Red Cat Holdings' Q3 2025 Earnings Call: Contradictions Emerge on Black Widow Production, VNav Software Impact, SRR Funding, Palantir OS Transition, and LRIP Timeline

Guidance:

• Long Beach factory is operational; FlightWave shipped its first drones in March and will ship monthly as scaling/ backlog clears.
• Visual Navigation (VNav) developed with Palantir is expected to expand margins and be sold at full price but is NOT included in current guidance; Street will be updated after one quarter of sales.
• Three-contract cadence: features (signed), LRIP (expected to sign soon and likely higher than January NASD report), then mass production later this year.
• Requested an additional $100M of SRR funding for 2025; company remains comfortable with its existing "25 to 65" guidance and is not dependent on extra funds.
• Palantir operating system implementation underway; expected to drive efficiencies and margin improvement ahead of mass production.

Business Commentary:

* Manufacturing Expansion and Product Innovation: - Red Cat Holdings announced that the Long Beach factory is up and running, having shipped its first drones in March, with plans to ship drones every month moving forward. - The company's Visual Navigation software for the Black Widow is nearing completion, which will expand margins and enhance the drone's competitive advantage.

• Defense Contracts and Government Funding:
• Red Cat Holdings anticipates a significantly higher LRIP (Low-Rate Initial Production) than previously reported, which is expected to be officially announced soon.

• The company seeks an additional $100 million in SRR funds for 2025, reflecting the increasing importance of drones in modern warfare and the favorable reception from administration officials.

• International Market Opportunities:

• The company continues to pursue tenders and RFPs with NATO allies and in the Pacific, despite geopolitical tensions between the U.S. and other countries.

• The Black Widow drone's unique features, such as robust design, EW capabilities, and Visual Navigation, make it an attractive choice for international partnerships.

• Software Integration and Efficiency:

• Red Cat Holdings is implementing Palantir's operating system, which is expected to improve margins by eliminating redundancies and enhancing efficiency across all factories.
• The partnership with Palantir for Visual Navigation on the Black Widow is seen as crucial for real-time mapping and GPS alternatives, addressing a critical need within the military.

Sentiment Analysis:

Overall Tone: Positive

• "Long Beach is up and running and shipped its first drones in March." Management said LRIP "is going to be significantly higher" than the January NASD report and that Visual Navigation "will expand our margins." They stated they are "very comfortable with our 25 to 65 guidance."

Q&A:

• Question from Glenn Mattson (Ladenburg Thalmann): Can you give a sense of timing on signing the SRR deal and the expected scope of LRIP?
  Response: Features contract is signed; LRIP signing expected soon and management believes LRIP will be significantly higher than the January NASD report, with mass production later this year.

• Question from Glenn Mattson (Ladenburg Thalmann): Any update on international opportunities with NATO allies or in the Pacific compared to last month?
  Response: International interest remains strong—Europe and consortia continue tenders; few competitors in the Black Widow category, and some opportunities have grown more favorable.

• Question from Mike Latimore (Northland Capital Markets): How should we think about Visual Navigation (VNav) relative to your guidance—will it be incremental or included?
  Response: VNav is not included in current guidance; expected to command full price via Palantir partnership and management will update guidance after a full quarter of sales.

• Question from Mike Latimore (Northland Capital Markets): Status and timing of moving to Palantir's operating system?
  Response: Implementation is in the early weeks; expected to be quicker than SAP installs and to deliver efficiencies and margin improvement before mass production.

• Question from Mike Latimore (Northland Capital Markets): Any additional context on potential extra SRR funds this year?
  Response: They requested an additional $100M for 2025 but may receive any portion (including none); company is comfortable with existing 25–65 guidance and not relying on the extra funds.

Contradiction Point 1

Black Widow Production and Sales

It involves differing statements about the production and sales expectations of the Black Widow drone, which is a key product for Red Cat Holdings, potentially impacting revenue forecasts and investor expectations.

