Great. Good afternoon. I am Louie DiPalma. I cover Aerospace and Defense on William Blair's Equity Research team. This is the second day of our 46th Annual William Blair Growth Stock Conference. We're pleased to be hosting a hybrid presentation/fireside chat with AV's management team. AV is the branding of the company formerly known as AeroVironment, after the merger with BlueHalo that closed roughly 13 months ago. Joining me today are Chairman, President, and CEO, Wahid Nawabi; CFO, its freshly new CEO, Sean Woodward; and Head of Investor Relations, Denise Pacioni, who's sitting in the front row. Following the presentation, there will be a breakout session in the Adler Room on the second floor. I am required to inform the audience that a complete list of disclosures and potential conflicts of interest can be found on our website at williamblair.com.
I also wanted to mention that I was supposed to meet with Wahid two weeks ago at the SOF Week conference in Tampa. Wahid was too busy to meet with me because he was meeting with customers, and so I am relishing this opportunity to actually meet with Wahid now. This is wonderful. My first question in terms of the broader drone landscape, I'm sure many in the audience saw that many stocks in the drone sector traded up between 20% and 35% last week after The Wall Street Journal reported that the administration may be interested in investing in drone companies. I was wondering what your thoughts, Wahid, would be for that, and whether that would potentially appeal to AeroVironment, or what's your general view on that?
Sure. Thanks for having us. Good afternoon, everybody. I think it's the afternoon. You do the disclosure one better than I could do it in my call. Maybe you should do it from now on for me as well.
Forward-looking statements.
Forward-looking statements. There you go.
You are free to make them.
Thank you. In 15 years, I think the SOF Week was the first time I couldn't make it to meet with you, and thanks for reminding me. It'll never happen again. Especially not before your conference. Well, look, the signs about this Office of Strategic Capital within the Pentagon is very clear. This is a positive sign for the industry because they believe this is a strategic area for our national security as a country, and it's an area that the U.S. needs to accelerate investments in adoption, in development of capability and capacity. They're willing to take hard U.S. taxpayer dollars and invest it in an equity, or joint venture, or teaming agreements to basically build the industrial base and build the capability and capacity overall. That's not bad. That's very positive. We support the administration on this front.
Second, we are actively engaged with them on several fronts in this area. There's multiple ways that we could essentially have a win-win-win outcome for the department, for the U.S. taxpayer, and also for AV. Primarily, this program is focused on a lot of startups that lack the capital, do not have the balance sheet. They don't have the capacity to produce. They have some good ideas.
You're not a startup.
We are not a startup. That's a fact, I believe. We are interested. We want to work with them. There's some options, but it's not directly targeted for the things that we do specifically as a company. We're open to it. There are some opportunities for win-win-win for those three stakeholders, and we're engaged with them. I'm not in a position to be able to comment on those, but we look forward to engaging with them further. It's primarily focused on folks that don't have the capacity to invest, don't have the capital to do this. They don't have the investors that can back them up, and the country needs a lot of those as well, and that's what it is.
What we could help them, actually, is also in some areas to partner with the department and help some of those startups scale things that we know how to do in the areas that we're focused on.
Great. Yeah, that's how I generally interpreted it. If the Department of War were interested in investing in you at $400 a share, then that would be pretty good.
It'll be still a very fair and reasonable bargain for them. But that's for them to decide, not me.
You've traditionally been known as a drone company. You pioneered the small drone industry with your Raven, your Puma, your Switchblade, and now you have your JUMP 20. One of the really compelling market opportunities is now you are also a laser company with your LOCUST. Your laser system has been in the media over the past six months, and you've signed many agreements. Investors are interested in what is the market opportunity associated with lasers, both domestically in terms of protecting the homeland, Golden Dome, but also in conflict regions, in actual theater.
Yeah. The short answer is it's a massive potential market opportunity. No one really knows exactly the magnitude and size of this market because it's just starting. It's going to be in the billions of dollars long term. We've got the leading position in the market. Before I get into a little bit more details on that, I want to just describe the overall AV investment portfolio and thesis for investment. Our business is made up of roughly four buckets in general. Roughly, we're in a quiet period, so I can't comment on the fourth quarter. I'm going to just talk in general. If you'd say about a $2 billion revenue business, about $500 million of that is what I call non-lethal drones for Group 1, 2, and 3.
