Unusual Machines, Inc. Q4 FY2025 earnings call

• 2025 was a transformational year, shifting from online retail store to drone components producer and enterprise sales business. - Fourth quarter was seventh consecutive quarter with record revenues, grew from 38 employees to 81 employees in the quarter, started motor production in scale in November. - 2026 is expected to be a year of rapid growth, well positioned as supply chain leader for small drone components. - Scaled from 81 employees to over 140 employees, started second and third shift at motor factory, producing about 15,000 motors a month, starting second shift at flexible production facility, producing first US - made Fat Shark headsets, working on battery pack production and automated motor production line in second half of 2026, anticipating manufacturing cameras in US by end of 2026.

In 2025, total revenue was $11.2 million, a 101% year - over - year growth. Fourth quarter revenue was $4.9 million, a 133% sequential growth. Gross margin was approximately 36% in the fourth quarter and 35% for the full fiscal year 2025. Enterprise segment revenue contribution: 31% in Q1, 48% in Q2, 57% in Q3, and 81% in Q4. Started production of motors in scale in November. Ended 2025 with 81 employees, and by now over 140 employees. Inventory including prepaid inventory over $15 million at year - end, cash $103 million.

• 2026 is expected to be a year of rapid growth in the US drone ecosystem. - Believes demand for components will outstrip supply into 2027. - Drone Dominance Program has component opportunities of about $90 million in 2026 and $250 million in 2027. - Anticipates sequential revenue growth in 2026 though there could be supply chain hiccups. - Explicit goal to scale production to meet demand for second phase of drone dominance by September 2026.

• Risks that enough customers receive orders under drone dominance or other programs and place component orders. - Dependence on limited enterprise customers and customer concentration risk. - Inventory build - up becoming obsolete or not selling at reasonable margins. - Managing rapid growth, integrating new employees and maintaining quality control. - Manufacturing bugs, delays or failure to achieve anticipated production efficiencies. - Availability of satisfactory labor pool. - Supply chain disruptions or component shortages. - Impact from tariffs, inflation and increased costs of goods sold. - Automated production equipment not operational on anticipated timeline. - Auditors may require changes to financial statements.

Q: Hey guys, thanks for taking the question and congrats on the solid quarter. First question was just around kind of like the backlog number. So I think you guys said it's around 12 million. Is that the right way to think about total backlog?

A: Yeah, so my whole team is cringy, Austin. Thank you for the question because I don't like the word backlog. It implies we're not delivering on time. But that is the outstanding volume that we're working toward delivering to, and we're still hitting delivery schedules. So $12 million is what we have purchase orders for right now. And then we have forecasts further out from customers.

Q: Congrats on the high exposure to drone dominance, staunch one. Could you maybe just like walk through with like these six to five customers, like, how much content per drone you guys are working with? Like, are they buying the whole portfolio content? Is it primarily motors? Would just love to get a sense of kind of how you're exposed for this first launch.

A: Yeah. So very few customers across all of the entrants have placed full drone dominance orders yet. So that's being discussed this week now that they've found out that they've won. So for, Our blend could be anywhere from one part for a customer all the way through a large chunk of them. But even actively over the weekend, we were getting some of these customers asking about other parts we offer. So I don't know what the mix is. I trust Stacey and the whole revenue side of the house will do whatever we can to serve as much of their needs as possible.

Q: And then just kind of last question, a sense of kind of like how we should thinking about the ramp. throughout the year, should we be modeling sequential revenue growth throughout 2026?

A: We're still scaling as quickly as we can. What I would say is there could be hiccups. Supply chains could be tough. For instance, There's currently a challenge getting barometers and as demand for drone dominance, I think sucks up a lot of parts. We have to get further in front of it, but I would expect sequential growth over the course of the year with maybe some supply chain acquisition challenges if demand continues to outstrip supply. So, you know, the goal is sequential growth, our procurement teams in front of it, but You've got to be material complete to make a part, and if you're waiting on one component, there could be a delay that could cause revenues to slide one way or another.

Q: Hey, thanks for taking my questions, and congrats on the strong year. Touch on the investment needed for the automated motor production line, and do you expect it to be kind of tuned and yielding at its expectation this year, or is that kind of a 2027 event?

