Andy Cross (3:25)

Is that why we're talking uncrewed systems, drone systems, the loitering systems which are the munition systems like the Switchblade, I believe. And then the McCready works, which is kind of a little bit of like a skunk works inside air environment, however, with a very, with a very specific purpose when they're designing systems. Give us a size of just our viewers, a scope of the size of products you're talking about. We're talking about drones that are as small as a person and as big as a car.

Waheed Nawabi (3:58)

Great question. So all the above. And in between. So yes, we're organized in three segments. Three business segments are uncrewed system segment, our looting munitions segment and then our macquity work segments precisely with how you described it. It's our incubator for specific types of technologies and innovation that could become the next disruptive capability in the world. In terms of the drones, first of all, the smallest drone we've made is probably the size of a hummingbird. It was actually on the COVID of Time magazine, it was called the Hummingbird. And it's literally it's a drone that is looks and flies just like a hummingbird. It's got sensors on it that he can go through a window and you know, surveil a room or. It's a phenomenal design. And in fact, the hard part of that DARPA hard part of that was it has to mimic the flight of a hummingbird with its wings flapping. And that's exactly what it does. The largest drone that we make, we made or designed is the wingspan from tip to tip of the wing is about 262ft, which is a few feet longer than an Airbus A380 double decker aircraft. And it's 100% solar power. And it takes off from a gravel Runway, not even paved, and gets up to the stratosphere, which is about 65,000ft up the air, essentially two times higher than general Airliners. And that's called near space. And it operates there for months at a time. And it's literally a stratospheric satellite essentially. And so those are the sizes of the drones that we make. Everything in between of those. The most common ones that we've made for the military are the hand launched Drones like the Ravens and the Puma and jump 20. Jump 20 is not hand launched. I'm sorry, Those Ravens and Pumas are hand launched. And then those are the ones for smaller forces, squads, company size and even brigade size forces that they can have their own organic ISR intelligence, surveillance, reconnaissance capabilities within their force structure.

Andy Cross (6:07)

That was a shift just very quickly, just for some context in that. So a military force, a squad, would be out in the field and they would have a person who would launch the drone by hand, and would they have another person who's involved in directing, steering it? Or is that all done? How is that even, how is that accomplished?

Waheed Nawabi (6:27)

Just great, great question all and both or. Or both. Both, essentially. Think of it this way, for Century plus in the military, ever since aviation, if you were a squad within the U.S. army and you needed to get some intelligence, surveillance, reconnaissance information about your surroundings, you have to call in a airplane, a manned airplane. You had to call an F16 or Apache or a, whatever airplane they had, manned airplane. And essentially that resource, multimillion dollar resource, would be probably tied up supporting dozens, if not hundreds of different squads on the battlefield. What we developed was a small drone that you could put in a backpack that you can hand launch, called Raven, and essentially one person can hand launch it and within a matter of minutes be able to fly for an hour and a half, up to 10, 15 kilometers around yourself and get your organic ISR capability. Intelligence, surveillance, reconnaissance, it takes usually one or two people most of the time, two people to operate these things, one person to launch it. And then once you launch, you have a ground control station, literally a little display with controllers on it, just like a video game. And you could see what's going on around you at day and night. And essentially you see it better than most likely manned airplane because you could fly low, you could, you're very quiet, mostly electrically powered. And they are really hard to detect with radios and jammers and sensors. And also they're very difficult to hear because they're tiny, they look like a little bird in the sky. And especially if it's dark, you can't see them.

Andy Cross (8:08)

Right. And so. And those are all battery powered?

Waheed Nawabi (8:13)

Mostly 90% of them are, yes.

Andy Cross (8:15)

And most of those are surveillance or surveillance. They're mostly surveillance, yeah.

Waheed Nawabi (8:20)

So Most of the UXs, the uncrewed systems, are considered non lethal, but they're primarily for surveillance, intelligence, surveillance and reconnaissance. But there are versions of our jump 20, for example, a group 3 UAS, that is, they, they can carry kinetic payloads besides being Just a surveillance drone. They can also be offensively used if you wanted to.