That means from a small quadcopter-sized drone all the way to a Group 3, which is a JUMP 20. It's a 200+ lbs air vehicle that Shahed drone is about that Group 3 drone from Iran. In that space, that's about $500 million business for us. We've got solid franchises. We've got several products: the Puma, the Raven, Puma LE, P550, JUMP 20, JUMP 20-X, VAPOR, et cetera. We get a franchise that's global, 50+ countries, around 55 countries around the world. It's generating cash, generating revenue, and it's got a huge install base and potential of growth. The next bucket is what I call our lethal drones. That is another $600 million-ish or so, growing very rapidly. It's a category that we invented again for the militaries. We did the first category, the same thing.
The U.S. military did not know how to use small drones 30 years ago. We were the ones who actually helped them operationalize it. Loitering munitions such as Switchblade 300, 400, 500, 600, and one-way attack drones such as Red Dragon make up that bucket. That's about another $600 million, growing very rapidly. That market has really taken off since the Ukraine conflict because it's put an exclamation mark on one-way attack or loitering munitions in general. We have our third bucket, which you're referring to, is our counter-drone solution set. We don't have a one single solution point, and we don't depend on one technology. Our approach has always been long term. There's going to be a layered approach to defending against drones, Group 1 through 3.
First, Group 1 through 3, which is small, medium, and semi- large drones, make up probably 90% of the market opportunity. That's a vast majority of the drones in the market that is going to be used as lethal and non-lethal drones. Our solution has three layers. Layer 1 is we've got the world's best jamming RF jammers, and that's the simplest, easiest way to defeat these things. They all have comms on the ground with the operator. They all use GPS, or majority of them do. You can jam that. We've got the world's best performing, heavily deployed in Ukraine, across the world, U.S. military, one program record. It's the best one in the world. When that doesn't work, you go to the next layer, which is a Directed Energy Laser Weapon System. That's what you referred to, our LOCUST series.
We're on our third generation product. X3 was the latest product that we just announced recently. That business is at its infancy. Literally at its infancy. The first potential program record that the U.S. Army's talked about is called EHEL, or Enduring High Energy Lasers. It's supposed to be roughly about $500 million program. We're one of the top contenders. They should be making a decision within the next few months. That would be an inflection point for that because if jammers don't work, most likely the holy grail for counter drones is going to be directed energy. This is basically a weapon system that's lasers. You point it to the drone, you track it, and you hit it within 1 km-5 km away and three to five seconds of energy, and you zap it from the air.
It takes the cost of defeating a drone from millions of dollars of a missile to less than $10 a shot. If that fails, you use kinetic kill, and we have a product in that category called Freedom Eagle-1. Everything else is another $700 million worth of what I call a portfolio of things that could become the next Switchblade, the next laser weapon, et cetera. I think we have growth in all these buckets, and our strategy is to achieve success long term in the area that we're focused on with software and analytics on top.
Great. As it relates to that layered system, what are the different ranges for the Titan in terms of being able to jam versus the second layer that you just mentioned, your LOCUST system ? How does that compare to what's in the market in terms of, there's the Coyote interceptor, and then you were also mentioning these very high priced PAC-3 or THAAD missile interceptors as well. Where does the laser system fit in there?
The laser system, just like any other weapon systems, come in different sizes based on kilowatt. How much energy you're going to deploy or direct to the target. At the lowest end, you're looking at about 5 kW-15 kW. The sweet spot is between 15 kW-30 kW. Our X2 product is a 20 kW-25 kW, and the U.S. Army program is targeted to be around 30 kW. At 30 kW, you're going to take out Group 1, 2, and 3 very effectively. From a small little quadcopter all the way to a Shahed drone, you can achieve success against those drones very effectively with our X3 product for the U.S. Army program record, potentially. Now, above that, the directed energy still has a market for even missiles against hypersonics and other things, and you can go up in kilowatts up to 300 kW.
There are systems out there that's very exquisite, extremely expensive, and not as reliable, not as effective that you could grow. We started to focus on the middle of the market because we think that's the sweet spot initially. We plan to go down on the kilowatts, the lower end, as well as on the high end. It is the best performing system out there. It's been in the news quite a bit. We are actively pursuing that. It's the only system that I know that the FAA has tested against commercial airliners. They just published a report recently, literally weeks ago, and said that the AV system is actually. That's the spot we're all focused on, but we're going to go up and down the food chain as well.
