the LASSO program of record and can be easily mounted on various platforms. Future helicopters, airplanes, ground vehicles, and larger drones are all potential candidates for the Switchblade 400 variants in the long run. However, this will develop over a year or more due to program adoption cycles. The reason we are increasing production at our Salt Lake City facility is that I expect demand in these categories and products to remain strong beyond fiscal year '27, with a gradual shift towards 400, although that won't happen immediately.
Our next question comes from the line of Seth Seifman with JPMorgan.
This is Rocco on for Seth. First, thanks for all the help, Kevin. It's been great working with you. Was the SCAR contract split between the Cyber & Mission Systems and Space & Directed Energy subsegments in SCD&E? And if not, what kind of weight on Cyber Mission Systems revenue in the quarter?
So that revenue is actually part of the entire segment. The SCAR program is under the Space and Directed Energy segment, not the Cyber segment. The cyber security and Cyber and Mission Systems business is separate and not impacted by the SCAR program. It primarily relates to the Space and Directed Energy side of our business.
I mean, even though it's down year-over-year in that segment, most of that was planned because of some programs that had gone away before we even acquired BlueHalo. But obviously, we're just doing a pro forma versus the prior year. And there's parts of that business doing very well on orders, but it's not necessarily showing up in revenue right now.
Right.
Yes. And we do expect Q4 to be strong. I mean obviously, the actual Space business is going to take a hit with the SCAR program. But the other businesses like Directed Energy, we expect to have a very strong fourth quarter.
Our next question comes from the line of Jonathan Siegmann with Stifel.
Just on SCAR, I know we've been talking a lot about it. Can you just talk a little bit about what success looks like in the recompete? Is it splitting share with somebody else? Is it selling more units at less of a price? Is it having a different role in the contract? And then also an idea of when we might hear something on how you guys make out in that recompete?
Sure. So Jon, we intentionally work with our customers to find a win-win solution on the current contract, the way it's structured. We couldn't do that. Success will look like as follows. We want to develop this product on AV's R&D dollars as a commercial item. Because we believe the market opportunity for this is massive, in the billions of dollars globally besides just this Space Force. We also know that the need for this capability gap has not gone away, and it's stronger. And if we had a commercial off-the-shelf solution available today, I'm a firm believer that the Space Force and many of the customers would be procuring them as a commercial product with more favorable pricing and more favorable profit profile because typically, we take more risk on R&D upfront and then we sell the product at a higher margin once it becomes commercialized. That is precisely our strategy. While we're doing that, Space Force is going to try to recompete this and see if there's any better product or more than one product that can meet their needs. Because the need for this is actually increasing, not decreasing. And they have indicated to me directly that funding for this actually is going to increase, not decrease over the next 3 to 4 years. So our intent is as we develop our commercial product, to then provide a commercial solution to the U.S. Space Force and be able to sell it to them when they are procuring it. And that's the decision that we made jointly with the Space Force that I believe is a win-win for both parties. It achieves their objective, and it achieves our objective, what we want to do long term. Obviously, we're not happy that we're taking a hit on the short term, but it is a very good option for us long term, and we're committed to it. My personal commitment and confidence in this solution set is stronger than before. And I believe if we had a commercial offering today, we would be selling it now. It does not exist, and we want to go faster, not slower.
We've already had inquiries from other customers for the product as well.
That's right.
But is it conceivable you could be selling this revised product as early as maybe fiscal '27? Or is this more of a longer-term development effort?
We are likely revising that based on the requirements. One of the challenges is to ensure our customers agree to a set of requirements that we finalize. It is anticipated that it will contribute more significantly to revenue in fiscal year '28 than in '27. There will be other items in the space business that will also contribute to revenue, but it is unlikely that the BADGER systems will do so in the next fiscal year.
One moment for our next question that comes from the line of Ronald Epstein with Bank of America.
This is Samantha Stiroh on for Ron today. We're just wondering, are there other programs under OTAs that could be at risk? And the programs you highlighted as in transition, are these programs of record? Or are they still under OTA as well?
So Samantha, this is the only program I am aware of at the moment. We do have a large portfolio of various programs in different sizes, but right now, this is the only one in this situation. It's not just because it's under an OTA; it's mainly due to the customer's circumstances and their need to move to a commercial model along with the capability gap. We have a desire to transition in that direction as well. For our other products and technologies, we are already in transition and there isn't a program record for those currently. We are competing for some of them, and we anticipate success in the models we prefer. So, to my knowledge, this is the only program of this scale we are discussing right now.
Got it. And then when you talked about the mix shift pushing margins down for the combined BlueHalo AVAV, do we see that turn more positive? Or do we expect it to be structurally lower for the near future?
