Palladyne AI Corp. (PDYN) Q3 2025 Earnings Call Transcript

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Overview

The earnings call summary indicates positive developments: new partnerships, vertical integration benefits, and quick integration of SwarmOS. However, management's reluctance to disclose specifics on GuideTech's metrics and the Department of War contract introduces some uncertainty. Overall, the positive impact of partnerships and strategic acquisitions outweighs these concerns, suggesting a stock price increase.

Key Financial Performance

Revenue for 2024 Expected to be about $8 million, with a projection to more than triple by 2026 due to acquisitions.

18-month backlog Exceeds $10 million, including ongoing development contracts with the U.S. Air Force and the U.S. Navy.

Cash and equivalents $57.1 million as of September 30, with $6.3 million used in operating cash for the quarter.

Total consideration for acquisitions Approximately $31 million, consisting of stock, cash, and assumed equipment and real estate debt, plus an earn-out of up to $25 million over 5 years if GuideTech's revenues exceed $71 million.

Investment in Banshee and SwarmStrike $5 million planned over the next 12 to 18 months to advance from TRL-6 to TRL-9.

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Operating Highlights

Palladyne IQ and Palladyne Pilot: Core products enabling robotics automation and advanced autonomous cooperation for unmanned systems. SwarmOS is a defense variant for collaborative missions.

Banshee and SwarmStrike: New loitering munitions designed for tactical and strategic operations, integrating AI for cost-effective and scalable autonomous systems.

BRAIN Avionics: Mission-grade avionics architecture delivering high performance at lower costs, integrated with AI for autonomous systems.

Palladyne Defense Launch: New business unit focused on embodied AI for national security, combining AI, aerospace design, and U.S. manufacturing.

Crucis Acquisition: Certified U.S. manufacturer supporting major defense programs like F-35 and Tomahawk, aligning with reshoring and supply chain resilience.

GuideTech Acquisition: Aerospace design and engineering expertise, enabling rapid prototyping and production for defense systems.

Vertical Integration: Combines AI software, avionics, engineering, and U.S. manufacturing under one structure for faster prototyping and production.

Financial Strength: $57.1 million in cash, disciplined spending, and expected revenue growth to triple by 2026.

Manufacturing Capacity: Over 100,000 square feet of production space, enabling in-house design, prototyping, and production.

Alignment with Department of War Priorities: Focus on cost-effective autonomous systems, reshoring production, and rapid capability delivery.

Expansion into Defense: Transition from a pure software company to a vertically integrated defense technology business.

Leadership Additions: Strengthened leadership with retired military officials to align with national security priorities.

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Risk or Challenges

Market Conditions: The Department of War's focus on cost per effect and reshoring production creates a demand for cost-effective and scalable solutions. However, the company faces challenges in meeting these demands while maintaining profitability and operational efficiency.

Competitive Pressures: Palladyne Defense aims to fill a structural gap between start-ups and large primes. However, competing with established defense contractors and proving its value in a highly competitive market could be challenging.

Regulatory Hurdles: The company must navigate complex regulatory requirements, including certifications and compliance with national security priorities, which could delay product deployment and increase costs.

Supply Chain Disruptions: Although the acquisition of Crucis aims to address supply chain resilience, any disruptions in the supply chain could impact production timelines and operational efficiency.

Economic Uncertainties: Economic fluctuations could affect government defense budgets and funding for projects, potentially impacting revenue and growth projections.

Strategic Execution Risks: The integration of GuideTech and Crucis into Palladyne Defense poses risks related to operational alignment, cultural integration, and achieving the expected synergies. Additionally, the company’s ability to scale production and meet Department of War requirements is critical.

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Guidance & Outlook

Revenue Projections: For 2026, the combined acquisitions are expected to push consolidated Palladyne AI revenue to more than triple the 2024 revenue of about $8 million, with positive adjusted EBITDA contributions from the two acquisitions.

Investment Plans: The company plans to invest $5 million over the next 12 to 18 months to advance Banshee and SwarmStrike from TRL-6 to TRL-9, unlocking larger revenue opportunities.

Market Trends and Demand: The Department of War's focus on cost per effect, reshoring and sovereignty, and AI in mission systems is driving demand for Palladyne's offerings. The company is aligned with these priorities, including the replicator initiative for agile, vertically integrated defense companies.

Product Development: Palladyne is advancing its Banshee and SwarmStrike platforms, integrating SwarmOS and BRAIN for coordinated swarming and adaptive targeting. The company is also developing a near hypersonic long-range affordable mass strike vehicle for the U.S. Navy.

Operational Expansion: The acquisitions of GuideTech and Crucis provide aerospace design, certified U.S. manufacturing, and rapid prototyping capabilities, enabling Palladyne to scale production and meet Department of War modernization directives.

