We're gonna kick it off. We have an intimate group here today, so it's, it's good. We have Kevin McDonnell, the Chief Financial Officer of AeroVironment. Kevin, I understand you have a presentation.
Yeah, I got a presentation, so I think I'll-
Yeah.
What? Should I just do it from here?
However you wanna do it.
Yeah, I can just do it this way. So we're more casual.
Yeah, it's cozy.
Okay.
Yeah.
So, just to make it a little bit more fun and interactive, I do have a couple videos embedded here, so, you won't just have to listen to me droning on. Drone on. Hey, see that? So here, here's the first video. This is a little bit of an overview of AV.
Somewhere out there, at a location you don't know, in a building you won't find, behind a door you can't open, is a laboratory, a headquarters, an above ground, underground proving ground for those who break ground, break rules, and break records. For making the things that make the modern warfighter and first responder more aware and secure, more capable and connected, better prepared, better protected. For over 50 years, this elite team of eggheads, gearheads, propeller heads, and heads of the class have been using aeronautics, astrophysics, biometrics, and other subjects you see here to save ounces and shave seconds, to get stronger and go longer, to move stealthier and stay safer, to put the right size, the right tools in the right hands at the right time.
That jaw-dropping, heart-stopping, game-changing tech that's tipping the scales in our favor today, we dreamed it, designed it, developed it, and delivered it, all before you even heard of it. Because our headspace is your battle space, from cyberspace to outer space. If you're in charge of our frontline heroes, our first lines of defense, know that every challenge has a solution, from A to V.
Okay, so let's get a little, little bit of an overview there. You know, our – we're traded on the Nasdaq under AVAV. Today we're just over $5 billion market cap with our headquarters in Arlington, Virginia, but center of gravity is pretty much Simi Valley, California. We have operations all over the United States, from California to Florida to Alabama, Northeast, et cetera. And we're about 1,400 employees. But one of the things that kind of differentiates us between a relatively small defense company and some of the other defense tech type companies, we've sold, we've sold products to over 55 allied nations, so we're very much an international company. We have international brand recognition, primarily through our Puma pro– Puma or Group 1 product lines over the years. But you know, about half of our revenue today comes from international customers.
We're kind of a platform company, and the more important part is the software. On the left, you see the platforms, Group 1 unmanned air vehicle is UAV or uncrewed air vehicle. Group 2 and 3, that refers to the size of the air vehicle. We're in the loitering munitions business, lethal drone business, ground robotics, logistics, UAVs, and space helicopters. But what really kind of makes it all go and cutting edge is the software. So we've been leaders in communications, battlefield communications for UAVs for many, many years. We have command and control software, autonomy and AI capabilities, computer vision, which is critical to autonomy over time, object identification, visual navigation, ability to navigate without GPS, for instance, flight control systems and other advanced technologies embedded into our platforms.
This shows you kind of a portfolio of our products. Highlighted here now are our Group 1 and 2 UAVs, which is our Pumas primarily, and Ravens, and also a Vapor helicopter, which is kind of gonna be emerging as a Group 1 solution on some of the U.S. programs. In the middle, and that was our first main product line. In the middle is our loitering munitions, which kind of came next. We've been delivering loitering munitions for almost 10 years. It's primarily been a niche market to U.S. Special Forces, but as I'll explain later, it's really become, you know, a much, much broader category and, and more ubiquitous type of product around the globe, and so we expect a lot of growth from that.
Then kind of the last one I'll highlight is our Group 2, 3, 3 UAVs, which was through an acquisition called Arcturus, and that's primarily the JUMP 20, which basically means it's a bigger drone that flies, say, 10, 12 hours, versus maybe a smaller drone might fly 6 hours and things like that, or 4 hours. We operate in three. So we take all those products, and we operate, when we report, in three business segments. One is an unmanned or uncrewed systems segment, which is the Group 1 to 3 UAVs, so the medium, we call the medium and the small UAS, and then our ground robots. The other business segment is the loitering munitions segment.
