Red Cat (RCAT) Q4 2025 Earnings Call Transcript

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Date

Wednesday, March 18, 2026 at 4:30 p.m. ET

Call participants

• Chief Executive Officer — Jeffrey Thompson
• Chief Operating Officer — Christian Ericson
• Chief Financial Officer — Christian Morrison
• Director of Investor Relations — Ankit Hira

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Takeaways

• Revenue -- $26.2 million for the quarter, an increase of $25.0 million year over year and $15.6 million sequentially, driven by defense and government demand.
• Gross margin -- 4.2% for the quarter, up 85% year over year and down 2.4% sequentially, reflecting product mix and scaling effects.
• Full-year revenue -- $40.7 million, rising $25.1 million from the prior year, linked to increased scale and program wins.
• Full-year gross margin -- 3.1%, growing by 332 basis points due to scale and manufacturing improvements.
• Operating expenses -- $67.8 million for the year, up from $32.9 million, driven by expansion and headcount growth of 85%.
• Research & development expenses -- $17.9 million, more than doubling from $8.1 million, focused on AI, machine learning, and system interoperability.
• Cash position -- $167.9 million at year-end, up from $9.2 million, providing greater financial flexibility.
• Inventory -- $30.4 million at year-end, up from $13.6 million, supporting supply chain management amid longer lead times.
• Production -- Achieved output of 50 Black Widow drones daily at Salt Lake facility, supporting capacity of 1,000 drones per month per shift.
• Manufacturing footprint -- Facility space expanded to 254,000 square feet across Utah, Florida, Georgia, and California; Valdosta, Georgia site provides 155,000 square feet for maritime production.
• Black Widow Ukraine deployment -- Secured a letter of request from Ukrainian forces to supply non-Chinese ISR drones, validated by in-field tests.
• Blue Ops USV production -- Georgia boat factory operational, aiming for 100+ USVs in 2026 and the capacity to scale further.
• NDAA Section 1709 impact -- Supply chain transitioned to American manufacturing and domestic sourcing, supporting new contract wins as foreign competitors lose eligibility.
• Joint development in Ukraine -- Formed the first nongovernmental agreement with a Ukrainian state-owned entity to transfer battle-proven technology to USVs and allies.
• Guidance policy -- No official guidance provided pending government contract execution; management will update as soon as contracts are secured.
• Drone Dominance program -- Anticipates market opportunity from potential procurement of up to 350,000 FPV drones and 17,500 ISR drones, supported by use-case ratios cited by Ukrainian forces.

Summary

Red Cat Holdings (NASDAQ:RCAT) reported record quarterly revenue growth, completed critical operational scaling, and materially increased cash reserves to strengthen financial and production flexibility. The company advanced its transition to a high-reliability, U.S.-compliant defense manufacturer, extending beyond aerial platforms into maritime USVs with operational and facility expansions covering all domains. The new joint technology agreement in Ukraine and a formal letter of request to replace Chinese ISR drones open direct access to high-volume international defense opportunities. Facility and supply chain investments, along with rapid scaling at U.S. sites and demonstration of fully operational counter-drone platforms, reinforce readiness for imminent government and allied contracts. Heightened urgency around geopolitical tensions, particularly in the Middle East and Ukraine, is driving inbound demand for both drone and maritime countermeasure solutions.

• CFO Morrison stated, "Our cash increased from $9.2 million at the end of 2024 to $167.9 million at the end of 2025," clarifying a substantial working capital improvement directly supporting investment capacity.
• COO Ericson said, "We remain on track to scale Black Widow Drones output to 1,000 units a month in the first half of 2026," highlighting near-term volume acceleration in core product lines.
• CEO Thompson indicated market-wide program dynamics by saying, "There's going to be a total award of 350,000 FPV drones. Going by the Ukrainian ratio of 20:1, that requires 17,500 ISR drones or 8,750 SRR systems."
• CEO Thompson remarked, "We found a boat factory in Georgia, signed a lease for 155,000 square feet. That factory just went operational approximately 1 month ago, and we'll have full rate production tooling later this month," confirming readiness to deliver new maritime defense products at scale.
• Ericson reported, "We have now established an office in Kyiv and have a fabulous team," evidencing a physical presence and direct engagement with Ukrainian defense stakeholders.