A: The CapEx has already been made. That is already accounted for on our books. It's really, you know, we're targeting having it in - house. Right now, July, it's a little bit uncertain. But then at the same time, the cost that you'll see is the material components. So if you're going to run 100,000 motors a month, you've got to procure the material for that six months ahead of time. So you'll see inventories match the requirement for that probably two to three months out, and then it'll turn on slowly. We really expect to see it running, you know, at reasonable scale by quarter four. with you know if we're faster if we get it done in quarter three that'd be great and you'll see the the cost the added cost for it will be us scaling inventory but since we're already moving toward 20 to 30 000 motors a month you'll just see that carried as inventories and prepaid inventories probably at the end of q2.

Q: You mentioned outperforming your internal expectations for gross margin in the quarter. Can you maybe give us some thoughts on how that trends as you make the additional investments and expand into – I think you mentioned battery pack production sometime this year. So where does gross margin trend?

A: Sure, and I'll explain why just so everybody can be aware on how gross margins work. You scale operations. All right. You don't really start to see revenue till a quarter delayed. You don't really see the gross margin impact till even a quarter after that. In a lot of ways, gross margin, because the people doing the work are in gross margin, but it doesn't show up in the financials till the product is shipped. So, for instance, you know, as we had people and we're building motors in November, we shipped many fewer motors that we made in November versus that we would in January. And so when you start new processes and new people, you know, they're not as efficient as they become with training and expertise and new processes. So I would expect whenever we turn something on, like the motor factory, the biggest impact to gross margins would be a quarter delayed. So you'd expect those in quarter one and then recovery from that as efficiencies and processes and scale come in. so we thought we'd see more from really the rapid scaling more of a dip but the employees that came on were more productive and crushed it and learned and our team did a good job of of keeping the dip lower but i would still expect our worst gross margins as we go through this to be somewhere in the quarter one quarter two time frame as we've just brought on so many new people and created so many new processes that the natural impact to cogs will be in those quarters.

Q: Final question for me. Maybe if you could touch on what the competitive environment and components looks like today. You know, you've kind of been going at this for, you know, a few quarters now, and I'm curious if anybody is kind of following a similar playbook or, you know, starting to catch up in components.

A: There's several other small companies that are private that are out there doing different types of parts. In addition, Some of our customers choose to do their own parts. So I would say for electronics, PCBs, there's a really great supply chain in the US. I'd say for everything else, there's nobody that is doing higher volumes than us. And again, because we think that this is a supply constrained market, it's just us growing as fast as we can without worrying about competitors because there's this much larger demand where we just collectively can't fulfill it all. So right now, everybody can go as fast as they can to secure market share question. And so we think there are a lot of other companies out there trying to do and enter some of these segments in the U.S. I do think that if you looked at who some of our competitors were last year, you'd look and say, like Luminaire on the retail side or GetFBB, A lot of them set up NDA compliant, but foreign supply chains in terms of and the FCC ruling was a really big surprise for that. So, you know, we've been very aggressive about onshoring production and still are. And I think, you know, a lot of the categories right now are the largest producer.

Q: Good morning, Alan and Brian. Thanks for taking my question. Great color on how supply - constrained the market is. I appreciate that. Just with your capacity being so valuable in this environment, can you just talk a little bit about how you allocate that your resources to customers? How do you choose winners in this dynamic marketplace?

A: Jonathan, appreciate it. The first thing I would say is the other side of this question is a lot of people ask why we don't increase our prices. So I'd like to start to say that we're trying to build relationships in a pricing model that's sustained and we're not in this unique market. We try really hard not to pick winners. We try to work with as many people as possible. And that's where I'll use my statements about drone dominance as an example. We are building capacity to build components for every single winner of phase two. Will we be able to supply every single winner? Will they all want to buy our parts? Probably not, but I hope they do. But in that way, we'll talk to and work with the 30 potential companies When drone dominance only down select to 10, and then we'll have a capacity to supply 10, and we won't be forced to make companies that may not have won that program take components. So we think by building to match the end customer demand, we're in a better position to shift material streams from us to the customers based on how effectively they compete. And that's really what we're trying to do is meet the entire U.S. components demand so that none of our customers, so that we don't have a dependency and they don't have a dependency on any specific individual program.