And then the last segment is MacCready Works, which does a lot of advanced development work, new products, funded partially by the U.S. DoD, funded some of it with our own IRAD, but they're both classified and unclassified. That's where we do all of our machine learning, AI, autonomy capability, all kind of comes out of MacCready Works. You know, one of the big changes that's happened, say, in the last couple of years is the Ukraine war, as we all know. And that really created the recognition that things like loitering munitions, reconnaissance drones are an important part of the arsenal of a smaller country trying to fight a larger adversary. So that has kind of been a shift in the whole warfare game around the world.
So you see some quotes on the right from different, different aspects of, of the Ukraine war, but it's really been a, a kind of a, a shift in momentum for the, for the all the unmanned or uncrewed systems business. So we think we're in a great spot because we have this-- We've been doing this for a long time. We have a, a large portfolio of uncrewed systems. We've been an innovator that whole time, the leading edge, not only on the outside, but on the inside, with machine learning and autonomy. We're, we're well positioned because of global tailwinds.
So again, it's not just Ukraine, it's not just the U.S., but it's the 55 allied nations that we sell to around the globe, buying new products that we have in current categories or new categories, and we've been doing this with customers in the field for over 20 years. So it's not just, you know, PowerPoints or on a piece of paper or prototypes. We've been in there innovating and changing and improving for over 20 years. It goes without saying that the world has become a much more unstable place, and that instability creates demand for our products in multiple regions, from Africa to the Middle East, to Europe, to Asia. And that's reflected in the fact that we've...
You know, post-Ukraine war, you've seen defense spending go up significantly around the globe, both in Europe and the European countries. The box there on the right just shows you what the pre-Ukraine forecast for 2027 was, about $1.8 trillion, and now that would be $2.3 trillion of defense spending around the globe. So a significant increase post-Ukraine war. For us, we're going after some fairly large markets. The biggest now would be the loitering munitions market, which we would estimate at least at $5 billion and rapidly growing. The medium UAS market's about $4 billion in our estimate. The small UAS market, which was our traditional market, is about a $2 billion market, and the ground vehicle market's under $1 billion.
So as you can see, with the acquisition of Arcturus, we added a big chunk in market, potential market. And now with the loitering munition and all the changes in the dynamics around the globe, we now have a much, much larger market we're going after. So, you know, our addressable market over the last 2 years has increased significantly. So just now, a little bit on the different business segments. The small UAS or uncrewed system segment, which is comprised of our small UAS and our medium UAS and our ground robots. On the small UAS, we've been the 800-pound gorilla in that market for many years. You know, again, 55 countries, you know, pretty dominant market share there.
You know, even when people see the product today, they say the Puma is the best product in the market, even though the Puma's been around a while. But we've been upgrading not only the software, but also the optics and things like that. So day/night, these types of things are critical for the war fighter on the edge. In the Group 2, 3 market, that's more of a... We're more the disruptor than the incumbent there, so we're fighting for market share from some bigger players there. But over the next couple of years, there's at least 15 different opportunities where that kind of market is turning over. It's, you know, the, there's. Incumbents have been there for five, 10 years, or 10 years.
Now, other countries are starting to look at, "Well, what's next?" We believe we have a good shot at hitting some of those opportunities. Then incorporating our autonomy and machine learning, computer vision into these products gives them a leading edge. Loitering munition segment, you know, this is our big growth engine. We've been, like I said, doing it for over 10 years. We've shipped thousands of units, but now we're moving to a whole different era here, to something that we believe is a billion-dollar, at least, opportunity for us in the not-too-distant future. We're looking at different variants. We now can sell to over 50 countries. That wasn't true 2 years ago. So we were limited only to the U.S. military. There's multiple programs of record, over $1 billion on the horizon.