Andy Cross (8:47)

Yeah. And just very quickly, the jump 20 is not a hand launched, that's not a hand launched one, that's a much bigger one. And the newer model think is modular. So you can add in different, you can actually add in, I believe a weapon like weapons, you could add in surveillance. You can, you, you can add things to it in the field based on what the fleet needs, Is that right?

Waheed Nawabi (9:07)

Correct? That's right. So the US military many years ago came up with these, what they call them, the categorization of different grouped groups based on how long you can fly, how high can you fly and how much payload can you carry. And they call them group 1, 2, 3, 4, 5 and 6 UAS unmanned aircraft systems. And so the smallest group in terms of payload, endurance and size is called group one, and then group two and then group three and group four. And when you get to like the stratospheric satellite one that I described, the HAPS platform, that's a group six capability. So now most of the ones that we make are group 1, 2 and 3. Jump 20 is a group 3 UAS, which means it's roughly about 25 pounds of payload and a maximum takeoff weight of about 60, 70 pounds, maybe a little bit more than that. And so that's a bigger airplane. It's not hand launched because a human cannot launch it with a hand. But ravens and Pumas and wasps, those are all hand launched small drones that weigh less than 5, 10 pounds essentially in terms of their total weight.

Andy Cross (10:16)

And the jump 20 can launch vertically, is that correct?

Waheed Nawabi (10:21)

That is correct.

Andy Cross (10:22)

Which gives it an advantage in the field, especially from ships.

Waheed Nawabi (10:25)

That's right. So over the last few decades, AV has brought an enormous amount of innovation into this space. Initially the drones were hand launched and it's called a deep stall landing. So when the drone comes in to land, comes back, because you retrieve these, they actually come back and they shut down the engine and then they just crash on the ground. The last 20, 30ft. That's how every Raven in Puma actually lands. And it's actually a surprising moment for a war fighter. If you're a soldier, you see this thing crash land and basically break into pieces. It's designed to do that. It's because dissipates the energy so it actually survives thousands of landings like that on hard surfaces. Jump 20 is a much bigger airplane and historically those airplanes have required a Runway. And when you are now Runway dependent like a scan, Eagle is for example you have to have a Runway close by to be able to take off from and land at that limits your operational use. A, B, it's way more expensive. C, it also actually makes it more dangerous for the forces because you may not have a Runway close by or then you become a target. So what we did is we developed this drone, the jump 20. That's the ends, the name jump, that basically has a vertical takeoff kit that it takes off like a helicopter or like a quadcopter and then it starts to get airborne. And once it becomes airborne, it flies like a fix wave. So it's called a hybrid VTOL vertical takeoff and landing airplane. And so what it does, it allows this airplane to have the best of both worlds. It has the ability to fly as a fixed wing airplane, which gives you endurance, it gives you more payload capacity, can go longer, can go faster, but it also gives you the ability to be Runway independent and operate with much, much less number of people. So the total cost of ownership of this system is dramatically lower than a fixed wing airplane that relies on a Runway.

Andy Cross (12:24)

And so that's the, that's really the, the unmanned drone side of the business. Let's talk a little bit about the loitering systems and then, and then I want to get into some of the, some of the exciting growth opportunities tied to a significant acquisition that you're making. The loitering system, which is the Switchblade, which are, which are hand launched essentially munitions systems that were very popular in the fight with Ukraine, was a very significant growth driver for you. That's tapering off now and actually you're not really expecting much growth from Ukraine going forward. And so quickly about the loitering systems and why is that important to have as part of your suite of products for aerovironment.

