Palladyne AI Corp. Q3 FY2025 earnings call

• Announced the acquisitions of GuideTech and Crucis, launching Palladyne Defense as a vertically integrated defense technology business. • Core capabilities include SwarmOS (embodied AI and autonomy core for defense/public safety), GuideTech (aerospace design, avionics, and precision low-cost attritable systems), and Crucis (certified U.S. manufacturer supporting major defense programs). • Highlighted BRAIN (mission-grade avionics architecture), Banshee (low-cost reusable precision loitering munition), SwarmStrike (long-range intelligent loitering munition), and IntelliSwarm (unified intelligent autonomy system). • Vertical integration of AI, engineering, and U.S. manufacturing to align with Department of War priorities.

Palladyne AI operates through two focused businesses. Palladyne Commercial focuses on scaling IQ and Pilot across manufacturing, logistics, and aerospace. Palladyne Defense integrates SwarmOS, GuideTech, and Crucis, combining mission autonomy, aerospace design, new products, and U.S. manufacturing. However, specific absolute revenue figures and contribution percentages were not provided in detail during the call.

• For 2026, consolidated revenue is expected to more than triple 2024 revenue of about $8 million. • Has a growing 18-month backlog of over $10 million, including ongoing contracts with U.S. Air Force and Navy. • Plans to invest $5 million over 12-18 months to take Banshee and SwarmStrike from TRL-6 to TRL-9. • Anticipates significant customer engagement across the portfolio in 2026.

• Forward-looking statements are subject to risks and uncertainties disclosed in Palladyne AI's periodic SEC filings. • Potential differences between actual results and those discussed on the call due to various market and operational uncertainties.

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: Thank you for your question, Brian. So 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, and I think there's a lot of opportunity in space, not necessarily tied directly to Department of War. But the 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 is part -- to be able to win that business, it has to be part of a design win that ultimately the entire system gets sold to a defense customer, Department of War, one of the services, et cetera. So that is what they've been working on for the last couple of years, and they have got some great traction in that regard.

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: So 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. So those are direct contracts. That's not where we're acting as a sub to somebody else.

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: Here's the way I think about it. 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. You can think of a couple of great examples that I use as an analogy here. If you thought about Steve Jobs trying to come up with the iPhone and all, he was going to produce the hardware, not the software, it wouldn't be the hit product that it became. Vice versa, if he was only focused on software, not hardware, it may not have become the hit product it was. Take it into something that's a little more current. Think of the Tesla cars. If Elon had said, I'm going to build the frame and the physical instantiation of the vehicle, but I'm going to farm out the AI and the software to somebody else, it would not have been an optimized car that attracted the millions of customers that they have today. What we see in our opportunity set going forward is in those cases where there are gaps of capability that we think the Department of War wants, we now 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 so that we can beat our near peer competitors worldwide to the punch.