We've just recently got some good news from the DoD for the Replicator program, which is a showcase of U.S. unmanned systems. We were named as the only company. There are several companies selected for the first tranche. There'll be other tranches, but we were named specifically AeroVironment in that. We've also got the initial order on the Army LASSO program, which is now gonna be their large program for the Switchblade 600 class loitering munitions. And then we just also got news that we were down-selected to one of the three participants in the Marine Corps' Light program, which is basically the Switchblade 300 class system. Another little video. This is a real quick one, just showing one of the keys in a loitering munition.
So you can shoot something off, you know, maybe find a target and hit it, or based upon GPS coordinates. But one of the strengths of the Switchblade, its ability to track a target, and in this video, you're gonna see it tracking and hitting a boat. So think about a boat moving in the ocean, rocking around. You know, it's not, it's not a sitting target, you know? It's a moving target. Oops, I went back. How do I go back? Oh, shoot! I gotta go back, too. There, now I go. Oh, shoot. Hopefully. Let me go back one more. There, let's do it this way. Here we go. Let's do this. Let's see. All right. So one of the things is obviously hitting boats, but we're also developing launchers off of boats.
So again, another problem is this thing comes out of a tube, and the boat's rocking around in the ocean. It's gotta orientate itself very quickly to get off to do its mission. Lastly, MacCready Works , we're very excited about what's happening here. It's our, you know, it's our smallest business today in, on paper in terms of revenue, but they're doing really exciting things in autonomy, machine vision, and things like that. This is kind of our focus of that, and they're working on several products for, you know, the U.S. DoD, like for instance, long-range or contested logistics, delivering supplies with, you know, autonomous UAVs that can fly hundreds of miles, and deliver goods or supplies to them.
That's where the HAPS product is being developed, which is a stratospheric cell tower in the sky, but also has some DoD capability. That's where we've built up all of our library of images, annotated images of military targets that we think is the largest library in the world. So people talk about autonomy. This chart just talks about the different kind of stages of autonomy. You know, at the end of the day, what you're trying to do is either lower the cognitive load of the operator, like, so maybe instead of flying one reconnaissance drone, you can fly multiple. You can say, "You three, go up, cover this area." Our systems will autonomously determine who will cover what area, for instance.
Or it can go all the way to, you know, fly around and find, try and look for a tank, that type of thing, or... And if you find the tank, send a message back about it. Or it could go to a lethal side where, you know, find a target, take out the target. But as I said earlier, kinda one of the key enablers here is image recognition. So you have to be able to understand what you're seeing in order to do autonomy. You can't do autonomy if you don't know what targets you're seeing, what terrain you're seeing, and we feel that's where we have a, you know, a very good position relative to our competitors to have a leading-edge image recognition capability through our Planck division or LEAP .
And this example, and, you know, it's a lot of print and type and stuff, but the idea is we have a product for it. It's called Spotter Edge. You can see it on the bottom there. And these products are used for multiple things like force protection, overhead imagery analysis. That was Spotter Geo, it's called. Airborne computer vision, that's Spotter Edge. A lot of our even competitors are gonna be using Spotter Edge on their platforms to identify targets, surface detection, person detection, again, another part of the Spotter project. Might even go down to runway surface detection or data annotation and things like that. So we're very active with multiple agencies and our peers in this market to deliver computer vision.
This leads to many advanced capabilities: autonomous operation, autonomous search, autonomous survey, 3D mapping, detection of targets, and coordination of multiple platforms, as I was saying earlier, within an area. And now a little video on this. A couple things that brought to mind is that, you know, one of the— So number one, a lot of the capabilities being developed in MacCready Works are now being transitioned to all of our platforms, from the Group 1 to the JUMP 20, the larger platform, to the Switchblade platform. So you're gonna see a lot more of this type of capability built into those platforms in the next couple of years.
And two, one of the things I didn't really talk about earlier, but was, is part of this, but going back to the Pumas operating in Ukraine, one of the challenges is the ability to operate in a GPS-denied environment. So that's one of the challenges that we've learned a lot in that fight and really tuned the product and, and created capabilities for it to operate in that type of environment successfully, and it's been very successful in Ukraine. Not without a little trial and error at times, but... Okay, now the fun stuff, financial overview. A lot of people ask us, "You know, you're getting a lot of business from Ukraine.
