David Strauss, aerospace and defense analyst here at Wells Fargo, pleased to have AeroVironment here. Dr. Rob Smith and Denise Pacioni. Rob is Chief Operating Officer, joined the company a couple of months ago. I actually knew you in your prior life at BWXT.
I remember you.
Yeah.
Yes.
Denise, Head of Investor Relations. We'll run through a couple of questions here over the next half hour or so. Rob, like I said, you joined a couple of months ago, I think prior at Lockheed, BWXT, couple other stops. Maybe talk about your background and what got you to AeroVironment and kind of what your objectives are.
Thanks. It is good to see you again. Appreciate the invite to come talk a little bit. I think for me, I've been very fortunate. I was a government employee in the intelligence community. I've been in a small business. I was, as you said, ran billion-dollar businesses, multiple billion-dollar businesses at Lockheed, Raytheon, BWXT. Had been lucky enough to be across a lot of different customer bases, both internationally and locally in the domestic market. I bring a lot of different experiences from that. If you think about what is AV today, that's what we are. We're a multi-billion dollar business across all domains. We've got the heritage BlueHalo and the heritage AV coming together.
We've got loitering munitions, we've got one-way attack, we've got uncrewed systems, we've got Counter-UAS, all phases of it, from RF to laser weapon systems, and soon we'll have a kinetic capability. You add that with the space and the cyber with worldwide operations. What I'm most excited about is an amazing team with amazing products and amazing leadership team. I'm personally just really excited to be a part of that, bringing the experience that I have from these other companies and continue to just leverage that and move this business forward.
Denise, maybe you could dig a little bit deeper in terms of the portfolio, what exactly you guys do. You added BlueHalo and some of the capabilities there. Maybe just talk about all the different places you guys are involved. Everyone knows you for your heritage UAS business.
Sure.
Set the stage there.
Rob did a good job with a high level overview.
Yeah.
I like to say that we operate in four end user markets. We have drones, non-lethal and lethal drones, space technologies, and Counter-UAS. I'll start with the Counter-UAS because we seem to be getting a lot of questions on that. We have a very layered defense approach to this. We have three different types of Counter-UAS. The first is our Titan product, which is an RF detect and defeat. The second, you're hearing a lot about right now, particularly with the war in Iran, it's a directed energy, it's called LOCUST. This is a directed energy Counter-UAS solution. Uses a laser, advanced targeting and tracking to specifically pinpoint a drone and take it down. The cost to take down a drone is less than $10. The third one is something we just recently won a program on last summer.
It's the long-range kinetic intercept. This is our Freedom Eagle -1 product. It's sort of our entryway into missiles. This is something we just recently put a press release out that we're expanding our facility in Huntsville, Alabama, to prepare for the demand that we foresee coming for that product, probably in the next year and a half. The Counter-UAS is something that we acquired with BlueHalo. That closed about a year ago, maybe 13 months ago now. Other technologies that we got from there are in space technology, cyber and mission solutions. On the legacy AV, which is what we're obviously known for, we've been around for decades. We have several lethal effects and loitering munition products. The one that's most commonly known is our Switchblade family of products. Started with the Switchblade 300, one-man portable, you can carry it in a knapsack.
Tube launched, it shoots out. It can go around. It's very maneuverable. It can go to high altitudes, go down, go up, go around, find the target. From there, we developed the Switchblade 600, same type of platform, larger warhead, can take out a tank. Just recently, last fall, we came out with the Switchblade 400. This was for the U.S. Army's LASSO contract. It's the best of both worlds between a 300 and a 600. Size of a 300, warhead of a 600. Other products that we have in our one-way attack or precision strike would be Red Dragon. This is one of our higher growth programs. Most recently, we introduced our MAYHEM. I think that MAYHEM is something that's very underestimated right now.
It's got the capabilities of a loitering munition, you can swap out the payload, it does not have to carry a lethal component too. You can put whatever you want on there. In addition to being launched from the ground, it can also be launched from a helicopter or a manned or unmanned aircraft. I think that covers sort of the full gamut of everything that we offer. We're a leader in innovation. We spend a lot of money on internal R&D. I think it's important to note that, compared to our peers, we do spend more on internal R&D, clearly more than the larger defense primes. Just because of the way the landscape of drone technology is moving, in order to keep up with everyone, you have to stay ahead. That's been a focus for the company for the last several years.