Yeah. I guess, how is the range? I know you did the demonstration in Albuquerque, in which you fried a quadcopter with your LOCUST. But how far is it able to, with a 30-kW system achieve that type of?
Usually between 1 km-5 km range. Yeah. The sweet spot's, depending on how large the target is and what the environmental conditions are, and what part of the target you're going to actually hit. The secret sauce to AV is not the laser itself. That's a pretty commoditized item to some extent. We have a lot of suppliers that make that. We don't make the laser itself, we make the system. The secret sauce for us is really the tracking and targeting software that allows a joint light tactical vehicle, like a JLTV that the U.S. Army has thousands of them-
Right.
... have be moving at 30 km an hour, 360 degrees, constantly surveilling the environment within 5 km out, detecting the drone, tracking it, and then pointing the laser at it while it's driving,. And shooting it down within less than three to five seconds. That's the business-
Yeah
... that's our secret sauce.
This provides the transition. You also mentioned how you recently made an announcement with your Freedom Eagle-1 missile system. Sean, I think you can provide some color on this. Investors are interested in... What is the timeline in terms of the Freedom Eagle shifting from prototype to Low-R ate Initial Production to Full-R ate Production? Related to what Wahid was just saying in terms of the LOCUST having a range of 5 km , what's the range of the Freedom Eagle missile interceptor?
Yeah. Thanks, Louie. We're very excited about this program. We won this last year. It was a competition that we went against Raytheon. We were down selected and chosen to work on this program. We're in the development phase now, development and testing. We're working with our customer as fast as we can to get through development, safety confirmation testing, and move into Low-Rate Initial Production in about an 18-month timeframe. Following that, we'll get into Full-Rate Production as quick as we can. We just made an announcement about our expansion in our Huntsville facility. We're increasing our production capacity. We're building out our factory in anticipation for that LRIP and Full-Rate Production, which will be done in our Huntsville, Alabama facility.
Great. How does the Freedom Eagle system compare to other interceptors on the market in terms of from a price point, but also just spec-wise?
Yeah. It was a specific niche that the Army was looking for to fill a gap of, instead of using those expensive missiles that Wahid mentioned to take down $20,000, $30,000 drones or any of the low-end ones. This is a high performing, high capable, long endurance, solid rocket motor capable to take down those key object Group 3 type platforms. It fills that niche that the Army was looking for in the requirement that they had for a kinetic kill of a counter- UAS.
Great. It's significantly lower cost than these?
Significantly lower cost.
The Full-Rate Production price target by the program requirement is roughly about $150,000 a copy-
Yeah.
... relative to a $1 million-$5 million missile.
Yeah.
It is designed from the ground up to address the specific need for Group 1 through 3, primarily 3, at 5+ km ranges. The other unique thing you asked about earlier, that Sean's point, is also it's radar-agnostic. You don't have to have a specialized exquisite radar system that costs tens of millions of dollars. You can marry this with any radar that the site has. It works with a lot of different systems. That was a very specific requirement for the U.S. Army, where many other missile systems have a very exclusive relationship and integration requirement with a particular type of radar. If you don't have that, it's a lot more money, it's a lot more work to a lot of sites. I think it'll be very important, this capability. It's a capability gap today that needs to be filled.
Definitely. In addition to expanding capacity for your Freedom Eagle missile interceptor, you've also announced major plans to expand Switchblade capacity in Salt Lake City. Are you seeing the demand signals that the orders will come for you to utilize that Switchblade capacity?
Yeah. We announced the Salt Lake facility build out, I think, last year. We're continuing to build that out. We're designing the factory from the ground up, literally building it to our specs. It's going to add about a $2 billion capacity of additional revenues that we can bring in through our Switchblade and other product families can be built in Salt Lake as well. We recently announced our down select on the LASSO program, and the SB 400 solution will be built in Salt Lake City. Our Switchblade 600 will be built in Salt Lake City. Our MAYHEM product will also be built there. We're seeing demand domestically, with the U.S. military, SOCOM, U.S. Army, internationally for our military sales and direct commercial sales, all for our Switchblade product family. We're going to build the factory and the capability in Southern California.