You know, can you? You know, so what does that mean for the growth in the future?" We put this chart together to try to explain kind of our growth path the next, say, 10 years. So in the short run, yes, we are benefiting from Ukraine sale. We just announced again in another aid package to Ukraine for both Switchblades and Pumas, and that'll continue to help drive some growth. We also—They used a lot of existing Switchblades for the Ukraine war, so we have to eventually replenish those, and now we'll be able to, in the short run, be able to sell the Switchblade to allied countries. So those are kind of some of the short-term drivers. But in the not-too-distant future, as evidenced by some of the recent announcements, we're looking at multiple large programs of record with the U.S. DoD.
We really have no tradition. We've had programs of record in the past, but the last few years, we really haven't had any large U.S. programs of record. So we're shooting for multiple Switchblade programs. In the Marine Corps, there's three of them. Now the Army has a large program. We're kind of in the first, picked for the first tranche of that. The Replicator program we talked about, the LRR, which is an Army reconnaissance, long-range reconnaissance drone, kind of equivalent to a Puma. And then we have the medium-range reconnaissance drone, which would be more like a Vapor class product. And then we have a long-range Switchblade 300 flying off a helicopter or something like that.
Well, the Switchblade has multiple projects for different platforms, shooting off of boats, shooting off of planes, shooting off of trucks, and all that. So that's another whole market, market for us. I guess that's the second one down there, integration of Switchblade platform on existing-- integration of Switchblade on existing platforms. And then, you know, kind of if you look out even further or maybe even a little bit, there's a lot of exciting stuff being developed in MacCready Works, not only in the software side, but as I said earlier, long-range, the contested logistics and things like this, are being developed in MacCready Works, we all think have legs for potential, issues in the, in the Pacific. In terms of our results, through our third quarter, our fiscal year just ended, in the end of April.
But in terms of the last 12 months, about $706 million of revenue, 66% of that came from our uncrewed systems or unmanned systems, 23% from loitering munitions , and MacCready Works was 11%. But over time, you're gonna see that loitering munitions amount grow, grow significantly. Our Adjusted EBITDA is about $152 million, which is around 17%-18%. We have a very, a, a good funded backlog of $463 million. But one of the kind of the differentiators from a traditional defense company is our investment, R&D investment. That is, runs in the 10%-12% of revenue range, which is a pretty high amount of money. And then this just shows you, our revenue trajectory over time.
You know, we've grown significantly over the last few years, 20% in FY 2023, 30% in FY 2024. Since FY 2022, we've shown continual improvement in adjusted EBITDA, and we would expect that hopefully to continue. And that's it. So, 10 minutes for questions. Go ahead.
What does it take to get drones approved for the DoD, for NATO versus non-NATO?
For what? Well, if it's not lethal, then we just get an export license for that. So they don't necessarily pre... We have export license to market that around the world. The non-lethal drones are a lot easier than the lethal drones, so that's why it was a big deal when we got the ability to market the lethal drones around the world to 50 countries.
Where is the data actually stored? If so, if a drone actually ends up on the ground, where is the data stored, and can the data be retrieved by somebody else before it goes back anywhere?
No, the product gets hardened, so you can't do that. Yeah. You can't, you know, get inside of it, so.
Are you doing any capacity expansion?
Say again?
Are you doing any capacity expansion?
Yeah, so we expect the Switchblade product line to grow significantly over the next few years. So, we've talked publicly that our current factory could get us to probably about $500 million in revenue for that product line. So, we think, you know, we need to look at something in the next couple years, so we're kind of actively looking for a secondary site, probably closer to where we do the warhead integration and the testing, which is in Utah.
Thank you.
The video that you guys showed had the C2 being used in the field, tasking drones, mobily.
Yeah.
Is that just for AVAV's products, or could that be expanded out for?