You were asking about some of our priorities and what we're looking at doing. Over the past year, we've increased our capacity for production by about 300%, and we have a plan the next 12 months to do another 500%. We've got a lot of tailwinds in the markets. We're working with suppliers. We're buying long lead materials, and we're really enhancing there. Also, with the business coming together, we're looking at continuing to do more solutions where we're providing multiple products, even potentially other people's products, to be able to deliver capabilities for the customer. I think that's really important as we go forward, and something that the Heritage BlueHalo and the Heritage AV couldn't do without coming together. I kind of talked about, hey, look it, we're in all the domains, many markets, many different customers.
To be able to bring all that knowledge together to deliver is really important. It's something we're going to continue to leverage. Lastly, we're spending a lot of time on looking at how we continue to do things more cost effectively. We've got a really robust planning process called SIOP, which is a piece of it. We're looking at bringing the best practices from Heritage BlueHalo as well as AV, bringing those best practices together from key performance indicators. We're also now moving, and we're looking at a strategy that says, now that we have all this data, how do we layer artificial intelligence? How do we do additional autonomy to be able to continue to drive our margins higher, and also be able to give the customer better price points?
Bringing it back to a high level, maybe talk about the budget picture. There's a lot of money in the fiscal 2027 budget. We don't know exactly how it's going to play out. There was $50-some billion for the DAWG.
Yeah.
Just what you see in the budget in terms of areas that are right there for you guys to tap into.
We clearly have key programs of record. If you look at what's happened, whether it's Iran or whether it's Ukraine, you see the future of warfare. We're always going to need exquisite systems, so I don't think that's going anywhere. It's clear the power of what drones and that technology can do, and the importance to counter that. We're in those markets, along with many others, but you were asking me specifically about DAWG. Defense Autonomous Working Group, DAWG, they have a $50 billion request in the president's budget. It's for one-way attack, Counter-UAS, all the markets that we were just talking about that we are in. I don't know how much will come through on that. We'll see, but it's likely to be a very large market. Just kind of stepping back, you said taking the big picture.
Renaissance did a study in 2025, and they looked at the Counter-UAS market, and they looked at the directed energy market. They said, "What is that likely to be in 2030?" The answer was the Counter-UAS market, $17 billion with 8% or 9% growth. The directed energy market, $4 billion with about the same amount of growth. That was before Iran. I have to believe that if that study was done again, that those numbers would be even higher. Again, we're just talking about a part of our business. We're just talking about the Counter-UAS and the drone business, not the cyber, the space, and all the other areas that we're in, which also have a significant amount of growth, and we're primarily positioned in. It's hard for me to say what's going to happen. Do I think it'll be $50 billion?
Probably not, but will it be something significant? It looks like it will be, and that's just a really nice tailwind for us as we move forward and that money gets executed. Let me also add this. We are putting ourselves in a position where we're buying long lead materials at risk ahead of time. When the customer funding comes, this is what Department of War wants. They want to be able to put you under contract and have it delivered. We're strategically thinking through where we want to do that. When the money comes and the customer says, "Who can deliver this to us in the next three months?" We can say, "We can do that" and move forward.
Supply chain, you touched on that a little bit, but kind of in terms of what you need, what are any potential key choke points? Talking about the capacity expansion you're putting in place, how directly are you going at the supply chain side of it?
It's a critical component. We obviously buy a lot of components from a lot of suppliers. We're doing a couple of different things. One, we're looking at where we should be consolidating suppliers and where we have small contracts that we want to bring those together to have larger contracts to have more buying power and be able to do better negotiations there. We're looking at places where we have sole source and we need additional capacity, so we're looking to dual source in some cases. We're working with our major suppliers on it. We have 18-month forecast on what we're going to need, and we're working with them and putting in long-term arrangements so that they can facilitize for that capacity.