Waheed Nawabi (13:09)

Great question, Andy, and let me elaborate a little bit because the context of this means a lot and it explains a lot to your viewers if you ask me, in my view. So when we first invented and gave the small drones to the small war fighters like squads in Afghanistan, they realized, oh my God, I found my adversary and I see they're over the other side of the mountain, they're five miles away. I now need a weapon system to take that target out and prosecute the target. And that's when the idea of a kamikaze drone or switchblade was born. Called the loading munition. And what is that? It's a tube launch uav. Same size as a small Raven, maybe a little smaller, and the larger version is much bigger. The size of a Javelin war weapon system. And you basically take out a tube out of your backpack. Three of them fits in a rucksack, three switchblade, three hundreds. And the whole thing weighs a total of 25 pounds. So one soldier can carry three of them at a time in a rucksack. You put it down on the ground within like two minutes, you can push a button and out of the tube comes a uav, opens up its wings and starts flying. Now you find your target and you've got a half hour to fly around up to 20, 30 kilometers to find your target. When you find the target and then you say hit it and you designate the target and essentially it goes and it actually prosecutes the target. It flies directly into the target, stationary or moving. And there's a lot of technology that goes into that. I'm not going to get into that detail. And so that business was a disruptive capability for the warfighter because they were able to now not only have organic ISR capability, they also had organic precision lethality from distances that was not visually capable to see the target.

Andy Cross (14:57)

Right.

Waheed Nawabi (14:57)

And that was a game changer. And so now Ukraine has become the poster child because it's been so much public and awareness and videos of this thing. And now the larger version of that carries the same warhead as a Javelin anti tank weapon, but it goes up to a hundred kilometers away and it could fly for up to an hour. And you can literally take out a moving tank at 35, 40 miles an hour down the road and at the moving speeds and you could come at it from different angles. It has dramatically changed the landscape and then the war in Ukraine. So when the conflict in Ukraine started, our switchblade and our small Pumas were the first set of capabilities that the US military gave to the Ukrainians at the beginning. And since then it's been a phenomenal success. And US DoD has given them more and more and more and more. And what you're referring to is that we knew that this war eventually going to end. And about a year and a half ago we intentionally said we, we need to pivot away from the demand in Ukraine. And now we have a robust pipeline of billions of dollars worth of opportunities outside of Ukraine that we're looking at for the next 10 years.

Andy Cross (16:09)

Hey, it's Ryan Reynolds here from Mint Mobile.

Waheed Nawabi (16:11)

Now I was looking for fun ways to tell you that Mint's offer of unlimited Premium Wireless for $15 a month is back. So I thought it would be fun if we made $15 bills but it turns out that's very illegal. So there goes my big idea for the commercial. Give it a try@mintmobile.com Switch upfront payment of $45 for three month plan equivalent.

Andy Cross (16:33)

To $15 per month required new customer.

Waheed Nawabi (16:35)

Offer for first three months only. Speed slow after 35 gigabytes of networks busy. Taxes and fees extra.

Andy Cross (16:38)

See mintmobile.com let's talk a little bit about that because that's where it gets a little bit even more exciting is you announced a big acquisition with Blue Halo. I think another Virginia based company, very much like AeroVironment is that pushes AeroVironment in kind of a whole new direction. As I understand, there's very little overlap with the product suite. But Blue Halo Space specializes in things like providing for space technologies, counter drone, surveillance and counter UAS capabilities, electronic warfare and cyber. So talk a little bit about what you're expecting from the Blue Halo acquisition and, and why you decided to push in that direction.

Waheed Nawabi (17:21)

Sure, yeah. So we're incredibly excited about this because in my 15 years of career at AB, this is a historic moment. It is a game changing transaction for us and for our customers and most likely for our shareholders. Here's why I say that our strategy has been that if you take these unmanned systems that are in different domains, ground, air, subsea, on the surface of the water and in the stratosphere and in the space, and you connect these unmanned systems, you integrate them with AI and autonomy and you put computer vision and autonomy together with them and you operate and at the edge of the battlefield, you are delivering a set of capabilities to the US military that is basically changing warfare since the machine gun. Invention of machine gun, essentially. I actually saw a speaker the other day expert in this area who said Switchblade is the new machine gun of the 21st century. It made literally his entire presentation was on this. That's very true. So this is our strategy, this has been our strategy and this has been the strategy for Blue Halo as well. The beauty of this is that the domains are the areas that we focused in they did not, and the areas that they focused on we did not. And so this brings the best of both worlds together to build a company that has the domains that really all matter. Space, cyber, ground, air, stratosphere, subsea, and counter UAS and intelligence community all together. And that's why there's literally no overlap between our businesses and an enormous amount of synergy. So we can go and offer to our customers a end to end multi domain solution that's all based on unmanned capabilities and the types of trends and threats that we see to compete with our adversaries like China and everyone else.

