The U.S. Drone Boom: FCC Shock + 30,000-Drone Mandate = Scale Up($UMAC Impact Stock)

What day is it?

There was several different things that came out. It was yeah, eight days ago the FCC put out news. A little bit before that, the Department of War. You might call it a Christmas present, but like a little bit Grinch style, where you know they're just like, "Well, you thought you were going to spend time with family."

Well, I like my family. What do you... Yeah. No, I'll cover the few different things real quick and then we can talk about them.

The FCC is the big one. It was expected for a long time the FCC would ban DJI drones and Autel drones based on what was in the suggestion from Congress. The FCC's language actually is an FCC ban on all foreign-made drones and drone parts. So the and drone parts is one of the big deals, but the other one is all foreign sourced, not covered countries, not DJI everywhere, not in the US. And then they went on to say parts that are not even traditionally regulated by the FAA like motors and batteries. You know, normally they don't review those. So, okay. That means no Japanese parts or Korean parts or Taiwanese parts or Canadian parts or European parts. None of them are going to get new FCC certifications. Hey, we're a US drone parts manufacturer. So really tough on the industry.

We got a lot of calls over the holidays, you know, with people being like, "All right, hey, what can we get in line, etc., etc." And we're already starting to plan how to scale faster than we were planning on how to scale before. So great news for the potential of our business. But if there I thought there was scaling risk before now there's scaling risk and government scrutiny like hurry up you know you're like what. In addition to that the Gauntlet program which is I think it's there's a website for it but it's the Department of War's like open call the the request for solicitation the RFS went out on December 17th and talked about the program and the initial feedback is due January 10th and that basically says, "Hey, look, no covered countries components at all in your drones and priority for US-made parts." The first wave is for 30,000 drones and the expected delivery starts before next summer and then it keeps ramping from there.

The NDAA is the third piece of legislation. The defense budget from the government got signed into law and in that budget it includes about $900 million for small drones. First time it's specifically called out. It includes a specific line item for PBAS which is purpose-built the traitable system where we did put out a press release congratulating all our customers that won which is all the customers that won. I don't know. That's as much as do your own math. And then inside the NDAA, there's specifically section 914, which creates a committee with the person that reports directly to the director of Department of War to review and audit the supply chain for drones and drone parts along with providing a vehicle for the government to invest directly in facilitating anything that's not at scale. So, the NDAA drives money in and a direct path to build out parts. The Gauntlet program is a consumer-driven thing that mandates US parts in scale and narrows it. And then the FCC kicks out all foreign made parts, not just for the military, but ultimately for the consumer and for delivery and for everything else. We're the largest domestic manufacturer for several categories of parts.

Do you know what's really neat? If you want, let's say we're making 10,000 motors a month. If you want to have the country have a capacity for 20,000 motors a month, it's much easier and faster for us to double than for some new company to show up, figure it out, and scale all the way to 20,000. So hardware is virtuous cycle. Like the person doing the most can do the most more the fastest.

I actually the first thing I thought of when I saw this stuff, I thought, you remember the remember the Jaws where he's they're throwing chum out into the water and then he sees the shark. He goes, "We're going to need a bigger boat."

Yeah. Luckily, we're super well capitalized. We have great customer relationships. We're already in the process of scaling because we'd been 20 people last summer. We're already at 80. The motor factories already got one shift running. So, we can split that up so they can manage two or three shifts and we have the supply chain relationships and everything else. But the FCC thing coupled with the other two things all in like a 4-day period, our whole leadership team was just like, "Well, there goes Christmas." Like, you know, because if we don't start immediately and get in front of it, then we're going to just be overwhelmed by the title wave. But, you know, we already have the hiring plan in place. We're already set up to start to go do the career fair things that we need to locally. We're figuring out and have already ordered more equipment to increase capacity. We're looking at how much supply chain to meet demand.