Are you talking about the tablet or the-
The tablet, but the tracking system and just all of that command and control that's happening. Can you... Is it just AVAV, or could that be opened up to-
Well, we bought a product company called Tomahawk last year, which has kind of the tablet, but more importantly, the mission control software, which is being used with multiple platforms. So that does extend there. You know, some of those capabilities would be extended, but some probably aren't. So I don't know where the break is on that.
Yeah. Thank you.
Now let me jump in. Where does AI fit into all this, right? 'Cause there's other folks in the world doing AI stuff. So when you think about your product offerings versus, say, you know, the software that Anduril has or the software that Shield AI has, where does the AVAV product fall in there?
Well, as I was trying to say, is basically, what is AI? I mean, from our product perspective, AI is a lot about autonomy.
Okay.
Its ability to recognize where you are, the targets that are there, and do something, right? So that's where the AI part comes in, is-
Yeah.
So it starts with the image recognition. And our products, to a certain degree over the last several years, have all had some type of autonomy to them. You know, we've had that capability to throw up three, four drones at a time and, you know, do reconnaissance in an area. And they figure out themselves, "Here's how we're gonna divide this up." That's kind of like AI.
Got it.
Um-
Got it.
And then over time, that autonomy can be, you know, find these targets, but without communication—see, the key is, like, when you're in a contested environment like Ukraine, you don't necessarily, you can't rely on communications. You can't rely on GPS. You have to have other ways to accomplish the mission, which one of those ways is just pure autonomy. You know?
Got it.
Pure ability to say, "Go find these targets, and come back and either come back and tell us, or, you know, send a quick signal that might not be detected when you fly at a higher, higher altitude, or when you're out of the dome of contested environment," and things like that.
And then maybe, for folks that aren't as familiar with it, can you just explain quickly, what is Replicator and what it really means? 'Cause it's a huge one for-
Yeah
For you guys.
Yeah. So Replicator is a US DoD program initiated at the highest levels of the, of the US DoD. And my simple view of it is, it's gonna be a showcase of, of the US's kind of drone or autonomous capabilities, and so, or unmanned system capabilities. So that'll, you know, that could be from boats to, you know, things like the Switchblade and, and, you know, and we're gonna, that's gonna be demoed in a couple of years. And they're gonna, they've funded, I think the current funding is around $500 million in the US DoD program.
Got it, got it. And then the, you know, the broader CCA program, what's that mean for you guys?
The collaborative?
Yeah, Collaborative Combat Aircraft.
Yeah. Well, we're not in that.
Okay.
So we're watching that to see who wins that. But, you know, a Collaborative Combat is a basically a big drone with which has AI capability, so to speak. And hopefully, that eventually will have Switchblades and things like that on it too.
Gotcha. Gotcha.
Yeah.
Gotcha.
I mean, we would expect over time, Switchblades to be launched from all those type of platforms or Switchblade-like products.
Gotcha. And then you highlighted, I mean, correctly so, the way you guys view R&D spend-
Right
Is different. So when you think about, just purely from maybe the CFO seat, the return on that investment, how do you think about that? And how much of that R&D is billable to a customer, and how much of that's really your blood, sweat, and tears you're spending on stuff?
Right. So when you look at our financial statements, that's where you see the 10%-12%.
Yeah.
You know, this year, I don't know, it's, you know, almost $100 million, just say round numbers.
Yeah.
But that's what you see on our in-. There's also a cost. There's also CRAD programs or customer-funded programs-
Mm-hmm
Which could add another $100 million. So total investment in new-
Gotcha
... technology, just roughly, is probably double what you see, you know, on our income statement. So, you know, it's pretty simple for us. You know, the big investments, there's smaller investments, but the big investments are next generation Puma, which is gonna be for the LRR program, a militarized JUMP 20, and variants to Switchblade. Lots of variants to meet some of these newer programs, different platforms, things like that. That's kind of the thrust. You know, the Switchblade market is huge, so you gotta say there's a good return on investment there. We gotta protect our turf on the small UAS, and then we have the JUMP 20.