We believe that as we focus more on commercial items in the Space DE business, it will lead to higher adjusted gross margins and, more significantly, higher adjusted EBITDA margins over time. Before the merger, our adjusted EBITDA margins were around 18%. BlueHalo operated more like a traditional defense contractor, but there is considerable opportunity to take their projects with various customers and make them commercially available. LOCUST is one example, and we are very optimistic about the gunsights product, which is gaining a lot of traction. Additionally, the Wasp product, a derivative of BADGER for existing ground stations, is also showing promising results. Therefore, we are confident that as we bring these products to commercial markets, we will see significant growth and improvements in both gross margins and EBITDA margins.
Our next question comes from the line of Trevor Walsh with Citizens.
Wahid, could you clarify something? Regarding the programs you mentioned in Space & Direct Energy, specifically the LOCUSTs, laser communications, and laser gunsights. As you move towards a more commercial approach, does this mean you're not necessarily reengineering the technology to align costs with what’s happening with BADGER? Or is it more about the market strategy and just transitioning them through a different phase of their lifecycle?
It's more about the business model and strategy for going to market than the programs themselves. The reason for the constraints with BADGER was the existing cost-plus contract, which limited our ability to transition to a commercial model. We had the chance to renegotiate that with the Space Force, and now we are moving more quickly towards that model. However, there hasn’t been any significant change in the technology; we have strong, differentiated solutions and technology. Our focus is on changing the business model and go-to-market strategy with our customers, specifically in how we price and offer our products, and how we plan to build and scale the business in the future.
Got it. Super helpful. And Kevin, maybe just one quick follow-up for you. Just piggybacking on the guide and maybe a more directed question. If I look at the midpoint from where you had the FY '26 guide to where you guided now, it's about a $75 million shift down. Is it fair to assume that a strong majority of that sum is SCAR related or perhaps an even split between SCAR and the other programs you mentioned? I'm just trying to understand the full range of that impact.
Well, I mean, this has been a tough year in many ways. I mean, you've had all the government funding delays and the pushing of things to the right, some of the things that usually drive our margins higher. To be honest, we've been somewhat capacity constrained on the things that really, we could have probably shipped this year that we now are in the process of building capacity for. So when you put that all together, at the end of the day, we hit the midpoint of both the guidances. Obviously, we're hopeful that we'll be well into the over $1.9 billion range on the revenue as our original guidance set. It just drives that EBITDA margin down because of the volume and the mix, but it's really the volume that drives down the number. But we're very optimistic about next year, seeing the activity that's coming in. The money is starting to flow. It seems like to the different forces, different branches and then down to the programs, then the war, that activity is significant and likely to drive our growth higher than this year for next year.
Our next question comes from the line of Austin Bohlig with Needham & Company.
First one just has to do with your guys' updated full year revenue guidance. If you're just looking at the Autonomous segment, obviously, demand trend seems to be strengthening. How has that changed compared to the beginning of the year when you gave this guidance when you kind of back out the SCAR opportunity?
Austin, we don't provide detailed future forecasts at this time. However, I can share that demand for our systems remains very robust. We faced three main challenges this quarter that we consider unsatisfactory, and I take full responsibility for that. We are dedicated to achieving our goals in the fourth quarter, as we have a strong track record of growth and delivering value to our shareholders. The shortfall this quarter was due to two external factors and one internal issue. As I mentioned earlier, the fundamental demand for our systems has never been stronger during my 16 years at AV. Both our Autonomous Systems and Space & Cyber segments have significant long-term growth prospects, and we are committed to pursuing those. We anticipate a successful growth year, as Kevin noted, and believe we will be well-positioned for fiscal '27. We are focused on delivering results and value to our shareholders, and in Q4 we expect strong growth. However, due to timing delays, we may not be able to convert all of that demand into revenue immediately. There are limits to how much we can produce and deliver to ensure customer satisfaction while maintaining high-quality standards. This might extend into Q1 and beyond, but I expect next year will still be a growth year for us.
There's nothing wrong with this year. We achieved $1.9 billion in revenue by bringing these two companies together and navigating numerous challenges, including government funding issues. I am very proud of reaching that target. The EBITDA will be approximately 90% of our original guidance, which is nothing to be ashamed of. We remain the leading defense technology company in terms of EBITDA, revenue, or any other metric. Overall, it has been a great first year for this merger.
Okay. And then kind of my second question has to do with LRR. That line item in the budget got a significant increase, which includes SRR, MRR and LRR. Do you guys have a sense of kind of like what the allocation might be for you guys in LRR or related to LRR in total?
So Austin, we have not received any specific sort of breakdown of how the funding is going to be allocated to those categories. Well, what I do know and what we are certain about is that our customer is in desperate need to acquire more of these solutions as quickly as possible. We've had our manufacturing ready review with the customer for P550. They just gave us an initial order, which I described on my earnings remarks comments. And I expect the P550 and LRR to be a significant growth driver in fiscal year '27. And for that specific reason, we're actually ramping up production even more. And so I think we're going to be most likely receiving, based on my understanding and reading the market and the customer interest, healthy significant growth in our P550 product line in terms of revenue next fiscal year in orders.