Yeah. Well, conveniently, we got our warehouse that we thought would last us a few years. We got in there in December. So we have 30,000 foot warehouse or 20,000 somewhere between 20 and 30,000 square foot warehouse to manage logistics. We have a almost 30,000t motor facility. We have dedicated space for component and kitting. We have dedicated space for our headsets. We did just get a sales office and it's just the right distance from our manufacturing center that the sales people won't be interfering, you know, so they're not in the same place to walk out to be like, "Hey, we have a demo." Nope. Just far enough away that it has to be scheduled. So that's good. And our sales team's great. And so we have the space to scale up and we can always get more space because of the way we've organized. So that's great news is as we roll that in, we're ready to take in the material and we got in front of it. So we have this big chunk of material already coming and now we're like, well, do we put another bigger wave behind it? I mean, yeah, we will.

No, this is like you're driving down and you're driving a car on the freeway, the racetrack. Let's take a legal scenario, the racetrack, and your foot's like you're going pretty fast and then your friend just reaches over and shoves your knee so that you like floor it. Yeah. That's where it's at. And really if we get through the scaling risk phase six months from now.

The FCC applies to all drones and all drone parts. So we've always said there's a first demand wave, which is the military, and it's right now. But if you believe in delivery drones or any of the rest of the US market, all non US parts just now require an FCC waiver. So if Amazon Prime Air is going to build drones and deploy them,

Yeah. Which thank goodness DJI makes a great product. DJI just can't get new FCC licenses. So what that means is like the Mavic 4 Pro, you know, or the most up-to-date one right now, they'll still be able to buy over the next several years. But it also sets a clock on the domestic industry to like grow up and hit price quality points that the industry is nowhere near yet. But in doing that now alternative supply chains become much less likely. So sourcing from India which was you know heavily discussed or what Apple is doing for not with the FCC. And there's real concern especially with the Olympics and the World Cup and the risk that drones pose. So, I think Yeah. So, that was specifically called out in the FCC being like, "Look, you need a lot less anti-drone if the drones can't all be taken over and controlled." They're like, "So we can." And so this is definitely a swallow of the medicine to the US industry. Like, and the FCC, the Department of War, the NDAA, everybody's like, "Well, figure out how to get it done." Like, it's a major step back.

Sure, it's possibility. Sure. But first, who's going to challenge it? Because you just automatically lost if you're in the industry, right? You're never going to see a nickel of aid from any of the government sectors if you do that. So then if a user, what the Chinese government challenges it, then they'll just figure out how to pass laws that implement the same thing. So it might get challenged and maybe the FCC doesn't regulate batteries because it's strange that they do as part of this, but it doesn't mean batteries won't have the same regulation.

Right. It might just be that it's moved from the jurisdiction of the FCC to somewhere else. Okay. Yeah. You know, so instead of worrying about legal action or caring about it, this is what the future looks like. And it was pretty clear and there's always been pretty strong bipartisan support for this. And I really think with the World Cup and the Olympics coming that there's not going to be like, yeah, these are okay. There's a waiver process and stuff. So there's some really great companies that do things. Parrot Drone, for instance. They're a French company, but you know, their drones have always been well regarded. I think they'll be able to get a waiver pretty easily, for example. And a lot of other folks will be able to get waivers for parts. You know, pretty much all the controllers use Samsung tablets.

So, how are you not like, you know, so I think the waiver process once they figure it out won't be like so onerous as to be too sticky about it. But I really this is a massive massive signal that like it's time to make drone parts in the US. And with the demand coming from the Gauntlet program of like 30,000 this summer and then another I think or 90,000

No, it's all new. These are all new orders coming. So as you see all this happen, there's a ton of I think not just Department of War but government in general mandate to say hey it's time to do drones in the US. They're too important almost like the chips act and it's very much there and this is the parts part surprise me to no end. And so the fact that people are now really paying attention to the supply chain means we have a two-year head start.