Strategic Alignment: Palladyne's structure and technology align with Department of War priorities for rapidly fielded, cost-effective autonomous capabilities, supported by ongoing contracts with the U.S. Air Force and Navy.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:In terms of BRAIN hardware from GuideTech, how much of that revenue is commercial versus government? Do they go-to-market as a prime generally or a subcontractor? Can you quantify the sales cycle, including the design win phase?

A:GuideTech's BRAIN hardware customers are all in the defense sector, with some opportunities in the space arena. They primarily act as a supplier to primes who integrate BRAIN into aviation or aerospace platforms. Winning business requires a design win, which involves integrating the system into a defense customer’s platform. GuideTech has made significant progress in this area over the past few years.

Q:Prior to the GuideTech acquisition, did your drone partners have another third party they use for edge compute systems? Does the acquisition provide a single solution for drone manufacturers?

A:Smaller drones commonly use NVIDIA or Qualcomm boards, and SwarmOS software is implemented on both. Depending on mission requirements, BRAIN can supplement or replace these boards. The acquisition positions the company as a vendor for avionics and navigation systems for new weapon systems.

Q:Can you share information about GuideTech's installed base, number of partners, or average deal size?

A:Management is not prepared to share details about GuideTech's installed base, partners, or deal sizes at this time but expects to provide more information after the first quarter.

Q:How does the Crucis acquisition address manufacturing concerns about scaling large programs? What components are they manufacturing, and who are their primary customers?

A:The Crucis acquisition addresses scaling concerns by acquiring established companies with proven manufacturing capabilities and innovative technologies. This avoids the challenges of scaling up manufacturing independently. Crucis manufactures complex aerospace components and has customers like the F-15 program and other vehicles.

Q:How are opportunities with drone partners Red Cat and Draganfly tracking?

A:Both companies are progressing well with opportunities in the Department of War. Red Cat has been engaged longer, while Draganfly is a recent partnership. The company is working to educate the Department of War on the benefits of collaborative autonomy provided by SwarmOS. The engagement with Draganfly is in its early stages.

Q:Are the Air Force and Navy the main customers for your acquisitions?

A:The company has direct contracts with the Air Force and Navy, funding the development of deployable capabilities. These are direct contracts, not subcontracting arrangements.

Q:Will revenue composition be categorized into hardware, software, and services?

A:Management expects to clearly articulate revenue composition into components, services, and software sales, though they are still sorting through the details.

Q:How quickly can SwarmOS be integrated into GuideTech's development cycle and product lines?

A:Integration of SwarmOS into GuideTech's products is expected to be quick, similar to its integration with NVIDIA and Qualcomm boards, which took a few weeks. The engineering team is actively planning the integration path.

Q:What product category is the potential Department of War contract award related to?

A:The potential contract award is related to SwarmOS capabilities. Management did not provide further details as it is premature.

Q:Why is GuideTech able to produce key systems more cost-effectively?

A:GuideTech developed internal software tools that revolutionize aerospace design and engineering, enabling them to go from concept to prototype in less than six months. This efficiency, along with their experienced team, contributes to their cost-effectiveness.

Q:What are the benefits of vertical integration from the recent acquisitions?

A:Vertical integration allows the company to control both hardware and software development, optimizing them together for faster innovation and enhanced capabilities. This approach is likened to successful examples like the iPhone and Tesla cars.

Q:Has the government shutdown affected tender conversations or commercialization efforts?

A:The shutdown did not significantly slow down reengagement with government customers. Conversations resumed quickly after the shutdown ended.

Q:Is there any seasonality in the businesses being acquired?

A:There is no significant seasonality in the acquired businesses, though government budget cycles can impact timelines. The recent government shutdown caused delays in approvals but did not indicate broader seasonality issues.

Q:Have the acquisitions improved sales cycle visibility or shortened sales cycles?

A:The acquisitions have not changed the 12- to 18-month sales cycle for commercial IQ sales but have increased opportunities to monetize SwarmOS. It is too early to determine if the defense sales cycle will be shorter.

Q:Will the company expand its sales staff in the next 6 to 12 months?

A:Yes, the company plans to expand its sales staff, including building a team to support Doug Dynes, who will lead the defense business. This expansion was planned even before the acquisitions.

Q:When will the next version of IQ become available, and is it being tested at customer facilities?

A:The next version of IQ is currently being tested internally. Once debugging and testing are complete, it will be placed with customers. The focus is on improving the user interface to make it accessible to non-software engineers.

Q:Review of Unclear Management Responses

A:Management avoided providing details about GuideTech's installed base, number of partners, and average deal size, stating they would share more information after the first quarter. Additionally, they did not provide specifics about the potential Department of War contract award, citing it as premature.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

PDYN Transcript

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Palladyne AI Corp. (PDYN) Q3 2025 Earnings Call Transcript

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PDYN Report

Palladyne AI Corp. 10-Q

10-Q

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