Industry glossary

• USV: Uncrewed Surface Vessel, a waterborne autonomous platform used for maritime monitoring, defense, and reconnaissance operations.
• ISR: Intelligence, Surveillance, and Reconnaissance — drones or systems focused on collecting and transmitting data about battlefield situational awareness.
• NDAA Section 1709: A U.S. statutory provision prohibiting the federal procurement of certain foreign (notably Chinese) unmanned aircraft systems and components, strengthening compliance and domestic sourcing.
• FPV Drone: First Person View drone, a type of unmanned aerial vehicle controlled by an operator wearing video goggles, primarily for close-in, tactical applications.
• SRR: Short-Range Reconnaissance, a U.S. Department of Defense program for fielding small drones used in close-range battlefield applications.
• Epic Fury: Cited in the call as a program related to U.S. government drone procurement; context indicates significant Black Widow and SRR alignment.
• ACS Bullfrog: A specific counter-drone weapon system integrated on the Variant 7 USV; capable of neutralizing FPV and Shahed-136 drones at short range.
• Aeon's Zeus: Long-range countermeasure weapon system for USVs, designed to neutralize Shahed-136 drones at up to 20 kilometers.
• Letter of Request (LOR): Formal written request from a government or defense entity for procurement or evaluation of systems; in this case, from Ukrainian forces to Red Cat.

Full Conference Call Transcript

Ankit Hira: Good afternoon, and welcome to Red Cat's Fourth Quarter and Full Year 2025 Earnings Call. Joining us are Red Cat's CEO, Jeff Thompson; COO, Chris Ericson; and CFO, Christian Morrison. Please note that certain information discussed on the call today will include forward-looking statements for our future events and Red Cat's business strategy and future financial and operating performance. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict and may cause actual results to differ materially from those stated or implied by those statements. Certain risks, uncertainties and assumptions are discussed in Red Cat's SEC filings, including its most recent annual report on Form 10-K and other SEC filings.

These forward-looking statements reflect management's beliefs, estimates and predictions as of the date of this live broadcast, March 18, 2026, and Red Cat undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. In addition, our comments on the call today will contain references to non-GAAP financial measures such as adjusted EBITDA and key business metrics. Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results.

A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures as well as definitions of the key business metrics referenced and management's reasons for including the non-GAAP measures and key business metrics referenced may be found in the press release. Finally, I would like to remind everyone that this call will be recorded and made available for replay via link available on the Investor Relations section of the company's website at ir.redcatholdings.com. With that, I'll now turn the call over to Jeff.

Jeffrey Thompson: Thanks, Ankit. Good afternoon, and thank you for joining Red Cat's Q4 2025 Earnings Call. I'm going to let Chris Ericson, our COO; and Chris Morrison, our CFO, discuss last year's extraordinary Q4 results, which annualized would be over $100 million. I am going to cover Blue Ops, Black Widow work in Ukraine, drone dominance and guidance. A year ago on the same call, we announced our new mission, Maritime USVs. We found a management dream team in the early summer to build this division. The new team spent many weeks in Europe to learn how these boats were so successful against the Russian Navy. By August, we had preliminary designs.

And by December, we had a boat in the water driving autonomously and out-of-the-box ATAC capable. We found a boat factory in Georgia, signed a lease for 155,000 square feet. That factory just went operational approximately 1 month ago, and we'll have full rate production tooling later this month. We believe and are confident that they can build over 100-plus USVs in 2026 as we ramp up production capability to thousands. Blue Ops is a strategic and important part of Red Cat's family of systems. It opens the rest of the globe for Red Cat. Our family of systems was limited to 30% of earth.