Andy Cross (19:18)

And Waheed, how do you see the integration going? Because different products, same customers, maybe a little bit different customers and they have space force and the space side. You, you all are not really the space side. But talk about how you expect the integration to go. Not so much the numbers, which I always love numbers, but just more about the sales process, the R and D process. How do you expect that all to all to unfold over the next year and a half?

Waheed Nawabi (19:44)

Sure. So it's going to take us a couple of years to get all the integration completed in this because these are large equal sized businesses and there's very little overall, but there's a lot of opportunity for integration and synergy, the synergies. This is all about growth. This acquisition is all about growth. And essentially because there's very little overlap in terms of our products and our customers, it allows us to benefit from each other's cross selling and cross capabilities. The areas that I see. So integration so far is going fantastically well. I mean we're ahead of our schedule in many ways are untracked or ahead of our schedule. We've got the first was to get a hot start Houdini HSR approval. We got that for the MD Trust. We got the SEC approval which was unprecedented and at about a week or so timeframe. There's one last hurdle left which is to get the approval from our shareholders. There's a shareholder vote that is due on at the end of April, May 1st. So technically we're about to complete all those on track and on schedule, hopefully. And then beyond that, there's a few other small knickknacks that are going to flow and we expect this deal to close in the second quarter of this calendar year. Now the, the. So the integration work has already started. We're working together to kind of build our plans for the future and we're doing extremely well. But it's going to take us years to basically realize the full value of this deal. The reason is because we also have to work with our customers to help them with their capabilities and how they can benefit from the integration of these two entities together.

Andy Cross (21:31)

And while you just talk a little bit about the customers because it's obviously a lot of defense, US Defense, international defense spending, similar for Blue Halo, maybe a little bit different, but similar as well too. One of the things I think that allows you to be able to develop and innovate in something Like Switchblade is just those deep relationships you have with your customers and I think kind of like ingrained with the customers from a development perspective. Talk a little bit about the research and develop initiatives that you have inside Aero environment and why that is or how you consider that a competitive strength and a uniqueness. This a unique proposition.

Waheed Nawabi (22:10)

Absolutely. So the characteristics of a next gen defense tech prime which we are the example of are some of them are as follows. Number one, we invest a lot in R and D as a percentage of revenue than most the, not most, all the primes. Our, our average R and D spend as a percentage of revenue is similar to a, you know, high, high end technical tech company. 11 12% of revenue on R and D which is unheard of. I mean companies like Lockheed and Northrop, their, their R and D spend at best is 4% maybe you know, not even. And so we don't wait for the customer to fund us to develop the product. We've never done that in our history actually Number one, number two, agility. We are incredibly fast. Our development cycle, the latest product that we just developed for our uaxs platform called P550 we just introduced from sitting down with the US army on LRR requirements and understanding the requirements until we actually had the prototypes fly was less than nine months. Less than nine months. We're going to actually get it to manufacturing ready la where you can produce in high volume and less than 18 months total. Total. You know historically in the U.S. doD a program takes 10 years. So we are shrinking that to less than two years. That is the genetic DNA of aerovironment. The third thing, we're incredibly, incredibly intimate with our customers. We spend a lot of time iterating the solution with the customer upfront which allows us to then come up with the solution and capability that the warfighter absolutely loves. And it's ideal for their needs. And so those three things, agility, innovation and customer intimacy is something that's very unique to our culture and blue halo as well. And the reason why this is a advantage for us is because we have international customers that we do this really well. They don't. They're incredibly close with Air Force and Space Force and the intel community. We're not. And we're very strong with army and socom. So these are all what I call even complementary besides custom, besides products and markets.

