AIRO Group Holdings (NASDAQ:AIRO) Q2 2026 Earnings Call

0:00 Thank you for standing by. My name is Jonathan, and I will be your conference moderator today. At this time, I would like to welcome everyone to the AIRO Q2 twenty twenty six earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. Thank you. I would now like to turn the call over to Jack Snaft, Investor Relations at AIRO. Please go ahead. Thank you, operator, and good morning, everyone. Welcome to the AIRO Group Holdings, Inc. Second quarter twenty twenty six earnings call. We appreciate you joining us today and look forward to sharing an update on our progress and performance. With me on the call are Doctor. Cherenjit Pithuria, our Executive Chairman Captain Joseph Burns, our Chief Executive Officer and Doctor. Maria Pilipiv, our Chief Financial Officer.

0:55 Today's call will include forward looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements relating to AIRO's 2026 outlook. Forward looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward looking statements. Forward looking statements represent management's beliefs and assumptions only as of the date made. Information on factors that could affect the company's financial results is included in the company's most recent annual report on Form 10 ks and other filings with the SEC from time to time. In addition to our prepared remarks, our earnings press release, SEC filings and a replay of today's call can be found on our Investor Relations website at investor.thearrogroup.com.

1:48 We have also posted our earnings presentation on the Investor Relations section of our website.

1:53 In addition, during today's call, we will discuss non GAAP financial measures. These non GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Reconciliations between GAAP and non GAAP financial measures and the discussion of the limitations of using non GAAP measures versus their closest GAAP equivalent is available in our earnings release. Additionally, we plan to discuss drone segment backlog, a definition of which can be found in our earnings release. We will also discuss our cash balance as of 07/31/2026, which is a preliminary estimate based on information available to us as of the date of this presentation. Additional information on this metric can be found in the earnings presentation on our Investor Relations website.

2:40 With that, I will turn it over to our Executive Chairman, Doctor. Chiranjeev Kuthurya. Thanks, Jack, and thank you all for joining us today. AIRO delivered a strong second quarter that was marked by revenue outperformance against expectations, driven by solid execution within our Drone segment. Gross margins improved to 64% and we swung to a small operating profit for the quarter, a big improvement from the loss we saw in the same period last year. Looking ahead, and as Maria will discuss in her section, we are reiterating full year revenue growth guidance of 15 to 25%, and she will detail some additional thoughts to think through the rest of the year.

3:44 On top of this, total drone backlog grew roughly 9% from last quarter to approximately $163,000,000 On the strategic front, it was also a busy quarter. The RQ35 Pro achieved blue UAS certification, which opens up meaningful new opportunities in U. S. Defense procurement. We also unveiled our new RQ70 long range ISR platform. Development continues on the JC two fifty and the JX two fifty cargo and ISR drone variants.

4:36 And costs there are coming in below expectations with the first flight still on track for later this year. We remain squarely focused on the unmanned drone market. Second quarter was a solid quarter of execution, and we expect that momentum to continue as we scale manufacturing, diversify our revenue base and stay disciplined on cost, all while continuing to invest in AIRO's next phase of growth. With that, let me turn it over to Joe to discuss our strategy and the operational highlights.

5:25 Joe? Thank you, Chiranjeev, and thank you all for joining us on today's earnings call. I am happy to report second quarter results that exceeded expectations, finishing out a strong first half of the year. Our second quarter results were marked by on time drone deliveries plus multiple announcements. These recent developments highlight our execution on strategy, but we are not done here. While second quarter top line results mark sequential growth versus our 1Q performance, this demonstrates the variable nature of our business. Still, second quarter results topped expectations, and we are reiterating our full year guidance ranges we previously provided.

6:12 Maria will walk through the financial details later in the call. Now let me provide some updates on our portfolio and strategic positioning at AIRO. We have solid, growing portfolio of products and services. We remain focused on the overall drone market, whether it be through new product developments or through partnerships and inorganic opportunities. We are actively working to reduce quarterly variability by expanding our international and domestic revenue base. One such milestone on our product side and one that I'm especially pleased to highlight is that our RQ35 drone is now officially blue UAS certified. With this approval, the RQ35 is recognized by the Department of War as a secure compliant unmanned aircraft system, eligible for government and defense procurement under NDAA requirements.