With our new Variant 7 and other hulls, we can now launch from 100% of the globe. We believe that our Blue Ops USVs can keep our war fighters out of harm's way and make them more lethal. We believe Blue Ops could be very helpful in Venezuela, in the USVIs, the Gulf of America, Cuba and urgently in the Strait of Hormuz. Blue Ops demonstrated partners on Innovation Day that was timely. We demonstrated short-range and long-range counter drone capability. For short range, we have the ACS Bullfrog on the front of the Variant 7 that can shoot down FPV drones up to 1,500 yards and can do the same to a Shahed-136.

For long range, we have the Aeon's Zeus that can travel 20 kilometers and take out Shahed-136 at a very low cost. The 2 weapon systems combined on the Variant 7 controlled miles away can deliver a potent deadly deterrent for short-range and long-range counter drone operations. Let's move on to recent work in Ukraine with the Black Widow. Last fall, we deployed a team to Ukraine in hopes to get them a drone to replace the Chinese ISR drones and to verify the drones we are delivering to soldiers would work in an actual battlefield. The team received an MOU and an LOC and recently LOR, a letter of request.

I'm going to have Chris Ericson, who just got back from Ukraine last night, give more details on this mission. I also want to thank the Red Cat ICC team for this hard and dangerous work. Drone dominance. As you know, we do not make the cut at drone dominance Gauntlet I. I have a ton of excuses, but I'm not going to go there. We are preparing for Gauntlet II and hope to have better results. But we believe even if we lose every stage of the Gauntlet, we will still be one of the larger beneficiaries of the program. There's going to be a total award of 350,000 FPV drones.

Going by the Ukrainian ratio of 20:1, that requires 17,500 ISR drones or 8,750 SRR systems. Sensor shooter requires a sensor, and that's what the Black Widow is. We will support the Drone Dominance program in any way we can. Guidance. We are not currently ready to offer official guidance. We want to have our government contracts in hand before we give guidance. We do not want a replay of last year during the continuing resolution. Fortunately, we have a budget for 2026, which also just received an additional $150 billion, and it looks like we'll be getting another $50 billion for Iran. We don't have to wait until the next quarterly to give an update on guidance.

And as soon as we have the contracts in hand, we will update the market. And with that, I will hand this to Chris Ericson.

Christian Ericson: Thank you, Jeff, and good afternoon, everyone. With that intro, I'll skip ahead a little bit and talk about the most interesting part of my script. Yes, I just returned from Ukraine yesterday. My first overarching impression is that I was in awe of the spirit of resiliency of the Ukrainian people. They continue to show how David could stand up to Goliath, and my favorite retort to that comment was only comparable if David wasn't given a sling and rocks. We have now established an office in Kyiv and have a fabulous team.

We are building the business and relationships to most effectively, one, test our equipment at the front and obtain true feedback; two, identify new product and integration partners with battle-proven technology; and three, use this knowledge to increase the efficacy of our unmanned systems. I'm happy to report that we have tested multiple systems at the front and proven that our tech works and works really well. This has now resulted with Red Cat receiving a letter of request from Ukrainian forces to provide our systems to begin replacing the use of Chinese-made ISR drones.

Black Widow's compact rugged design and secure communications architecture has proven invaluable in real-world deployments, which will contribute directly to mission success for our defense customers. And finally, this past week, we entered into a joint development agreement with a Ukrainian state-owned partner to bring new battle-proven technology to our USVs. This agreement is a huge step forward as we are the first nongovernmental entity to successfully enter into this type of deal, which will enable the future transfer of battle-proven technology to us and our allies. So let's change directions a little bit and talk about how the factory is the weapon.

We have quickly learned through current global conflicts how important -- how important factories and capacity are critical infrastructures in supporting a country's defense. Over the past year, we focused on acquiring talent, improving processes and tools, transforming from a fast-moving start-up to a repeatable, high-reliability production enterprise that can deliver quantity and quality and stability to our customers. Our operational performance in Q4 2025 reflects the successful execution of our multi-domain strategy and our ability to adapt rapidly to the evolving defense technology landscape. We achieved remarkable production scalability while maintaining the quality and security standards our defense customers demand.