We're really enhancing our ability and our capability to be able to do supplier quality. We're spending a lot more time with suppliers, having a more robust supplier qualification process, and then working with them to make sure that what we get has the quality we need at the scale that we need. Supply chain's going to be really important, and it's something that we're continuing to look at.
In terms of the competitive environment, we seem to hear about new players in the drone market every day. Maybe talk about how the competitive landscape has evolved and what you're doing from a cost perspective. It seems like the price points have the potential to go lower and lower. What you're doing to be increasingly competitive from a cost standpoint.
Yeah. Obviously cost is always going to be important. We want to continue to leverage our fixed costs. We've got good tailwinds for growth going forward. Holding those overheads and those fixed costs to be less than what our growth will be to leverage the bottom line. I kind of mentioned it earlier, but with our ops expansion, we're looking at moving, and we've got a facility that we're facilitizing in Utah to have low-cost manufacturing for the Switchblade 600, right?
600. For the Switchblade 600, we're really looking forward to that. That has capacity to do about $2 billion. I think with the facility leverage, being able to go to multiple shifts, we're looking at multiple shifts as we ramp up the facilitation that we're doing, the focus on, we have a very robust process. Some people call it AP. There's lots of different things for it. Looking at how do we optimize what we're doing on the factory floor, pull the best practices across them, and lower the price so we can get some of that savings and drop that to the bottom line, and customers, we continue to be cost competitive with customers.
There's been some speculation, I guess, in the press about, maybe for Denise, the DOD making investments in the space and companies, and I think that's all that's kind of been out there. We haven't heard anything else, your thoughts or take on that?
Sure. I'll start, and Rob can help me out here if I miss anything. Obviously, we feel like we're in a very good position right now. We have been preparing to invest ourselves. We had a very successful capital raise about a year ago. We feel that we do have the balance sheet strength to handle this, the demand that we foresee coming. Having said that, if the government were to propose some fabulous offer, this is not something that we would turn away from. I think it's kind of an open-ended item at this point.
Yeah, I would just add the Department of War and the administration has been very clear in their interest to invest in tech, that with businesses that are going to be growing, that have a lot of tailwinds, that they're doing a lot of business with. We fit into that category. Like Denise says, we certainly don't need the capital. We're well capitalized, have access to the markets. If one of our strategic customers, which the U.S. government is obviously one, although we obviously have worldwide products sold worldwide, wants to invest in our business, that's something we will absolutely engage in a discussion around.
You touched on the Counter-UAS market, how many questions you're getting about that. That seems to be the newest area of kind of focus for investors, and you have a number of different solutions. How do you see that? It seems like it's kind of early days in that market. We're still trying to figure out what the best solution or if there is one best solution. How do you see that market kind of evolving? It seems like lasers, directed energy is a great solution, but might not work in certain situations. Just your thoughts on how that market could evolve and kind of where we are today in terms of that playing out.
You want to have a layered defense. We're fortunate that we have or will have when the Freedom Eagle gets done, products in all of the different layers, if you will. Let's take Golden Dome as an example. There's two parts of Golden Dome. There's the theater ballistic missiles and those, and that's kind of the Raytheon, Lockheed's of the world. Then you've got the Counter-UAS layer, which is where we play. We have a product called Halo_Shield, which think of that as a command and control system for the tactical edge that has artificial intelligence capabilities and really can command and control all of our products and candidly other products as well. Then for us specifically, we've got Counter-RF, which let's think of that as the first line of defense. You use RF to knock out the drones.
That would be our Titan system. We have two of them. We've got the surveillance Titan, so you can see small drones far distance. Then we've got the actual RF attack Titan. Then you get to laser weapon systems, our LOCUST system, our X2 and our X3. X2 is really focused on Group 1 and Group 2. Our X3 is focused on 1 through 3, and it's fielded today, and it's knocking down drones. You can look, the Secretary of the Army was out. He went to White Sands, and he shot our LOCUST, and he tweeted about it and how effective it was in knocking down and taking out UAS. You'll have that, and then in the future, you'll have a low-cost Freedom Eagle kinetic weapon.