7:08 As most of you know, Blue UAS streamlines access to the DOW and federal procurement channels, accelerating our ability to compete for and secure US defense contracts, which we expect will support AIRO's long term revenue growth across domestic and international markets. We believe the Blue UAS milestone is a testament to the RQ35 from its embedded technology, use cases and performance on the battlefield. The RQ35 and now our recently unveiled RQ70 continue to set our technology apart from the rest of the pack. The RQ35 is battle tested, having been deployed in the Ukraine conflict, and the platform is extremely quiet, hand launched and purpose built for ISR missions.

7:59 It has demonstrated real resilience even against electronic warfare and in GPS and GNSS denied environments. With up to 50 kilometers of range and a hundred and fifty minutes of flight time, it delivers extended time on target plus quick frontline serviceability with a smart battery for reliable performance. The r q 35 platform also offers onboard AI with edge computing, which enables real time identification and classification of enemy assets and threats while strengthening navigation, situational awareness and mission execution. This drives faster, more informed decisions in the field. As a note, edge computing brings our flying servers closer to the battle, allowing us to significantly speed up and improve target recognition and decision speed.

8:54 This reduces the already jammed bandwidth required by other competitor systems. Our goal is to embed AI across all of our product and service offerings at AIRO. The r q 70 is our newest platform, built on years of r q 35 battle data and leveraging our existing manufacturing and NDAA supply chain. We are already engaged with multiple defense customers on future deployment. It offers configuration flexibility between standard, long range and VTOL configurations and includes a modular design that lets it serve as a standalone ISR drone for NATO and allied customers. Our RQ70 is built for up to eight hours of endurance, a 100 kilometers of range and resilience in GPS denied environments.

9:45 We are reaffirming expected production start in January 2027. Capabilities such as these further set AIRO apart with strong customer validation to date. We are building on that momentum with new initiatives and will continue to provide updates in the quarters ahead. On the product side, we're making great progress developing our cargo and ISR drone variants, the JC two fifty and JX two fifty. We have been strategically evaluating and selecting suppliers for the vehicle, and we are reaffirming our expectation for the first flight later this year. I am also happy to report that AIRO specific costs for development are running below our internal expectations by low double digit percent.

10:34 There are a few driving factors. First, because the cargo and ISR variants share a common foundation, we are developing them at a fraction of the cost of their passenger counterpart. Second, we have made real progress in supply chain negotiations, which is lowering our input costs. Third, we are realizing synergies across the platform faster than we had modeled. And finally, our R and D team has been executing efficiently, which is keeping development cost discipline. Taken together, these factors are giving us confidence in the cost trajectory of this program. While still in the early innings, all the developments that I mentioned represent our efforts in diversifying our product portfolio and stabilizing revenue variability over time.

11:22 On the avionics and electronics side of our portfolio, AIRO delivered largely flat revenue quarter over quarter as demand for our avionics products remained stable and consistent with the prior quarter.

11:35 Despite the static growth year to date, we are actively advancing next generation sensor and navigation solutions, which were on display at the EAA Air Show in Oshkosh in late July. We received solid feedback at the trade show with customers highlighting our product reliability and functionality. Avionics continues to play a critical and strategic role within our broader company profile. With our Avionics and ramping US drone operations now consolidated under one roof in Phoenix, we expect synergies here to begin bearing fruit in the coming quarters. These dynamics are part of what reinforces AIRO's long term competitive advantage. Over time, we expect to bring more avionic systems in house across our unmanned platforms, streamlining operations, reducing supply chain complexity and ultimately strengthening our gross margin profile.

12:33 Lastly, on the services side, we are continuing to evaluate strategic alternatives for training, and we expect to have an update on that direction by the end of the year. We believe the training segment remains a valuable asset with a significant long term opportunity, although the segment is capital intensive and often requires meaningful ongoing investment. Recall, while underlying demand persists within this segment, performance here has been below expectations. This is driven by the fact that the task orders coming out of The US Government are not within the strengths of AIRO. We believe this narrative will shift over time, and we are positioning, investing and strengthening our training asset to pursue upcoming long term close air support training opportunities.