Our next question comes from the line of Nicholas Labbadia with UBS.
Zooming out a bit as UAS, loitering munitions, one-way attack drones and many of your other technologies continue to evolve daily on the modern battlefield. How do you balance meeting the current demand surges that you're seeing from the customer with the risk of building excess inventory given the pace of advancements in the space and how quickly some technologies are becoming obsolete?
Thank you for the important question. We carefully monitor our inventory to avoid excessive buildup that could lead to obsolescence or become unnecessary for our customers. Currently, and likely for the foreseeable future, customers are ready to accept all the demand we can generate in the categories we discussed, such as UAS, loitering munitions, one-way attack, and RF counter UAS, particularly in Directed Energy. We are scaling our operations based on strong anticipated demand for fiscal '27 and fiscal '28. Additionally, our products are designed for quick modular upgrades and improvements. This means we can adapt to changes on the battlefield by making adjustments to existing platforms and systems without significant risk. Over the past 3 to 4 years, we have gained valuable insights from the conflict in Ukraine, utilizing many of our products. There is little that can catch us off guard, and we are proactive in maintaining our position. Our customers are urgently requesting ramped-up production due to both immediate shortages and the need to stockpile for the future, as global conditions remain unstable. We are well-positioned to meet these demands.
Our next question comes from the line of Clarke Jefferies with Piper Sandler.
Wahid, Kevin, maybe to put the funding turmoil in the rearview mirror. I mean we're now here with the new budget. There were reports last week that there might be an appetite to pull forward some of the reconciliations funding. Is it too early for you to see some of that contract activity or some of the new sort of process starting to proceed with the budget underway? And maybe just maybe paint us a picture of the next 6 to 9 months on how some of this spending authority plays out? Do you expect the peak of the sort of contract activity to happen between now and September? Or how do you expect it to play out? And then one follow-up.
I anticipate an increase in contracting and awards for us in the first and second quarters, mainly due to the budgets. I frequently visit Washington, including Capitol Hill and the Pentagon. Our team is dedicated to monitoring the funding and approval processes. Although the funds are authorized, they still need to be allocated from the Office of Management and Budget to the Pentagon and to specific accounts within the services for program officers to execute those contracts. They are preparing for this, and we are closely tracking the situation. I see very encouraging signs. While I can’t predict the exact amounts, the momentum is heading in a positive direction. I agree that we should observe an increase in the first and second quarters, especially since the next budget cycle will begin thereafter, and the current government budgeting cycle wraps up around the second quarter.
Perfect. And just a follow-up, I think you touched on a lot of coverage of the BADGER program and the commercialization in other SCDE programs. But I just wanted to specifically ask what commercialization might look like for the BADGER program? How does that change your current manufacturing lines or the capacity plans you may have, does commercialization look like a retool of that technology to bring the capability more in line of what the off-the-shelf offering would look like. I just love a little margin detail on commercialization for BADGER going forward.
Sure. So let me add some color there, Clarke. We understand the capability gap. We understand that our C2, the command and control systems for all of our military and intelligent satellite needs to be upgraded and overhauled. Phased array is going to be one of the key solutions in that problem statement. And we have about a 3-, 3.5-year head start than anyone else. We also understand what it takes to actually have a solution that works. In fact, we've demonstrated some of that already. So as long as we can neck down the requirements with the customer to a definitive crisp level, we're going to go ahead and lock down the design and we're going to convert that into a product that we can produce and deliver to our customers. That will take about a year or so time frame. And at the end of that, we will have a product just like a Switchblade or just like a Puma or just like a JUMP 20 with a whole bunch of different features and functions and a price tag and a lead time that our customers can procure. We do not have to engage in back where they have to actually watch over us on how we develop the solution and how much progress we make every day on that design effort. It is all going to be within our control. We want that because it allows us to go fast. It allows us to design the best solution for our customer. So success would look like that in the next 12 to 18 months. And I believe that the need continues to actually grow rather than shrink. And the urgency in our customer is increasing, not decreasing. It is a very high priority for the U.S. Space Force to solve this problem and address the problem with the solution. And we are well ahead of everyone else. We just need to get it done and deliver the solution as a commercial item.
And thank you, ladies and gentlemen. This concludes the Q&A session. I will pass it back to Denise Pacioni for closing comments.
Thank you once again for joining today's conference call and for your interest in AV. 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 enjoy the rest of your evening and we look forward to speaking with you again following next quarter's results.
This concludes our conference. Thank you for participating, and you may now disconnect.