Yeah. I mean for me personally, everybody's like, "What do you think about this?" I'm like, "Well, it's a pretty dramatic step." If we survive the scaling, which I'm pretty sure we will. I mean, as a Silicon Valley startup kid, like, I'm not too worried about it. We're going to be fine. I'm like, then yeah, we're going to have a monster company here in a year or two. Like, there's just no if we don't screw it up and hold our position at the front of the pack where it's virtuous cycle because it's hardware.

We our customers have such tight timelines to meet the government's requirements that I'm actually not worried about this first wave of 30,000. We have a plan to scale into that. Where I'm really looking is, hey, what are the next chunks? Because how much more capex investment do we have to put in right now to hit phase two and phase three of those programs? Because I think we're going to be a primary supplier for a lot of components for a lot more entrance than we were before. So we have to say how are we in a position to actually be the supplier for 70% of the industry in the timeline that the industry has demand signal for because now they can't use Chinese motors. Before we thought there would be a blendover phase where we could second source and roll over. So maybe a three-year to become the 70%. But our customers now have this absolute dependency on us. And in some ways then some aspects of common defense and of the military programming building out we become you know you remember those things that talk about AI or the internet and there's like one company that's the fragile little thing that it could fall over on like that's no UMAC. So we have to be a pretty resilient peg in the ecosystem and we have to look further out now to say okay what investment do we have to start to make January February to have the capacity the talent the team in the space to deliver next October based on the demand signals and how much commitment are we willing to put at that luckily we don't really burn any money and we have like $150 million in liquid assets so if it's a 10 or $20 million decision we make it and not have our like not have it be existential for the existence of our company forever. So, we're in a really wonderful position in that regard to sit down and ask the question and not be like, well, we can't afford it, you know, we can afford it. But that's the real that's the real gotcha.

Yeah. So, we made the investment assuming this would happen, right? Had this not happened, it'd be way more panicky. Drone Nerds has a few positive things. First, because of the potential for the ban, they probably got a ton of business last quarter. You know, everybody who wanted to stock up before the uncertainty probably stocked up. So, first I'm guessing lot of engagement. Second, they can still sell all the DJI stuff, but what it really does now is as people are looking to fleet management and there's a lot more uncertainty. People aren't just going to go to DJI's website and buy five more drones, they're going to go to Drone Nerds and say, "Okay, as I look for software programs to do my power line inspection fleet, what drones are the best drones for me to start to integrate as this rolls out?" And so I think it's going to push their margins more positively, and drive more customers back to them, lean on their expertise and service and software suites. So I think this will ultimately I always thought this would be a really positive driver for their business because there's now more need for their specialization and their understanding the whole marketplace and all the different products and how they solve the customer's problem than there was when it was always just go buy DJI.

So, if you believe the Department of War wants to buy a million drones a year, the TAM is between 500 million and a billion dollars a year in revenue for our company three years out. And that's just for the Department of War. The FCC opened up the domestic TAM, which you figure is probably another million drones a year at least for us. So, it's probably another 500 billion dollars a year. So, our three-year TAM, based on what you see out there, is somewhere between 500 and a billion a year in revenue. And our five-year TAM is probably between one and two billion in revenue, assuming we just do the parts we're doing now, right? Do other stuff. Yeah. That's just assuming we're you know we feel good about the powertrain that we're not interested in any kind of other growth vector or solving customers other problems.

Well, I look at it a little differently, you know. You don't eat dessert before dinner and just brought out a real big dinner plate. So, I'm not going to worry too much about dessert till we finish dinner. But we're hungry. Yeah. So, you know, but yeah, dinner's big enough.

Yeah. I think, you know, how many times do you have to get lucky before people think you're regularly lucky? My wife likes to joke I have a few horseshoes buried in places no one knows about. This just feels like a continuation of that. You know, in all seriousness like a lot of things have gone the right way that are and then I think our team's done a really good job of stopping me from going down a bunch of rabbit holes you know they'll often look at me and be like I'm not that I'll be like okay so I collectively I think we've made a lot of really good decisions some of them very hard.