The great thing about Halo_Shield is it tells you where to lay down all of your assets that you have optimally, and then it helps the operators because when these things are happening, I don't know if any of you have ever been in these situations, things are really moving fast. There's a lot happening. There's a lot of decisions that have to be made. Our software has very advanced artificial intelligence to show the operator optimal ways to respond. You may choose not to respond in the typical way of RF and then laser and then kinetic. If it's a lot of swarm and advanced, you might shoot other kinetic capabilities earlier, and these are decisions that the system will tell you to make. We integrate in with other operational platforms as well, so we can communicate at different echelons.
We have a full solution across all of the Counter-UAS. I agree with you. Just look at what's happening over in Iran. These systems are going to be critical, and we have leading capabilities in all these areas.
You touched on this is going to be part of Golden Dome. Are there any other places potentially in Golden Dome that the company would play in?
That's the big place where we would potentially play, in the Counter-UAS. There's other niche things. There's space. We do a lot of space technology. We have some of the best laser communications technology in the world, particularly for what I call long haul. There's a lot of companies that have laser communications that are shorter, like for a LEO or MEO. We really focus on the GEO, where you need very precise electronics to be able to close those links over such large distances, and that's really our secret sauce in that market. There will be other places where we play peripherally, but in my opinion, the largest potential for us is in that Counter-UAS.
Okay. Denise, maybe just going back to SCAR, the program, and what exactly happened there, and how much is it contributing in the fiscal 2026 revenue that won't be there in 2027, and what is the path forward on that program or that technology?
You being kind to me because I'm the new guy?
Well, you've only been here a few months.
You kind of give her the hard question.
I wouldn't say it was the hard, you weren't here, I was going to give it to Denise. I didn't want to take it away.
I can just give you a little bit of background. I'm not going to comment too much on it. The BlueHalo acquisition that came over. It started off as a cost plus. It was moving to a firm fixed price. In January, there was an announcement that there was going to be a stop work order. We were taking a pause. Later in March, it was announced that there was going to be a termination for convenience. Related to that right now, we still feel very strongly that the technology is very important to the U.S. government as well as perhaps other customers. We are still going to work through this product. We are going to invest in this product. There will be a recompete with the Space Force.
We have said that we are going to participate in that. At this point, I think that's all that we can say. We do feel like that we have very good technology in this area. We do think that it's very important. It makes a lot of sense. This is something that we are going to continue to pursue.
Yeah, I appreciate why you would ask the question.
I think it's still on investors' minds
It is. It is, and it makes sense. To Denise's point, it was a termination for convenience. There were some requirements changes given new information for the government, which was not initially anticipated to be in the system, and it was driving a lot of additional cost. The government made the decision to take a pause, to re-look at the program, and then to come out with a new acquisition. We're continuing to invest in that technology on IRAD, and continuing to mature it, because we believe that it's an important product and we're interested to continue to work with the government, see what happens over the next 18 months. We're talking about the recompete in 18 months, and like Denise said, our intent today is to move forward and to bid on that. We'll see where this goes over the next 18 months to two years.
Okay. The opportunity for margin improvement, BlueHalo kind of brought the margin for the entire company down a bit. Just how do you think about the opportunity for margin improvement?
Yeah. Well, with the tailwinds that we have from the revenue side, we're in a good position to leverage our fixed costs and be able to drive margin expansion, which is in our plan. We can talk more specifically about things. I just will also note that when you look at some of the Counter-UAS, which is now in our segment one, that did come with the BlueHalo acquisition. I would just encourage investors to recognize that when you're looking at our segment one and segment two, it's not equal to the old Heritage AV and BlueHalo. Some very nice products when the Counter-UAS came over, which have a very nice margin profile, moved over.
That said, we're investing a lot in some new products over in the CMS, our cyber and mission systems business, which we expect to expand, and right now they're investments that should turn over the next couple of years. We're looking at, I've already mentioned this, but, and Denise said it as well, looking at second shifts, looking at Utah, these are all ways to better leverage our fixed costs as our production goes up. Right now we are investing, I already mentioned 300% last year, 500% this year. We are building that infrastructure. We will sell and grow into that and get the revenue associated with that, and that will do a lot for the bottom line.
That capacity expansion, that's on the UAS side?
Well, the one in Salt Lake is for, yeah, it's for Switchblade.