13:20 That said, we are exploring all possible avenues for the business, but our focus remains on unmanned systems. Overall, we are encouraged by the momentum generated across our portfolio during the second quarter. From achieving blue UAS certification for the RQ35 and advancing customer engagement around our new RQ70 platform to progressing development of our cargo and ISR drone variants and positioning our avionics business for future synergies, we continue to execute on our strategy of expanding capabilities, diversifying revenue streams and embedding AI across our offerings. While there is still work ahead, we believe these milestones reinforce the strength of our technology and market position, and we look forward to building on this momentum in the quarters to come.

14:13 We remain disciplined on our capital initiatives. We continue to evaluate inorganic opportunities carefully, focusing on acquisitions that would be accretive in the near term and that strategically enhance our product portfolio, namely for drones, avionics and electronics. We also see M and A as having the potential to play an important role in reducing AIRO's quarterly revenue variability over time. As I have discussed in the past, our balance sheet gives us real flexibility to act when the right opportunity comes along, and selective M and A will continue to play a vital role in how we endeavor to maximize long term shareholder value. With the multiple drone deliveries in 2Q and given the timing of these drone deliveries at quarter end, our cash balance as of 07/31/2026 was approximately $56,000,000 significantly strengthening AIRO's balance sheet.

15:13 In closing, the initiatives, discipline, and efforts we have employed to date bolster our strategy of delivering mission ready ISR systems that can be reduced, upgraded, and supported at scale. I am also grateful for the colleagues beside me today and for every employee who makes this company what it is. Our leadership team brings extensive industry experience to the table. And as we continue to add key personnel, we are further strengthening our competitive position in the market. With that, I will turn it over to Maria who will walk you through the financial results in more detail. Maria? Thank you, Joe, and good morning, everyone. For the second quarter of twenty twenty six, revenue was 43,200,000 compared to 24,600,000 in the second quarter of twenty twenty five.

16:04 This represents growth of nearly 76% year over year. Revenue for the quarter was ahead of expectations driven by outperformance against expectations in our drone segment, partially offset by underperformance in avionics and training. Gross profit for the quarter was 27,700,000, representing a gross margin of 64% compared to a gross profit of 15,000,000 and gross margin of 61% versus the same period last year. The improvement in gross margins both sequentially and year over year was also driven by a product mix shift back towards drone products consistent with expectations.

16:50 Recall, our first quarter margins were impacted by upgrade revenue negatively impacting margins. Operating income for the quarter was $1,700,000 versus negative $19,700,000 in the second quarter of twenty twenty five. This year over year improvement is a result of higher revenue, improved gross margins, and IPO related costs incurred in the prior year period. We remain disciplined on costs while continuing to invest selectively in the infrastructure needed to support our growth.

17:26 Our second quarter net loss was $2,000,000 versus a net income of $5,900,000 in the second quarter twenty twenty five.

17:36 Second quarter twenty twenty six EBITDA was $5,100,000 compared to $18,900,000 in the prior year period. On the adjusted basis, EBITDA was $6,800,000 up from $4,700,000 in the second quarter twenty twenty five. As Joe mentioned, on the cost side for our JC two fifty and JX two fifty platform, I am happy to report the development costs are tracking below our internal expectations.

18:09 The shared foundation between our cargo and ISR variants means we are developing them at a fraction of the cost of the passenger version, and we are realizing savings beyond our original projections by roughly low double digit percentage.

18:26 We retain flexibility to adjust our spending pace up or down as conditions warrant. Right now though, we believe the right path forward is delivered, efficient investment to put the required infrastructure in place to support our next phase of growth. Turning to cash flow and liquidity. As of 06/30/2026, we had $25,900,000 in cash on the balance sheet with $6,800,000 in debt.

18:56 Accounts receivables were higher than usual at quarter end driven by the multiple drone deliveries late in the quarter. As of July 31, we had approximately $56,000,000 of cash primarily reflecting the subsequent collection of international drone receivables outstanding at quarter end. This strengthened our liquidity position and provides us with continued flexibility to execute against our strategic priorities.