This represents our ability to search production capacity, demonstrating the operational agility that sets Red Cat apart in the defense contractor community. We remain on track to scale Black Widow Drones output to 1,000 units a month in the first half of 2026, and our USV boat manufacturing will have first deliveries expected in Q2 of 2026. The regulatory landscape shift following NDAA Section 1709 implementation has fundamentally changed how we operate, creating unprecedented opportunities while requiring enhanced focus on supply chain security and domestic sourcing. We responded by strengthening our American manufacturing capabilities and expanding our network of trusted domestic suppliers.

Our NDAA-comliant supply chain has become a significant competitive differentiator, allowing us to capture market share from foreign competitors who can no longer serve defense and government customers. Our manufacturing expansion has been transformational with overall facility square footage increasing from 36,000 square feet last year or 2 years ago to 254,000 square feet in Utah and across new locations in Florida, Georgia and California. Our Salt Lake facility now operates at an impressive capacity, having produced 50 Black Widow drones per day, proving the ability of producing 1,000 drones per month on a single shift. The facility has room to triple the manufacturing lines and add additional shifts.

Our FlightWave facility in Torrance can produce 125 Edge 130 drones per month using only 1/3 of its available space. Additionally, our Valdosta, Georgia facility provides 155,000 square feet dedicated to our expanding Blue Ops maritime production capabilities and room to produce more than 100 boats per month. This strategic expansion positions us to meet accelerating customer demand while maintaining our commitment to quality and security standards. During the quarter, we triumphed when faced with the challenge of rapidly scaling production to meet accelerating customer demand and still maintained our rigorous quality standards. This record quarter. We also expanded our manufacturing partnerships, most notably with Hodgdon Shipbuilding to ensure ability to quickly pivot for growing demands across all operational domains.

Our expansion into maritime operations through Blue Ops represents perhaps our most significant operational advancement, extending our family of systems approach beyond the air and land domains to uncrewed surface vessels. These USVs leverage the same autonomous technologies and secure communications that have made our aerial platform successful while addressing the growing demand for maritime domain awareness and operations. The partnership with Hodgdon Shipbuilding brings proven shipbuilding expertise to our advanced autonomous capabilities, creating a unique value proposition in the maritime defense market. This operational growth has truly placed us in prime position for the future where the factory is the weapon.

I'm sure you may have some follow-on questions, but first, I'll turn the call over to Christian to discuss our financial results, after which we'll take questions. Christian?

Christian Morrison: Thank you, Chris. I'm pleased to present Red Cat's financial performance for the fourth quarter and full year 2025, which represents a transformational period in our company's growth trajectory. For the fourth quarter of 2025, revenue was $26.2 million, up $25.0 million year-over-year and up $16.6 million (sic) [ $15.6 million ] sequentially as deliveries accelerated. This growth was driven by robust defense and government customer demand, our expanded program wins and our ability to rapidly scale production for mission-critical requirements. Gross margin was 4.2%, up 85% year-over-year and down 2.4% sequentially, reflecting mix and ramp dynamics typical of our growth phase. For the full year 2025, revenue was $40.7 million, up $25.1 million year-over-year.

Gross margin was 3.1%, up 332 basis points year-over-year, partially driven by scale benefits and manufacturing improvements. Gross margin can be volatile on a quarter-to-quarter basis due to revenue levels that include fixed costs reflected in our cost of goods sold and investments in productions that are not yet at scale. We are continuously implementing more efficient processes and procedures that will enable us to capitalize on the expected increased demand and growth. Our ability to deliver and perform has remained strong alongside our focus on rapidly scaling operations, reflecting our disciplined approach to cost management and the premium value of our American-made secure drone platforms.

Operating expenses in 2025 were $67.8 million compared to $32.9 million in the prior year. This increase in operation -- in operating expenses were focused, planned and deliberate to enable us for the accelerated growth we experienced in 2025 and more importantly, for further growth expansion going forward. We increased our headcount by 85%, which primarily included increased engineers and corporate headquarter functional positions. Research and development expenses were $17.9 million compared to $8.1 million in the prior year. This increase in R&D investments is focused on advancing our core platforms, developing new capabilities in artificial intelligence and machine learning and enhancing the interoperability of our family systems across air, land and maritime domains.