Q: Hey, good morning, folks. I want to ask about the B2B sales pipeline coming up for 2026 and a couple parts of the question with a lot of numbers. So how many B2B customers have you shipped to over the last year? How many are in that 12 million backlog? And then looking ahead, what does the process look like? I know Stacey was promoted to Chief Revenue Officer. What does her team look like? I assume, you know, with the drone dominance announcement, it's all hands on deck right now to get those orders. But if you give us a little visibility that it would help us looking out over the next year.

A: Yeah, so I think the number of customers we've sold to depends on how far down the line you want to slice it. We've sold to hundreds of enterprise customers in small scale for R&D and some of that even through our retail channel. At large scale, it's constantly shifting with some of these programs, but we don't have single customer concentration. We still don't. I'm not positive where the exact blend is exactly today. And really where we see Stacy's team continuing to drive this, and what we see is really important is not new customer outreach, but more importantly, being sure all the customers we have are satisfied. I believe in the last year, our sales team has done a really good job of driving awareness to everybody and getting small numbers of parts and being designed in for most of the drone companies that people are aware of or that we think have any ability to scale and even some that are smaller. And now it's really relationship management and starting to look more past what they need today to what they need tomorrow. So, you know, we don't care if to service 200 customers. We think the market is going to consolidate some and maybe be down to 50 customers. And we want to be sure that those 50 customers have a great experience working with us and get what they need. And maybe a little visibility on what does Stacey's team look like? How many folks are underneath her now? How many, you know, in sales? How many customer service? What does that team look like? There's five or six people right now doing the combination of sales and customer service, really more relationship management. And then we're actively looking for more account managers. Nice thing is it doesn't need to be a huge team because we don't have to go door to door or anything. And they're doing a great job. And if I could shift gears, I know it's no longer the focus, but on the retail part of the business. Are you still looking to grow that business? How important is it? I know you've added a new person in charge of that. I'm actually seeing Rotor Riot TV commercials now. What's the strategy for the retail business?

A: The strategy is to use it as a sales funnel and provide parts out there. So the goal is to keep it healthy. We don't expect significant growth there. We expect it to move in the marketplace. but it acts as an amazing sales funnel. So a lot of our customers will go and buy motors off of there for R and D, et cetera, knowing that they can buy them at scale when they go to production. And so from that perspective, we think it's a really important part of our sales process. It, it minimizes the need for people to go ship stuff all the time. And from that perspective, our hope is to, see it continue where it's at with some growth and some energy, but right now it's not the priority of our business.

Q: Hey, good morning. Morning. Just with... But with the start of Operation Epic Fury, Alan, what have been your observations just relating to unusual machines and future warfare and how you're positioned? You know, I got mostly larger systems at this point, but, you know, if you look at lessons learned so far, curious what your observations are.

A: Yeah, so I'll start and say, hey, war sucks, right? And what we're seeing is through conflict, people have developed new technologies, right? And in this case, you know, I think Ukraine is still the largest driver of what has caused people to look at the drone component supplies. I would say when you look at Epicury, when you look at everything else, when you look at drone dominance, whether it's, you know, on the positive or negative side, I think the current Department of War realizes not just that drones are going to matter but counter drone is going to matter and that we have to understand both sides of it and so i think they'll procure a whole bunch of drones to test counter drone systems to understand what they may use from our department of war may understand what adversaries may use against us and i think you're just seeing the solidification of this next generation or next paradigm of how conflicts are going to be operated you know, with robots and particularly aerial robots. And then I guess just a question on the funding side or your customer funding side, you know, what are customers seeing on contract adjudications? You know, is the environment picked up? Is funding getting out to them?

A: I don't track too many of them too hard. I mean, most of them or a lot of them are large enough that they make money and they pay their bills on time. So I haven't had people say, hey, look, we can't pay for components because we're waiting on payment, which we'd be fine with. So in that case, I assume that they're getting paid. But we don't dive too deep into it past that. And then in the letter for 25, you painted a picture of two halves for 25. How would you characterize 26, particularly as you scale here to capture this big demand environment?

A: I'm going to use an analogy because I like it, and this is a little bit more me, but 25 was fuel in the rocket. And then you saw in early, like in mid - 25, we lit the fuse. And like any rocket taken off, it starts really slow. You know, it just starts to lift off the pad. And I think 26 is going to look like the next part of the launch.