We're going to shift it to Salt Lake once that factory is up and running later this calendar year. Have dual capacity to be built in both Southern California and Salt Lake.
Great. At the beginning of our Q&A session, we were discussing how the Department of War was considering making investments in drone companies. One of the themes over the past six or seven months has been the desire to quadruple production of the top 15 missile programs. I was wondering, how does the Department of War view the Switchblade in the context of these very expensive missile interceptors? That it seems somewhat paradoxical that the Department of War is citing how a PAC-3 interceptor is too expensive, and how you've come up with the Freedom Eagle missile at a fraction of the cost, but the Department of War still is looking to quadruple production of these more expensive missile systems.
I'm wondering, is it possible that the Department of War could come along over the next few weeks and designate the Switchblade as one of those top 15 missile systems, and task you with quadrupling the production of the Switchblade? For the past, I think, five or six years, you've talked about the potential for the Switchblade to have the program of record status. It seems as though those missile systems have that status. I was wondering, where does the Switchblade sit in terms of the importance for.
Yeah.
... the Army?
Indeed. It's a very interesting point you're making. Like you said, first of all, the short answer is, this is a very new category for the department. PAC-3 missiles and Patriots and Javelins have been around for decades.
Yeah.
Their use cases, they're well known to the military, what I call force structure. We do need more of those because probably the most misunderstood fact or critical point with the general public in general, not this crowd, but the U.S. public domain, is how far behind we are as a country in our national security competitiveness. How fast and aggressive China and some of our other adversaries have been investing to literally give U.S. a very serious run for our freedom and safety. We need those missiles to go up. We've actually doubled, quadrupled production in the last two years aggressively on our own dime, primarily based on demand signals and the orders that we've received. We 've been shipping. We're doing that. U.S. military also paid us some dollars.
They've actually funded us. Not huge amounts, small amounts, to expand and accelerate, double the production of Switchblade 600 again, recently. We announced that a little while ago. We've been doing that. I do think that since it's a new category, the ramification of what the use cases are and how it gets lost when you're so much in a hurry and all that. I do believe that that moment eventually is going to come. We can look at the portfolio. We have a Switchblade 300, 400, 500, MAYHEM, and also-
Red Dragon.
... 600. Red Dragon. We have a portfolio that we've developed on primarily our own dime in the last few years with our own dollars, shareholders' money, and developed this franchise and this category that didn't exist before Ukraine, essentially. I think it's going to be a few more years until that moment comes because it's just picking up. I think over time, we see a lot of demand signals. Not from the U.S. alone, but also from our allies across the world, that we're going to need tens of thousands of these. Not just thousands of these, in the future. I think that that point is coming. MAYHEM, which is the Switchblade 500, for example, is designed to be mounted on any type of other asset.
You could put it on a helicopter. You can mount it on an airplane. You can mount it on a ground vehicle. It improves its versatility to go on existing platforms dramatically. That is other ways that we can expand the use cases and adoption of loitering munitions in the military.
What enables the MAYHEM to be launched from those different types of platforms? Is the launcher different for the MAYHEM than versus Switchblade 600 and 400?
Yeah. Primarily, that's the biggest difference. When Switchblade was initially developed, was for dismounted troops. There's two of us, or three of us, or a single one of us. We carry these on our rucksack or a couple of boxes. We're going to put it in the back of a pickup truck. We're going to go drive somewhere, take it out, within minutes, launch a weapon system from a ground dirt floor. That's a different sort of a design architecture and concept than I have all kinds of different platforms. I want to mount this just like I mount any weapon system. There is a tube, it's called a common launch tube, CLT, that the Army standardized on. This is going to go into that exact same tube.
The mounting mechanism for this is very similar to any other missile that the army uses for that, and it could be used on a lot of different platforms. The new helicopter that they've got in development, the airplanes that they have, ships, boats, et cetera, could benefit from this common launch tube capability.
Yeah. I think in different press releases, you indicated that the MAYHEM system is competing for the launched effects competition. Do you already have orders for the MAYHEM, or is that something you anticipate in the future?