Andy Cross (24:28)

Why you talk about, you mentioned some of the competitors. I'm just interested. So again, much smaller than the Boeing. Like why, why doesn't someone like Boeing or Lockheed just Basic, just try to do what you're doing and compete directly with you. Like you mentioned the uniqueness DNA of aerovironment. But I just want to understand maybe a little bit more about how have you been able to really not corner this part of the market but, but really be the leader when it comes to this part of the market for the dod.

Waheed Nawabi (24:57)

So Andy, you asked a really, really great question and I believe this question that you're asking is a multi billion if not trillion dollar question. Right? Because why can't the big guys copy what we're doing? The answer is complicated to some extent, but it's pretty simple as well. Number one, Number one, we have been competing with the large primes since inception. There is not a day that goes by that we don't compete with the big primes on a regular basis. Number one. And they have not been successful to break into our recipe and copy and our recipe. It's not that easy for them. Number one, the inertia within these large companies is we wait for the customer, we wait for the customer to pay for it and then we would nickel and dime the customer more and more and 10 different ways and we're going to move at the pace that it's even slower than the customer. And so all those things are antithetical to our strategy and our DNA. We are impatient. We do not like two years of the development cycle even. And so our process is incredibly this entrepreneurial model. So if they even actually tried to copy our model, it is very dilutive to their strategy into their existing model. So there is an inertia, but there's also a culture. It also is a what I call the way that we're designed, the kind of people we hire, we hire, we. Our biggest competitive hirings are with the Googles and Apples of the world. It's not necessarily with Northrop and Lockheed. We respect them. They're great companies, don't get me wrong. They've done a lot of things that they do really well. But that's not our ball game. Our ball game is that fast, iterative cycle, highly innovative, disruptive. And we also are very vertically integrated. So if you look at all of our, most of our systems, we design almost every single subsystem that comes into our system solution. So our technology stack is very highly vertically integrated and stacked. What that does allows us to make a system that is highly, highly optimized for the warfighter. And so the analogy that I use is the following to just to illustrate that point. When you buy the Boeing Airplane, the engine is made by someone else there, you know, the, the avionics is someone else, the glanding gear is someone else, the air conditioning is someone else. And you kind of a system integrator and you make air structures maybe. Okay, even the airstrike, not made by them. And nothing wrong with it. That's the model. I mean, I'm not trying to poo poo it. It's just the way it is. That's what it is. It's the facts. Right now in our case, we design our air structure, we design our avionics, we design our autopilot, we design our own gimbals, we design our electronic computer on board, we design a ground control station, we design the air structures, et cetera, et cetera, et cetera. And the, the argument that I give to a lot of people analogy is this. If you were to build the best car, you use the best brakes, the best tires, the best engine, the best transmission, you're going to have the worst performing car, not the best performing car. That's right. You optimize by making a Toyota Camry or a Mercedes Benz or a BMW by optimizing all the subsystems.

Andy Cross (28:10)

Yeah.

Waheed Nawabi (28:11)

And that is our strategy and that's why we are vertically integrated. And so that gives us an advantage in competition as well with our competitors. And that's why we're so successful in our.

Andy Cross (28:22)

Almost like you're the, like a Ferrari at scale for, for primes to the. To the dod.

Waheed Nawabi (28:31)

It's exactly right. Our model is. How do you, how do you deliver the performance of a Ferrari at the affordability of a Camry or in a Ford Taurus? That's essentially what we use. And we standardize a lot of things and we design and manufacture and scale, but we do it in such a way that is really affordable, cost effective and scalable. Fourth of July savings are here at the Home Depot. So it's time to get your grilling on. Pick up the Traeger Pro Series 22 Pellet Grill and Smoker now on special buy for $389 was $5.49. Smoke a rack of ribs or bacon apple pie. This grill is versatile enough to do it all this summer. No matter how you like your steaks, your barbecues are guaranteed to be well done. Celebrate 4th of July with fast free delivery on select grills right now at the Home Depot. Subject.