Our investments in the business demonstrate the inherent value of positioning and the pricing power that comes with being a trusted domestic supplier in the defense market. Regarding our investment priorities, we've made strategic investments across multiple areas to support our growth trajectory and maintain our competitive advantages. We remain focused on deploying capital across 3 key areas. The first area of focus is our USV division build-out, which is estimated to be a $30 million to $40 million investment to fully operationalize the division. Second, we remain focused on strategic acquisitions; and thirdly, increasing inventory and managing our supply chain to meet customer demand.

One of the most notable improvements in our financial profile has been our improved cash position and working capital management. Our cash increased from $9.2 million at the end of 2024 to $167.9 million at the end of 2025, providing us with substantial financial flexibility to pursue strategic initiatives and capitalize on market opportunities. These results demonstrate Red Cat's evolution into a premier defense technology company with the financial strength and operational capabilities to capitalize on the tremendous market opportunities ahead of us. Our working capital position has strengthened considerably, driven by our enhanced cash position, healthy AR and strategic inventory investments.

We increased our inventory from $13.6 million to $30.4 million during 2025, reflecting our proactive approach to supply chain management and our commitment to meeting accelerating customer demand. The strategic nature of this inventory build becomes especially important when considering the supply chain requirements and the extended lead times for specialized components in the current regulatory environment. Looking ahead to 2026, we're positioned for continued strong performance driven by several key factors that reinforce our confidence in Red Cat's growth trajectory. While we are not providing annual guidance at this time, we expect to maintain revenue momentum throughout the year. Our revenues are supported by our expanding and increasingly diversified customer base and growing international presence.

When we gain additional visibility as we progress throughout the year, we look forward to updating the market. We are also being mindful of the ongoing geopolitical developments that are currently in the headlines. We are also influencing our international expansion plans, particularly in the Middle East and Asia Pacific region. While current allied relationships remain strong, changes in defense priorities or procurement policies could affect the timing or scale of international opportunities. We're also monitoring potential changes in defense spending priorities as new administrations and congressional leadership evaluate budget allocations across different military capabilities. And with that, we're now happy to answer your questions. Operator, will you please open up the line for Q&A?

Operator: [Operator Instructions] Our first question comes from the line of Austin Bohlig with Needham.

Austin Bohlig: Congrats on the solid Q4 execution, guys, and it seems like the pipeline is really strong. Understanding you guys aren't giving kind of formal guidance, which I think is prudent, there seems to be a ton of tailwinds, everything from SRR to this bold opportunity, drone dominance now with this really unique opportunity in Ukraine. Any way you can give us some kind of different scenarios on what 2026 could look like?

Jeffrey Thompson: Yes. And we don't want to get ahead of our skis again. But I mean, there's a range from all of you out there between $100 million and $170 million, very wild -- crazy goalposts right now. We're fine. We're very comfortable in the top half of that, but we're not ready to commit to it until we get contracts in hand to give our official guidance.

Austin Bohlig: Okay. No, that's fair. And then just wanted to dive into this new Ukraine opportunity. This seems pretty incremental. Do you guys have any idea of like how many you could be potentially replacing?

Jeffrey Thompson: Yes. Well, let me -- I'm going to have Chris Ericson answer that because he just got back last night, and he was in the room when they notified us.

Christian Ericson: Yes. So we were there with the war fighters and the guys who are collecting all the data there, and they came back and I asked them the question, they said 350,000 ISR drones a year, Chinese ISR drones is what they're going through a year on the Ukraine front, a massive number.

Austin Bohlig: Wow, wow. So a big opportunity there. I guess kind of lastly for me and more just kind of want to touch on all businesses, the boat segment. Obviously, what's going on in Hormuz. Have you guys noticed any sort of increase in maybe RFP or interest just given the heightened conflict in the waterways or anything you could talk about there?

Jeffrey Thompson: Yes. So Austin, you were at Innovation Day and 2 days later, the war started. And our biz dev team, all of our different teams have been getting stuff coming at us in every which way and direction some people calling, asking panic questions, what can we get here and now? As things calm down a little bit, it looks like there's going to be some pretty massive RFPs coming out of the Gulf states. They won't take as long as traditional RFPs. We're seeing an uptick in some Navy inquiries that were at Innovation Day. We are hearing a lot about counter. People want counter.