What is the timeline for the SRR deal signing and the scope of LRIP? - Glenn Mattson (Ladenburg Thalmann)

20251114-2025 Q3: We are on pace to deliver over 500 Black Widows to the U.S. Army, exceeding our previous guidance. - Jeffrey Thompson(CEO)

Can you update us on the full rate production order and provide an estimate of its size? - Austin Bohlig (Needham & Company, LLC, Research Division)

2025Q3: Full rate production order size is unknown, but the LRIP is now around $35 million. - Jeffrey Thompson(CEO)

Contradiction Point 2

Visual Navigation (VNav) Software Impact on Sales

It involves differing expectations about when Visual Navigation (VNav) software will impact sales and revenue, which is crucial for financial forecasting and investor expectations.

How will VNav software impact sales and guidance? - Mike Latimore (Northland Capital Markets)

20251114-2025 Q3: VNav software is developed with Palantir and will not be included in the current guidance until we have a full quarter of sales. It's a necessary feature for drones, and we expect it will enhance margins. - Jeffrey Thompson(CEO)

What key contracts or milestones must be achieved in the next few quarters to meet revenue guidance? Any updates on Russell 2000 progress? - Ashok Kumar (ThinkEquity)

2025Q1: We don't expect significant revenue from USVs in 2025, but there's interest in our products from various companies. - Jeff Thompson(CEO)

Contradiction Point 3

SRR Funding and Revenue Expectations

It involves differing statements about the expectations for SRR funding and its impact on revenue, which are critical for financial planning and investor expectations.

Are there any updates on potential additional SRR funds this year? - Mike Latimore (Northland Capital Markets)

20251114-2025 Q3: We requested an additional $100 million for 2025, given the growing recognition of drones' importance in warfare. - Jeffrey Thompson(CEO)

Can you provide guidance on Q1 2026 revenue? - Glenn Mattson (Ladenburg Thalmann & Co. Inc., Research Division)

2025Q3: We requested an additional $100 million for 2022 and 2023. And in 2024, we requested another $100 million. The U.S. Army has not provided any additional funds. - Jeffrey Thompson(CEO)

Contradiction Point 4

Transition to Palantir's Operating System

It involves changes in expectations regarding the timeline and benefits of implementing a new operating system, which could impact company efficiency and financial performance.

Can you provide an update on the transition to Palantir's operating system? - Mike Latimore (Northland Capital Markets)

20251114-2025 Q3: We're in the early stages of implementing Palantir's operating system, which is expected to improve margins and reduce redundancies across factories. It should bring significant efficiencies and benefits from prior experiences of companies like Anduril and Saronic. - Jeffrey Thompson(CEO)

Can you update us on the status of your transition to Palantir's operating system and when it might be completed? - Mike Latimore (Northland Capital Markets)

2025Q3: We are in the early stages of implementing Palantir's operating system. It's a more streamlined process than traditional ERP installations. We anticipate it will provide efficiencies and improve margins across all factories. - Jeffrey Thompson(CEO)

Contradiction Point 5

LRIP and SRR Deal Signing Timeline

It pertains to the timeline for signing the LRIP and SRR deal, which directly impacts revenue expectations and contractual obligations.

Could you clarify the timing of the SRR deal and the scope of LRIP? - Glenn Mattson (Ladenburg Thalmann)

20251114-2025 Q3: We expect the LRIP to be significantly higher than initially reported in a NASD report. The features contract has been signed, and LRIP signing is imminent. We hope to sign it soon and will provide updates at the upcoming investor town hall. - Jeffrey Thompson(CEO)

What key milestones/contracts do you need to achieve in the next few quarters to meet your revenue guidance? Are there any updates regarding the Russell 2000? - Ashok Kumar (ThinkEquity)

2025Q1: We expect to be part of the Russell 2000 reconstitution by the end of this month. - Jeff Thompson(CEO)