Andy Cross (29:24)

We'll wrap up here in the next few minutes here. Waheed. This has been such a pleasure. Thank you. I want to talk a little bit about Just the market environment that you're seeing right now, obviously. So much talk about what's going on in Washington, D.C. down the road here from us, with your key customers being tied to the federal government and the DoD, how do you maintain that relationship that allows you the healthy balance between pricing and. And service? Is there, is there recurring revenue model stream behind your products or is it, is it kind of once and done and just the brand speaks for itself and then they come back and order more? So a little bit about just what you're seeing from the marketplace and how that is starting to impact the way that you're thinking about pricing and also delivering services to the government.

Waheed Nawabi (30:11)

Sure. So, you know, our business is very unique in some ways in that regard because we, a lot of our development activities and software, we do a lot of software, but we don't sell software by itself as a big individual line item, although, you know, we do sell some software. But a lot of our hardware is differentiated and value added by the software capability within it. So we call it a software enhanced solution set. Our revenue stream is both hardware and services, services and engineering services. And there's some software sales, but not a lot of it. There is absolutely a long tail with every sale. So when we actually sell to an army or to a Navy or to special forces, a small UAS system, those systems are like airplanes that last five, 10 years and they're used on a regular basis. So there's a long tail that goes around most of the times the customers, you know, break them, they need upgrades. So there's an enormous amount of value in that regard. I can tell you that from my 15 years in the company, we've had tremendous years of success. The company's never been positioned better than we are positioned today in terms of the opportunities in the future. Phenomenal. Phenomenal position. We exited our third quarter, which we just had our earnings call with $764 million with the backlog. That is a large, large increase and a record backlog than ever before in the history of the company. So we're going to have a. We're going to have a record year. We're going to have the record quarter. We have a record backlog going into the following year. And we are sitting in a market that is essentially just. Everybody's talking about the type of capabilities that we primarily are in business for. Yeah. So it's a great position.

Andy Cross (32:04)

And is there, is there a market outside of the DOD and the governments? Like, talk to us about how you think about that.

Waheed Nawabi (32:10)

Absolutely. So today there's markets for Department of Interior, it's for the Homeland Security, for the border, for the Golden Dome. And we, as I said, export to up to 55 different countries around the world. These are all US allies. And as they increase their spending, with defense budgets going up, I believe that we're going to be one of the primary beneficiaries of those because they're spending more money in the areas that we provide capability. And why is that? Number one, it's the kind of capability that has made Ukraine successful against the Superpower A B. It is far more affordable. We are a much, much more affordable capability than anyone else. Let me give you a perfect example. Today there's over 1,500 Pumas flying in Ukraine on a daily basis. Seven by 24. Right. The cost of that 1,500 Pumas is less than a couple of F16s, maybe one F16. So you look, we're like 70, 80% of the Ukraine's air force capability. You can't get that with one F16. And so the economic equation is much, much in our favor.

Andy Cross (33:21)

Yeah. And you gave a stat with the Switchblade in your, I think latest call I talked about one of the Switchblade 600s. Basically for every one launch on average it's about $13 million of hardware destroyed in Ukraine.

Waheed Nawabi (33:32)

That's right. In the last few months they've used about $36 million worth of Switchblade 600-00 and they've destroyed. This is, according to Ukrainian military specific data points, close to $3 billion worth of Russian strategic assets. And these are not like little assets. These are strategic assets that takes years to replace. And so they consider Switchblade not a tactical weapon, but a strategic weapon. Why is because of these dynamics.

Andy Cross (34:04)

And do you think that if you play it forward a few years from now? Well, international is obviously a big part tied to the war in Ukraine. But will international be. Will that be the big growth driver for Aerovironment plus Blue Halo going forward?