19:27 As of 06/30/2026, we had roughly 163,000,000 in drawn backlog. We expect the majority of this backlog to convert to revenue within the next twelve months. We will be updating our backlog to include US opportunities and ongoing pursuits in the coming quarters. We expect this will meaningfully increase the total backlog as those orders are incorporated.

19:55 We define backlog as orders we reasonably expect to convert to revenue over the next twelve months. While this metric provides visibility into near term demand, our broader pipeline continues to expand, underscoring the long term demand trends we have discussed throughout today's call.

20:14 Based on our current visibility, we are reiterating our full year revenue growth guidance of 15% to 25% year over year. Let me provide some additional context on the expected cadence for the remainder of the year.

20:30 First, one material drone delivery originally expected in the third quarter was completed in the second quarter. As a result, first half revenue represented approximately 50% of our current full year expectations. Second, reflecting the pull forward, we currently expect second half revenue to be in line with or modestly above first half revenue. Within the second half, we expect third quarter revenue to decline sequentially from second quarter followed by stronger first quarter. We currently expect fourth quarter revenue to be modestly above second quarter. Third, given the international nature of our business, foreign exchange remains a factor in our outlook.

21:18 We now anticipate greater FX headwinds in the second half with an incremental revenue impact of few million dollars compared with our prior expectations. We have incorporated that impact into our outlook and remain confident in our full year guidance range. We continue to expect modest gross margin compression versus 2025, with full year gross margin broadly in line with first half levels. Turning to profitability. We continue to expect full year 2026 adjusted EBITDA in the negative mid to high teens millions, with the quarterly cadence expected to broadly follow revenue. In closing, our strategy remains focused on three priorities, diversifying our revenue base, scaling manufacturing, and accelerating new product introductions.

22:16 As those products ramp up and make up a larger share of revenue, we expect that to reduce quarterly volatility and strengthen backlog growth over time. Specifically, with the introduction of the r q 70, the first delivery of Zentra camera suit and the j c and j x two fifty coming online late next year, we expect to begin seeing the benefits of that revenue stability next year with continued improvements in the quarter and years that follow. That progress is exactly why fiscal year twenty six is the year of accelerated investment for us. As I have said before, we are still early in our growth phase, and we intend to invest accordingly while staying disciplined on costs and preserving flexibility to adjust our cost structure as needed.

23:06 The balance supports our confidence in AIRO's long term growth trajectory. With that, operator, we are ready for questions. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimal sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the q and a roster. Your first question is from the line of Colin Canfield from Cantor Fitzgerald.

23:52 Your line is now open. Please go ahead. Hey, thank you for the question. Maybe if we can start on drone order trends. If you can parse out the mix of U. S. And international drone orders for RQ35, discuss the milestones that you need to see to essentially increase the backlog, the comment you made on materially increasing backlog and basically what milestones does it take to recognize that backlog increase? And then if you could also talk customer interest for r q 70. Thank you. Hi, Colin. Thank you for your question. So I'll start. So our 163,000,000 backlog represents international, drone backlog and does not currently include any US backlog.

24:44 We expect that the majority of that backlog will convert into revenue over the next twelve months. So, naturally, the portion of it extends into 2027. In terms of The US, we have responded to a number of RFQs and continue to see growing pipeline of opportunities. And as those opportunities convert into orders and we expect them to be able to convert into backlog, it will provide additional visibility for US backlog, which will incrementally add to a 163 backlog we currently reporting today. As far as additional products being included, it's mostly compro composed out of r q '35. There's a very small percentage of r q '17 being added to this number right now. And and if I this is Joe. Good morning, Colin. If I could follow on with that. Some of the milestones, obviously, key milestones for us were the Blue UAS certification, which will allow us into The US market.