As I explained in my prepared comments, the Variant 7 has a great counter configuration with the ACS Bullfrog, which can take down FPVs and also can take down Shahed's at close range. And that combined with the Aeon's Zeus is something we're going very quickly at, and they're ramping very rapidly to be able to be a great solution, a counter solution for the Shahed's. And they also don't require a pilot like a lot of the Ukrainian solutions to take down a Shahed. So a lot of great tech coming out of Ukraine for counter Shahed's, but we think that we can also help dramatically in the Strait of Hormuz.

And you got to remember, this is -- everyone is talking about how this is so urgent right now in the Strait, but we believe that the Strait is going to need to be protected for not years, forever from now on. No longer is it going to be acceptable for the world to be held hostage by that one gap in small area there between the Persian Gulf and the Gulf of Oman. So we think this is a very long-term solution is to not have billion ships escorting tankers.

We prefer to do it -- we prefer to do it with 30 or 40 USVs, 10, 20 on each side and/or doing port protection being close to the shore of Iran to make sure that nothing is coming out with our counter capabilities.

Austin Bohlig: Well guys, keep up the great work.

Operator: Our next question comes from the line of Mike Latimore with Northland.

Mike Latimore: Sorry, I'm in an airport, so it might be a little bit noisy. I apologize. So I guess -- yes, congrats on the strong year. That was great. As you think about the full rate production contract, is that something that you would anticipate getting sort of one main order? Or would there be separate tranches over there?

Jeffrey Thompson: Are you talking for the Black Widow with the SRR program?

Mike Latimore: Yes, sorry. Yes, exactly.

Jeffrey Thompson: Yes. Okay. Because there's a -- we're going into full rate production, hopefully very soon with the boats also. So yes, great question. So as Austin alluded to earlier, there's an influx of orders related to Epic Fury. We're expecting, and again, not going to give dates to have our new OTA full rate production contract any day. We -- there is some possibilities of getting some immediate orders for Epic Fury, which might delay a week or 2 the other contract.

But we're progressing the ship every month still for SRR and things are looking fantastic with the SRR program with their funding and now with Epic Fury and a lot of other needs that we're hearing out of the Department of War for Black Widows.

Mike Latimore: Excellent. And I think you -- in your prepared remarks, you talked about anticipating an order for the USV in the second quarter, I believe. I guess can you give a little more color there in terms of type of customer region, that sort of thing?

Jeffrey Thompson: I'm sorry, I don't know which order in the second quarter you heard.

Mike Latimore: I thought you said something about a USV -- or anticipating a USV order in the second quarter. No?

Jeffrey Thompson: No, we did not say that, but we are hoping -- people are very interested in our USVs. There's a lot of urgency around our USVs right now. We were previously going to use our first 15 for demos only. And now we're going to -- hull # 6, which is just coming out now today. Hull #6 from 15 are now going to be hopefully shipped to customers as quickly as we can make them.

Mike Latimore: Excellent. And last thing on -- you talked about getting to 1,000 drones a month. Would you sort of start building to that rate even before having the contracts?

Jeffrey Thompson: We're there. We're doing that now.

Operator: Our next question comes from Ashok Kumar with ThinkEquity. Looks like we lost Ashok there. I don't see any more questions. And with that, I'll pass it back to management.

Jeffrey Thompson: Great. Well, thanks, everybody, for coming on. We had about 400 people on this call today. A lot of exciting stuff happening across the globe. Chris Ericson's great news that we'll be working very hard on quickly and scaling to help fulfill all the things that are going on. Again, we will not be waiting for an official quarterly call to update people on guidance. As soon as we have our contracts in hand, we will get that information out to the market. We're very excited. We still believe that every quarter is going to be a record going forward, and we're excited to get back to work. Thanks again.

Christian Ericson: Thank you, everyone.

Operator: This concludes today's webinar. You may disconnect at this time. Thank you, everyone, for your participation.

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