Waheed Nawabi (34:21)

Actually, we have growth in all of our segments and I believe that the Blue Halo is going to accelerate our growth and it's going to give us more opportunities to grow and allows us to position ourselves better for our customers long term needs, number one. But our growth is in every category. Domestically we have tremendous amount of programs that are coming our way. So we see tremendous growth in our switchblade loading munition. McCready Works has many, many new concepts that we have not talked to them about, some of them publicly, but some of them we have we're going to see some exciting news in the next month or two or three from that as well. And then obviously internationally, the growing customers that we have and all these customers are going to be increasing their spending quite a bit. And guess where they're going to be spending a lot of their money. The concentration of those investments are going in the categories that we are the leader in the world. So like I said, the future for AV has never been brighter. I genuinely mean that because I truly feel we're positioned incredibly, incredibly well. I mean we've positioned ourselves really well. We have the demonstrated track record and we're the one of the very few companies who actually has a track record of delivering to the U.S. dOD at the scale that the U.S. dOD is looking for.

Andy Cross (35:33)

Well, let's talk a little bit about manufacturing, of course, tariffs, all in the news. I know you have a big investment going on in, out in Utah, one year plants. But just when you're thinking about the landscape of increasing costs and where you're manufacturing things. Give us your lay of the land on what you're thinking as a CEO of a company, like you said, is building the technology stack internally and also on the manufacturing side as well too.

Waheed Nawabi (36:00)

Sure. So we're, so we're very focused from, you know, over a decade or two decades ago to build the next generation defense tech prime that the US DoD and the world, our allies need and deserve. That's really fundamentally been our strategy and vision. Long term we are the powerhouse when it comes to manufacturing for the defense industries and especially in drones and loading munitions. There's nobody that I know of that has anywhere close to our scale for defense production capability. When it comes to our capability systems, for example, I, you know, we have, we've been producing, we've already delivered over 60,000 of these systems worldwide. They're operating in any, every continent, every, you know, sort of weather systems. You can imagine production cost in tariffs. We do not see a problem with that in our business primarily because, because all of our suppliers are domestic. We have some component level suppliers that are not domestic, you know, like resistors and capacitors, which we're exposed to and everywhere. But that's a very small percentage of the total cost of our bill of materials on our products. So we don't expect that to be a problem, number one. Number two, we have the ability to also adjust our price with our customers because we sell a lot of our stuff as a commercial item. So commercial item means that we, the state, we set the price, but obviously we do it very rationally and very reasonably so. We don't, you know, cause problems and we've been very successful at it. So in that regard we're good. And our manufacturing for drones and looting munitions all in us, we intentionally decided many years ago that these things are going to be a problem for the rest of the industry. And we do not want to be like the rest of the industry. We were ahead of the curve even then and that's why we announced the new manufacturing facility to even that gives us another 5x capacity increase for loading munitions business. But it's very exciting because we're planning beyond next year. We're planning for the next five plus years because we see so many demand coming our way. That is very, very exciting.

Andy Cross (38:03)

I'm almost surprised we've gone this far without really talking about AI. I don't think that's happened in any of your, I'm sure, conversations with any investors. So you mentioned at the very top and let's just circle back to that. I know artificial intelligence runs throughout entire products. We talk about some of your investments you're making and why that's so important for your environment and for your customers really.

Waheed Nawabi (38:26)

So Andy, I'm glad you brought this up because there's a lot of hype and talk these days and companies are just seeing the word AI and autonomy in their name. They become, you know, very popular. And we recognize this 10 plus years ago. There's a level of autonomy in our systems that has been actually integrated in our system, in our drones since inception. Look, for example, Raven 20 years ago. There's some level of autonomy in Raven even then because the operator, the pilot on the ground doesn't fly it. It actually commands it to go from point A to point B to point C and loiter, wait here, keep an eye on this target. So there's a level of autonomy and AI that's already built in there, but we are way, way deeper than that. We believe all of these systems are going to work almost fully autonomously with no human in the loop eventually. And in fact a lot of that is in play today. And so we've been investing very heavily in that over the last decade and we offer solutions today. In fact, the ability for Switchblade to be able to lock on a target and finish the target successfully with no low to little collateral damage is part of that algorithm and part of that software capability. So we're a very large player in this space and we continue to invest in it. And I believe long term it's going to Be very, very big. And the good part is Blue Halo recognize the same thing. And they've been investing in this area as well. And so the combination of the two is going to be very, very unique and unmatched. Industry really excited about that as we wrap up here.

