Merlin, Inc. (MRLN) Earnings

Management highlights

- Key Q2 2026 Milestone Achievements * Completed the Critical Design Review (CDR) for the C-130J program with the lead U.S. SOCOM customer, clearing the way for upcoming integration, ground testing, and flight testing. This marks a major de-risking milestone for the company's flagship defense program after five years of development from RFP through CDR. * Signed a non-binding MOU with Israeli Aerospace Industries (IAI), a leading global freight aircraft conversion provider, to co-develop, integrate, and certify AI-powered autonomy for commercial cargo aircraft. This partnership expands the company's go-to-market ecosystem and targets access to the 2,400-aircraft global civil cargo market. * Achieved Stage of Involvement (SOI) III with the Civil Aviation Authority of New Zealand (working under a bilateral safety agreement with the U.S. FAA), becoming the first large aircraft autonomy program to reach this certification milestone. Both the core flight control computer and automated air traffic control communication software passed all requirement testing, and an agreed compliance path was established for AI/ML-based natural language voice interaction with air traffic control, eliminating major regulatory uncertainty for the entire industry. - Core Business Strategy and Value Proposition * The Merlin Pilot is the re-usable, certifiable core AI "brain" that can be adapted to any airframe and any mission, with capability improving continuously across all adaptations. Products for specific customers are built by combining this core with tailored airframe and mission requirements, enabling lower deployment costs compared to bespoke one-off autonomy systems. * The company targets large existing fixed-wing aircraft (both crewed and uncrewed) across defense and civil markets, addressing a well-documented global pilot shortage and $45 billion annual U.S. pilot spend. The total annual addressable market for Merlin's solution is estimated to be several billion dollars, based on a global base of over 29,000 existing addressable aircraft. * Revenue follows a three-phase model applicable to all customers and airframes: 1) Adaptation (paid work to tailor the Merlin Pilot to specific customer/airframe requirements), 2) Integration (paid work with partner networks to physically install the solution on aircraft), 3) Recurring licensing (ongoing value-based license fees for the life of the aircraft, the long-term core of the business model). * The C-130J program alone represents a multi-billion dollar opportunity, with 570 C-130J aircraft across all U.S. branches and allied nations.

Guidance

- Management confirmed that based on current operating plan assumptions, existing cash resources are sufficient to fund all planned growth into fiscal 2028, providing a long enough runway to reach key near-term certification and commercial milestones. - The company expects total revenue of $4 million to $6 million for the second half of 2026. - Management anticipates that meaningful revenue from the C-130J program's phase two integration will begin in 2027, but no full-year 2027 revenue guidance is provided at this time. - Adjusted EBITDA losses are expected to improve slightly in the second half of 2026 compared to the first half of 2026, as non-recurring one-time merger-related expenses are completed and hiring growth slows.

Segment performance

Merlin Labs reports only one core business segment focused on developing and commercializing the Merlin Pilot AI-powered autonomous aircraft system, so separate segment financials are not provided. For Q2 2026, total company revenue was $2.2 million, an increase of $1.2 million from Q1 2026. Approximately 90%+ of Q2 2026 revenue came from task order work under the company's defense IDIQ contract for the C-130J program. GAAP net loss for Q2 2026 was $58.4 million, an improvement of $32 million from Q1 2026 driven by non-cash financing-related fair value changes and one-time business combination charges in Q1. Adjusted EBITDA loss for Q2 2026 was $27.8 million, up from a $23.3 million loss in Q1 2026, reflecting planned investments in engineering, certification, and program execution. Operating cash flow was a negative $27.3 million in Q2 2026, compared to negative $23.6 million in Q1 2026. Capital expenditures for Q2 2026 were $1.6 million, down from $2.2 million in Q1 2026. End-of-quarter cash, cash equivalents, and short-term investments totaled $183.9 million with zero outstanding debt, an increase of $60.8 million from the end of Q1 2026.

Risks & headwinds

- Forward-looking statements are subject to material risks that could cause actual results to differ materially from expectations, including delays in regulatory approval timelines for certification of autonomous aviation technology, unexpected competitive market changes, limited access to additional capital if needed, slower-than-expected technology development, and broader macroeconomic and aviation market conditions. - The pace of adoption and deployment for the C-130J program is controlled by the U.S. Department of Defense customer, so timeline and revenue visibility is limited. - The integration of autonomous technology onto large, complex aircraft is a first-of-its-kind effort, with unforeseen technical, regulatory, and safety challenges that could delay milestones and increase costs.

Analyst Q&A

• Q: What is the expected revenue ramp for the C-130J program's phase two integration, and when can meaningful revenue be expected? /

  A: Management is working with the customer to secure a contract expansion for the integration phase, and will issue a public release as soon as an agreement is finalized. Meaningful revenue from phase two is expected to come in 2027, with no further details available for public announcement at this time.

• Q: What does the parallel development track approach mean for C-130J milestone timing, and what is the level of technological overlap between defense and commercial programs? /

  A: Parallel tracks refer to two concurrent priorities: 1) continuous improvement of the core Merlin Pilot AI brain while C-130J integration proceeds, and 2) applying lessons learned from C-130J integration (technical, regulatory, safety) to accelerate development of other adjacent large aircraft platforms. There is significant technological overlap between the C-130J defense program and IAI commercial cargo work, as both involve adapting the core Merlin Pilot system to large, complex, highly certified transport-class aircraft. Shared core technology and teams enable capital efficiency, so full independent staffing for separate programs is not required.

• Q: What milestone does CDR completion unlock for the C-130J program, and what will the first integration task order cover? /

  A: CDR completion clears the technical and engineering path to begin integration onto the first C-130J aircraft, which is required to unlock additional task orders under the existing IDIQ contract. Management cannot disclose specific task order details ahead of the customer, but integration will start with one aircraft, the first time autonomy has been integrated onto a large U.S. Air Force operational aircraft. The first integration will carry higher costs than future production aircraft, as expected for any first-of-its-kind deployment.

• Q: What testing milestones must be completed after integration, and when will recurring licensing revenue start? /

  A: Specific customer mission testing requirements are not disclosed publicly, but flight testing will follow a crawl-walk-run approach, starting with basic flight autonomy capabilities (takeoff, landing, air traffic control interaction) that the company already demonstrates regularly on its surrogate test aircraft, before gradually adding mission-specific capabilities. Recurring licensing revenue requires full certification and integration completion for each aircraft type, which the C-130J program is now progressing toward after completing CDR, aligning with the company's stated three-phase revenue model.