Tremendous opportunity around the globe with all these new turnover of that install base happening in the next couple of years to capture the maritime versions of that and the non-maritime versions of that.
Got it. Yeah, I mean, I would argue it's a very differentiated strategy that's served the company quite well.
Yes.
Yeah.
I mean, we've always been a. That's the great thing, we've always been an innovator, and people say, well, you know, I, I've been in many industries, a lot of technology businesses. To me, it feels more like being in a technology company, you know?
Yeah.
That we're really a technology company, innovation company first. That goes back to our founder, you know, Paul MacCready, you know, 50 years ago. He's a brilliant inventor. I never knew him, unfortunately, but he was just always on the cutting edge, and that kinda is in our DNA-
Yeah
Is to try to bring some cutting-edge solutions to the warfighter. He didn't start out just doing warfighter but, you know, ultimately, we morphed into that, so.
Got it. If the-
Any other question? Yeah, go ahead.
So, how do you think about the demand curve as you can kind of start selling a lot of your products to a lot of other countries now? How does that scale up, this kind of 50+-
I couldn't quite hear you there.
How do you think about demand kind of growing from those 50-plus countries?
Oh!
and now scale to... Do you need to do anything else in terms of building a sales platform, or is it all good to go?
Well, I mean, you know, one of the things that's been happening is we basically, we're in the small UAS market, like I said, we're the 800-pound gorilla. People just came to us. You know, there wasn't a competition we didn't know about because, you know, we've been, over the last years, kind of building a broader global sales force because now we have new products like the Switchblade to sell, the JUMP 20, and things like that. So we think there's a lot of a greenfield for us in those particular two markets. The small UAS market is... The market is growing just because of what I was saying earlier about the Ukraine war and stuff like that. So we think we have a lot of runway with our current products, let's put it that way.
We do think there's other areas that we can get into that are kind of similar in the uncrewed system space, in this whole space, to even expand the portfolio more, so. And then once you kind of have that, we have that brand recognition out there, so that's a good thing. Any questions?
Any other questions?
Yeah.
You get another one.
Thanks. And in terms of the competitive dynamics, I think you kind of asked slightly about that. Could you kind of highlight for us, as outsiders, how that competitive dynamic comes up? Because we see a lot of material from, like, Anduril or, you know, kind of peers which are emerging, investing heavily as well.
Yeah.
Can you kind of talk about the market and how you think you're kind of carving out your space versus others?
Well, I like to say, you know, you know, traditional markets, you talk about competitors and go... You know, at the end of the day, you know, we're all trying to. We're competing against adversaries like Russia and China. So, you know, I don't wish anybody, you know, ill. I mean, I want everybody to succeed with the niches they carve out. I think each of our product areas has its unique capabilities. We think 'cause of our kind of experience in the battlefield, you know, you know, a Puma can land in the water. I mean, the camera will survive that. We were just talking the other day, that gimbal on there, that camera on there is probably the only gimbal in the world that can really survive water landing.
And so, you know, we have capabilities like that that we, you know, we've just... Now that the market's growing, we can probably market some of our componentry to some of our peers, I should say, you know. So we hopefully all win, put it that way.
So on that regard, how are you thinking about others? On that regard, how are you thinking about, like, selling these components or these parts or even the software that powers your-
Yeah
People to work?
Well, we work with the, you know, other prime contractors all the time. So it's not uncommon in the defense space to, you know, work on programs together, give others technology, have the U.S. DoD say, "Hey, they should use your Spotter Edge in this, in this new solution." So it, it all, it all happens today. The gimbals is just something we haven't really explored, so I, I can't even say where that's gonna go, so.
Great.
We, like, we've been doing this so long, we forget some of the trials and tribulations that we overcame to really deliver a product that works in the theater, you know? So.
Well, Kevin, thank you.
Thank you.
Very much.
Thank you for the time.
That's great.
Thank you, everybody.
Yeah, you bet.