Yes, it is true that this product is competing and is a competitor or a offer to the U.S. Army for the launched effects. The whole mission of launched effects is exactly that, launching effects from various different platforms. Before that, there was no concept of having a loitering munition being launched. But now th is, because it's been proven. Specifically whether we have orders or not, I can't comment because it's a competitive process. We feel very good about our chances here and opportunity. It is developed from the ground up to be specifically developed for this opportunity for the Army, and we look forward to the progress that we're making. Our product's battle proven. This stuff is, we've been shipping thousands of them effectively and just created a whole category.
Right. I know you have significant orders for the Switchblade 600, the 400. You recently announced a contract for the Red Dragon. You're definitely seeing Switchblade orders. In addition, you also were awarded, I think it was a $118 million contract for your new P550 system, Sean. I was wondering how is that program ramping with the Army, and what are the use cases between the P550 and the JUMP 20?
Yeah. The P550 is designed specifically for the Army Long Range Reconnaissance Program. We were selected for that. We've been operating and delivering against the Long Range Reconnaissance Program. P550's got other international customers that we've already gotten awards for and delivering against. JUMP 20 and the JUMP 20-X product, we launched that probably about a year ago with the X version of it. That is specifically designed for maritime operations. We've been awarded through the MEUs, the Marine Expeditionary Units. We've gotten onto the U.S. Navy's COCO contracts or with the Coast Guard. That product has gotten tremendous adoption from a services platform operating in harsh maritime environments. We've also won multiple international programs with the JUMP 20 platform. We're anticipating the Army brigade level program, t he replacement for the FTUAS program, that we think the JUMP 20-X will be a perfect solution for.
Before I forgot to ask a question that I just thought of. I think Northrop Grumman earlier this week announced the milestone for their Jackal system, in which I think you co-developed that system with them. Can you provide any update in terms of what they announced, and do you continue to be involved there?
As I said, the category of loitering munition, it's new and it's growing. It's just a whole new category, similar to how small the UAS was 20 years ago, similar to now probably laser weapon systems are going to be the same in the next five years. Jackal was a version of Switchblade that essentially we co-developed and teamed with Northrop for a program called LRPM, Long Range Precision Munition, from the U.S. Army again. It's a large program. The idea behind that is I guess the one difference between a loitering munition like Switchblade, which is electrically powered, and a standardized missile is that it doesn't have a rocket propeller or turbo propeller to go there fast, to get to the target fast. It's a little slower flyer once it gets to it.
It has advantages when it gets there, and even when on its way it does. LRPM was designed to be a sprint loitering munition. It has a jet propulsion, that basically turbo, that gets there fast, at 0.5 Mach, almost that fast. Once it gets there, it slows down and basically behaves as a Switchblade. That particular category of missile doesn't exist. We're the first one that's developing it, and it has significant implications. If you're on a moving platform, a helicopter, standing at a standoff distance, you see an enemy tank, you don't really want to wait 10 minutes or 20 minutes. You want to get there within less than a minute.
You want to shoot something that gets there, you want to have the maneuverability of the Switchblade that you can go take it out in a variety of different ways, angles, sides, et cetera. That is what the announcement that Northrop made. We're doing primarily the actual air vehicle, the propulsion, and also some of the controls come from Northrop, and we're teaming together. We're very happy and very pleased with the fact that we're going to make this another, what I call groundbreaking new capability that doesn't exist in the portfolio of missiles that we have in the U.S. military.
Great. Sean, I was wondering, how has the international demand environment evolved over the past year? I know you can't talk about specific conflicts. Previously, you've discussed opportunities and contract wins in the Indo-Pacific, and you've discussed your role in Europe with the Ukraine conflict. Have you seen customers increasingly looking for sovereign manufacturing? What's the overall demand environment from a high level?
Yeah, we've been doing business internationally for decades. We know what it takes to win internationally. We've worked through offsets and industrial participation agreements. We have in-country reps. We have AV personnel working in country. We have legal entities established in a few countries. We've done joint ventures. We've acquired a company, Telerob in Germany. We know what it takes to win the business and what it takes to win specific country requirements. We continue to work multiple different opportunities globally, Indo-Pacific as well as European opportunities. We're confident that we have the ability to team local production, contract manufacturing as needed. We're able to flex and scale to meet our customers' needs.
Great. I believe that is all the time that we have. Thank you, Wahid and Sean.
Thank you.
Thank you.
Thank you, Denise. We're going to reconvene in the Adler Room on the second floor to go more in depth into many of these topics. Thanks.