AeroVironment (AVAV -2.38%), a provider of unmanned systems and defense technologies, reported results for Q1 FY2026 on September 9, 2025. The headline news was a record quarterly revenue of $454.7 million for Q1 FY2026, driven largely by the recent BlueHalo acquisition. Profit margins were compressed by large non-cash amortization and integration expenses. Overall, the quarter showcased strong top-line growth and a significant backlog expansion, but profitability and cash flow were negatively affected by integration and acquisition costs.

Business Overview and Strategic Priorities

AeroVironment is known for developing unmanned aircraft systems, robotic platforms, and defense technologies used by military and government customers. Its core strength lies in autonomous systems, including drones and related products like Switchblade loitering munitions. The BlueHalo acquisition immediately broadened AeroVironment’s focus into new areas such as directed energy (energy weapons), space technologies, cyber solutions, and advanced radio frequency (RF) and electronic warfare (EW) systems.

The company’s current strategy centers on innovation, integrating advanced technologies from BlueHalo, and meeting the evolving requirements of defense customers. Key performance drivers are its ability to win and scale large government contracts, continuous product development in areas such as artificial intelligence-enabled drones and electronic warfare, and the efficiency with which it integrates acquisitions and expands production capacity. Strong relationships with the U.S. Department of Defense and allied governments are also a cornerstone of AeroVironment’s business, guiding both growth and technology investment.

Quarterly Results and Developments

The quarter set a new revenue record primarily because of the BlueHalo acquisition, which closed on May 1, 2025. Legacy AeroVironment grew its organic revenue by 16%. The result reflected both acquisition-driven expansion and organic demand for the company’s established unmanned systems.

Performance by business segment revealed most profit contribution continued to come from the Autonomous Systems area. That segment, which includes legacy drone and loitering munitions products as well as BlueHalo’s unmanned offerings, posted $285.3 million in revenue. The newly created Space, Cyber and Directed Energy segment brought in $169.4 million in revenue, but margins there lagged as integration continued. The revenue figure represents a sharp acceleration from the prior year. Management reported that these results meant “Record revenue of $454.7 million, up 140% year-over-year; legacy revenue of $219.5 million up 16% year-over-year”

Despite the revenue growth, gross margin dropped to 21% from 43% in the prior year, a significant decline. Management attributed this to high purchase accounting adjustments, $37.4 million in non-cash intangible amortization, and a much larger portion of service revenue, which tends to have lower profit margins than product sales. Operating expenses rose sharply as well, particularly selling, general and administrative costs associated with the acquisition and integration work, which were $97.5 million higher than last year. As a result, the company posted a loss from operations of $69.3 million, compared to a $23.1 million operating profit in Q1 FY2025.

Earnings per share on a non-GAAP basis dropped to $0.32, down 64% from $0.89 in Q1 FY2025. The decrease was due to both higher costs—especially amortization and acquisition charges—and dilution resulting from the increase in shares outstanding after the BlueHalo transaction. Adjusted EBITDA, which removes many of the acquisition-related charges, increased by over 50%, indicating some underlying improvement in core cash-generating ability when nonrecurring costs are excluded. Net cash outflow from operations was $123.7 million, compared to an inflow of $28.4 million in Q1 FY2025. The cash balance, however, rose sharply to $685.8 million as a result of financing tied to the BlueHalo deal.

The acquisition also transformed the company’s future business visibility. Funded backlog at the end of the period reached a record $1.1 billion, up from $726.6 million as of April 30, 2025. This reflects both the strong order book brought by BlueHalo and continued high demand for the company’s legacy unmanned systems portfolio. Bookings totaled $399 million. Management stated that, as of September 9, 2025, AeroVironment had “Visibility of 82% to the midpoint of the FY2026 revenue guidance range” This means a large part of the year’s projected revenue comes from orders already in hand, providing a measure of predictability for the next several quarters.

The company continued to invest in research and development (R&D), with R&D expenses rising to $33.1 million. This maintains AeroVironment’s longstanding focus on developing new technologies for defense customers. Among the newer offerings are the P550 unmanned aircraft system (an artificial intelligence-driven modular drone), the JUMP 20X (a vertical takeoff and landing drone), and Red Dragon (an autonomous, single-use drone). BlueHalo’s specialties in advanced RF, directed energy, and space-qualified electronics add significant new competencies, and management expects ongoing integration of these capabilities to open further market opportunities. Still, the cost and complexity of absorbing such a large acquisition have introduced execution risk, both operationally and financially.

The period also saw significant balance sheet changes. Total assets grew to $5.6 billion, up dramatically from $1.1 billion as of Q4 FY2025, mostly due to the addition of goodwill and intangibles from the BlueHalo transaction. Share count rose by 77% between April 30, 2025, and August 2, 2025, and long-term debt increased from $30.0 million as of April 30, 2025, to $725.7 million as of August 2, 2025. The capital raised provides flexibility but also brings a substantial increase in financial leverage and dilution for existing shareholders.

AVAV does not currently pay a dividend.

Looking Ahead: Outlook and Watchpoints

For FY2026, management maintained its previous revenue outlook of $1.9 billion to $2.0 billion. It projects continued losses, with a net loss of $77 million to $72 million for FY2026, and a loss per share of between $1.63 and $1.53. On an adjusted basis—removing non-cash and non-recurring expenses—management expects EBITDA in a range of $300 million to $320 million, and non-GAAP earnings per share of $3.60 to $3.70. The company stated that visibility to the revenue midpoint stood at 82% as of September 9, 2025. But actual profitability may remain pressured until integration costs and purchase accounting impacts begin to diminish.

Key areas for investors to monitor include the pace and effectiveness of integrating BlueHalo, control of operating and working capital expenses, and the conversion of the record backlog and bookings into profitable future revenue. Management flagged that intangible asset amortization will continue to weigh on reported earnings until those assets are fully written down over several years, and cash flow from operations will require careful management as receivables and inventories expand alongside the larger business. Defense-contract timing risks and strong competition from larger established players remain watchpoints. The scale of the recent acquisition means that AeroVironment’s performance over the next several quarters will be closely tied to its ability to deliver on the promise of its expanded technology portfolio while navigating higher operating complexity and integration challenges.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.