Palladyne AI Corp. Q3 FY2025 earnings call

• Palladyne AI has completed acquisitions of GuideTech and Crucis to launch Palladyne Defense, a vertically integrated defense technology business focused on embodied AI for national security. • Core capabilities of Palladyne Defense include SwarmOS (embodied AI and autonomy core), GuideTech (aerospace design, avionics, and precision low-cost attritable systems), and Crucis (certified U.S. manufacturer supporting major defense programs). • Key products and initiatives include BRAIN avionics architecture, Banshee low-cost reusable precision loitering munition, SwarmStrike long-range intelligent loitering munition, and IntelliSwarm unified intelligent autonomy system. • Palladyne Commercial continues to scale IQ and Pilot across manufacturing, logistics, and aerospace, leveraging the original AI platform Palladyne IQ.

Palladyne AI operates through 2 focused businesses. Palladyne Defense integrates SwarmOS, GuideTech, and the Crucis companies, serving government, defense, and public safety customers with mission autonomy, aerospace design, new products, and U.S. manufacturing. Palladyne Commercial scales IQ and Pilot across industrial automation and logistics. Both segments are powered by the same autonomy platform but target distinct customers and have different strengths.

• For 2026, combined acquisitions are expected to push consolidated Palladyne AI revenue to more than triple 2024 revenue of about $8 million. • Plans to invest $5 million over the next 12 to 18 months to take Banshee and SwarmStrike from Technology Readiness Level (TRL)-6 to TRL-9. • Defense segment is an expansion of the platform, not a substitution for the commercial business.

Forward-looking statements made during the call are subject to risks and uncertainties disclosed in Palladyne AI's periodic SEC filings, which may cause actual results to differ materially from those discussed.

Q: Congrats on your transactions. 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? And then maybe can you quantify the sales cycle, including the design win phase?

A: Their customers are all in the defense sector. At least today, they are defense sector. They have also done some things in the space arena. BRAIN sales today are focused on them being a supplier to other primes who are building the BRAIN into their aviation platforms or aerospace platforms. It has to be part of a design win that ultimately the entire system gets sold to a defense customer.

Q: Prior to the GuideTech acquisition, did your drone partners have another third party they use for edge compute system. And so now the value is the drone manufacturer can come to you with one solution as opposed to using a variety of suppliers?

A: It is very common in the smaller drone space to have either NVIDIA or Qualcomm boards that are being used on those platforms. Our SwarmOS software is being implemented on both NVIDIA and Qualcomm boards. Depending on the mission requirements, you might see the BRAIN being a supplement to an NVIDIA or Qualcomm board or in lieu of an NVIDIA or Qualcomm board.

Q: Congrats on the transactions here. Did you say that the -- a couple of the main customers for your acquisitions were the Air Force and Navy or those the 2 main sort of end customers? I know you sell the primes, but do they end up in those 2 categories?

A: We actually have direct contracts with the Air Force and with the Navy, where they are funding the development of capabilities that they want to deploy.

Q: This is James. Can you hear me?

A: Yes, I can hear you. Thank you, James.

Q: Congrats on the transaction. I just wanted to double-click a little bit on the vertical integration and sort of the benefits of that and sort of the why behind the transaction. I think you said that it helps your scaling, but are there other benefits here like time-to-market or integration technology or maybe even some margin stacking that's eliminated that also are rationales for these ready transactions?

A: The ability to control your destiny on both the hardware and software side to evolve them in tandem so that you can optimize both is something that you don't get the benefit of if you're just providing hardware or just providing software. Examples like Steve Jobs with the iPhone and Tesla cars illustrate this. We are bringing together our software and the hardware and the avionics and the components altogether vertically integrated, so that we can go faster in a way that demonstrates enhanced capabilities.

Q: Earlier this year, you described a roughly 12- to 18-month sales cycle and suggested you'd have more visibility in the back half of the year. I'm wondering whether the acquisitions along with the creation of Palladyne Defense have improved that visibility. Are you seeing any signs that these moves could shorten the sales cycle?

A: The 12- to 18-month sales cycle was primarily focused on the commercial side of our IQ sales. I don't see any change there. These acquisitions give us more avenues to monetize our SwarmOS swarming software and increase our shots on goal, but it's too early to say if the sales cycle for the defense side will be shorter.

Q: It's about the commercial business. When will the next version of IQ become available? And is it being tested currently at customer or potential customer facilities?

A: We are testing the V2 of IQ in our own facilities now. As soon as we believe we've got it debugged and completely ready to go, then we will start placing it with customers. We're close, and we're going through all the testing internally right now to make sure it will be satisfactory for our customers when released.