25:41 So that was a big one. The r q 70, announcement and and launch of that product are also a big milestone to enhance our, expansion of our margin profile. You also mentioned or asked a question about early customer interest of the r q 70. It's been very strong because it does fill a gap in sort of that high end ISR market, that, long duration flight, ease of operations, and and low cost. So we feel very, very strong about the r q 70 filling in that in the interest category as well. Got it. Thank you for that. Maybe if we could talk about, free cash flow building blocks and and kind of, the level of investment, related to the defense transport platform.

26:29 If you could just kind of walk through how you think about the investment on that program inflecting down and perhaps maybe kind of how you think about that relative to the company's ability to generate free cash flow? Thank you. Thank you, Colin. So I'll start and I and then I'll let Joe add anything I missed. So in terms of free cash flow, we are very comfortable right now with our liquidity position, and it's closely tracking our internal expectations. The biggest factor for the quarter was timing, as we were building inventory to support deliveries and those as those deliveries secured, at the end of the quarter, significant portion of receivables converted into cash. And as I mentioned earlier, as of July 31, our cash and cash equivalents were approximately 56,000,000.

27:18 In terms of investments for the AIRO Mobility, we our costs have been reduced, which AIRO is very comfortable with. Right now, they're running in a low double digits, below initial expectations. And while we have not provided the size of the investments, we are still tracking on time. And overall, because we shifted our focus on ISR and cargo drones, it significantly reduced our expected developmental cost compared to the passenger platform, which, obviously, provides significant, up for our liquidity. And, if we think about going forward free cash flow, we anticipate the there should be a shift into positive cash flow 2027 and beyond.

28:05 That's great. Thank expand on the, the j x two fifty and the j c two fifty, our our ISR and cargo variants of that large cargo transport. You know, we we've talked about in the past about, eVTOL. This is an eVTOL aircraft, but it's it's different than what we had previously discussed in the passenger realm. We don't carry passengers on this. It's it's basically a large cargo drone. Very long duration. You know, hybrid drive can use conventional fuels. So they we think there is a new and growing, market for for this type of transport if you think about, sort of combat operations, the ability to resupply, get critical, medical information to and from, etcetera. So for us, it's a real opportunity to jump into somewhat of a new market. You're starting to see that, obviously, in in this industry as well.

29:00 Thank you. As a reminder, if you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. Your next question comes from the line of Andre Madrid from US Bancorp BTIG. Your line is now open. Please go ahead. Yep. Thanks, team. Good morning. I was wondering if you could provide us an update on where you're at with Nord and Bullet, those JVs. Sure. This is Joe. Good question, Andre. So, as you probably, know at this point, there are some, significant order issues or significant issues with the Ukrainian government's permitting process.

29:52 You know, in their current battle condition, the, the government there has pretty much stopped all licensing of aircraft coming into to, The US or technology transfers. We are still working there very well, and and we're working extensively with with both council over there and local council to get these the permits. But that said, you know, the partnerships and JVs like these are really compelling route for us, and I wanna make it clear that we're not dependent on any one of them for growth. The partnership with JVs will expand our access to multiple markets and help accelerate our growth plans. And we're currently evaluating additional partnerships as well, in in this particular market, in in those specifically for for drone dominance. So we're excited about other opportunities.

30:38 It's really opened our eyes as to what's what what's available, what the markets look like for us. And and with the ability for for our certification routes, we're we're excited about participating in these things moving forward. That's really helpful. And then, maybe pivoting to training for a bit. I know you guys had mentioned last quarter the you know, your your decision to pursue strategic alternatives or consider strategic alternatives there. I mean, is there any update that you can provide as to maybe how that's tracking and and and when the decision might be made? Sure. We're we're planning to to have decisions by by year end. We're making a lot of discussions around it. You know, as as we mentioned before, we're actively evaluating a range of strategic options.

31:26 And those our intent in disclosing this is to be transparent with the market. Well, really, our four our core focus right now is on, drone and avionics operations. And we see limited synergies between training segment and our core business, which is important while we're evaluating the long term strategic fit. Training is expensive. We have made a significant investment so far, but we're still excited about the opportunities in this particular business. But but as always, drones are our main focus, and that's where we wanna look at focusing most of our most of our capital. Yep. That's really helpful, Joe. I appreciate it. I'll I'll leave it there. Thanks. Thank you.