Andy Cross (40:03)

Wahid, thank you again for your time. Talk a little bit about the balance between growth and profits as you continue to evolve Aeroviron from a continued IP perspective with the products for your clients. There's a balance between investing in factories in Utah and figuring out how to manage the most efficient cost structure you can to continue to focus on your profit picture. How do you handle that growth?

Waheed Nawabi (40:31)

Sure. So it is not an easy balance because the appetite and the desire and the demand for investment is very large because we're growing and there's a lot of opportunity to grow even faster. And at the same time we've always remained very disciplined since ever since we've been public that we're going to be, we're going to continue to have profitable growth. Now every year we have to balance that. The fortunate thing is that we have a demonstrated track record to be able to actually grow and do it profitably. And so it's been a tremendously positive outcome for our shareholders. We do not believe in a non unsustainable top line growth where you just buy revenue with no profits. That we believe is a disastrous outcome eventually for the shareholder. And that has been proven in industry after industry. And unfortunately there's a lot of that going on these days around even our industry where people are not being really disciplined around investments. So anyway, but our track record is very good. We have an outstanding track record that when we invest in growth we deliver on it profitably for all of our stakeholders. At the same time, there are times where we ramp up increased R and D investment primarily because we see more growth down the line for more opportunities. That's a good sign in our view and we always do it in a very measured, judicious process. So there is good return for our shareholders and the short and long term as well. And our track record speaks for itself. We've had a very, very good record in terms of that and we continue to do that. And that's actually good news because we are a business that's thriving in terms of growth and that actually it's more difficult when you're not growing. Then we have to reduce cost. That's not the problem that we have. The problem for us is where can we invest so we can have the highest return rather than we're not to invest. So the appetite for growth is significant in our business.

Andy Cross (42:36)

Well, hey, my last question as we're wrapping up here with our conversation with you is you all are very good cautious with stock based compensation. That's getting a lot of attention now with a lot of tech companies of which I put you in that category. How do you balance that between cash compensation, stock based compensation and incentive rewards for your team and how does that impact your culture?

Waheed Nawabi (43:03)

So great question again, Andy. You're asking all the right questions if you ask me. In my view, look, compensation, especially bonuses and stock is fundamental to our strategy. Has been since we've been public. For example, when I first joined AV, one of the reasons I liked it 15 years ago is that every employee had a bonus plan. Every employee had a bonus plan. And I learned that in the airspace and defense industry, the big primes actually don't even provide a bonus for every employee. There is no such thing as a bonus for everybody. And so I'm on the same bonus plan as everybody on the factory floor. And why do we do that is because we want to align our priorities and our incentives and our outcomes with our shareholders and with our customers as well. And so therefore it allows us to all move in the right direction and be aligned stock. I mean we're generally conservative because we care about our shareholders. But we do know and our shareholders recognize this that stock based compensation for our employees is critical. We have people that have been with our company for over 40 years. 40 years, Andy. And why is because we believe in the long term win, win, win relationship and outcomes as a team. And so I think that's going to continue to be part of our and the beauty of this was the best example that is Blue Halo. That is an all Scott deal. They believe so much in their strategy and our strategy that it took 100% stock. It's really unheard of for private equity firm, very reputable one Arlington Capital for any of them to take it. But you know I have great relationship with them and they really believe in the long term strategy that we both have as a partner, which is exciting. And so I think we are positioned and poised for a lot of strong performance and prosperity over the next several years.

Andy Cross (45:03)

Waheed Nawabi, thank you for joining us here for the conversation about Aero environment. Exciting times ahead. Challenging also as you bring in a very exciting partner in Blue Halo and an acquisition that you're going to close sometime, hopefully in the next year. We wish you on behalf of the Motley fool, all the best.

Waheed Nawabi (45:20)

Thank you, Candy. You said it right? If it was easy, everybody would do it. It's not easy. It's hard work, but it's worth it. And we're committed to it, and we're excited about it. Thanks for having me.