Yep. That's specifically for that part of the business.
That's correct.
Right. Okay.
We could bring other products in there as well.
Yeah.
It's primarily done for Switchblade.
Okay. Denise, I guess, what is maybe some of the misconceptions you think that are out there in terms of what's going on with the business or the financial profile of the business, that you would want to debunk?
I think right now there's a lot. There's very strong demand signals.
Yeah.
I think that sometimes some of the newer investors to our story are a little frustrated over the pace at which some of these awards come in. We do feel very strongly that drone warfare is changing the landscape right now. This is going to be the wave of the future. It will be drones. It will be counter-drones. We don't need to win the lion's share of what's out there to be successful. I think that over the course of the next couple of years, you're going to see a lot more come our way and to our peers' way. I don't think it's a zero-sum game on winning these contracts. I think that there is enough money out there for us and for our peers. I do think it's something that not a lot of people understand is we did have the first-mover advantage.
We are continuing to work on that. We do spend money on R&D so that we are ahead of technology, that we are leading technology with our drones and our counter-drones. I think that there's a fear right now that there's too many new entrants. That primarily is in the FPV space where we don't operate right now. We're Group 1 through 3. We're not in the nano drones. We're not in the 5,000 and under category. I think, if people could just be a little patient and hopefully some awards come through, I think it would appease everyone's insecurities right now.
Once customers get products that work, and we have product, obviously, as you know, these products are all out in the market, including the laser weapon systems.
Yeah.
They're out in the market working today. You get trained on them, you know how to use them. They work well. Of course, there will be other folks that are selling stuff in, but we're in a great position to be able to leverage that and talk to the customers, understand what they need, make modifications to our product, solve challenges that they have, and I really like where we're sitting today and it's always nice when you have a strong tailwind in the markets that you're at and you have great products.
Yeah. We touch on UAS, Counter-UAS. What do you guys do in space? What is your business in space? I think BlueHalo brought some capabilities on the space side.
Yeah, we do some components. We do some mirrors. We do some pinpoint accuracy. The big one is the laser communication system I already talked about. We're kind of differentiated there. I was talking earlier to some investors, and I was saying a lot of the technology that makes our space work so well. When you think about it, when you're trying to close links over long distances in space, the most important thing is to be able to have the beam go over very large distances. Even small errors in your transmit means you can't receive it. You have to be very, very precise, and that's where our secret sauce is. We're in GEO. We're in long links. We don't really play in the LEO or the MEO as much.
Actually, I said this earlier, too, to some folks, that is also what makes our laser systems so special. A lot of people think about it's all about power. Well, power is important, but that's not the only important thing because it's beam size and it's the ability to be able to hold that beam on the target at the exact same spot, and that's the same basic technology of what you have to do in space. That's the reason why our laser weapon systems are so effective. We can hold the beam. We've got a very tight beam, and therefore, we're very, very effective, even at lower powers than other companies at much higher power. When you have the lower power systems, you can put them on Humvees. It's much easier to move them around. It creates a market that's much better.
Recently, we announced we were on a DDG with the Navy, and that's a tough place to put a laser weapon system because the boat's moving, and even then, we were 100% successful with the targets that the Navy threw out. There were 18 targets, and we successfully defeated all 18. We're the only company that we know of that has done that. That just, again, it just goes to show where we are in the technology and how advanced we are in the laser weapon system and why there's a lot of interest in our product, and we expect to be selling a lot of these in the near term.
Is this optical communications that you're talking about in space?
Lasers.
Lasers, but more on the GEOs, because I know there are a number of players that are on kind of the LEO side.
Yeah.
You're talking about GEO.
We're GEO.
Even longer distances?
150,000+ km , yes. Yeah, that's really where our sweet spot is.
Okay.
There's a lot of technologies for the shorter links, that's important. I'm not minimizing that's not where we want to play. That's more competitive. There's more companies there. You can select a little bit more on price. We want to be at the high end where you need the performance, that's where we focus.
Yeah. Well, with that, we're approaching our time. Rob, Denise, thanks very much.
Thank you.
Appreciate you.
Thanks.
Thank you.