AeroVironment, Inc AVAV Q2 2026 Earnings Call

Thank you, Denise. Welcome everyone to our second quarter fiscal year 2026 earnings conference call. I'll begin by summarizing our quarterly performance followed by Kevin who will review our financial results in greater detail and then discuss guidance for fiscal year 2026. After this, Kevin, Denise, and I will take your questions. I'm pleased to report excellent quarter financial results while setting new records in multiple areas of our business. Despite the challenges posed by the elongated US government shutdown, we delivered excellent financial results and achieved several strategic milestones that we believe position AB for strong sustained growth well into the future. During the quarter, we introduced several innovative products and secured multiple large long-term contracts. A testament to a recipe for innovation and proof that our strategy is winning. The total ceiling value of new contract awards during Q2 reached $3.5 billion, a historic record achievement by AB. This also resulted in record second quarter bookings of nearly $1.4 billion. These achievements underscore that our strategic investments are delivering results and progressing our business to new heights. We also made significant progress on multiple programs of record that we believe will solidify our leadership in all of the domains in which we participate: air, land, sea, space, and cyber. With strong topline growth expected on the horizon, we are executing on our expansion plans to further scale our manufacturing capacity and meet accelerating demand across several of our products and programs. Our proven execution capabilities combined with a robust pipeline of orders and operational readiness reinforce our confidence in achieving our industry-leading long-term growth objectives. At the same time, overall, the integration of Blue Halo is exceeding expectations, strengthening our capabilities and positioning AV as the premier next generation defense tech company. Let me summarize our key messages for the second quarter of fiscal year 2026, which are: first, awards with a total contract value of $3.5 billion bolstered bookings to reach an all-time high of nearly $1.4 billion driven by key program wins that support AV's long-term growth. Second, we also achieved another record second quarter revenue of nearly $473 million. Third, we launched several new innovative products aligned to our customers' highest priorities and continue to execute on expanding our manufacturing capacity to meet accelerated demand. And fourth, we're raising the lower end of our fiscal year 2026 revenue guidance and now expect revenues between $1.95 billion and $2 billion. Beyond these strong results, the defense industry is at an inflection point. AV is not just prepared to lead. We are ahead of the curve, setting the pace for everyone else to follow. Let's not forget the US Department of War is firmly committed to shifting their procurement practices towards agile, commercially available products and capabilities, favoring companies that invest their own capital, develop disruptive solutions at speed while transitioning them to full rate production and scaling capacity quickly. This validates the business model AV has embraced not just in the past few years but over multiple decades. AV's business model and strategy have always been to invest in innovative and disruptive solutions ahead of customer requirements, scale their production rapidly, and deliver decisive advantages that enable our customers to acquire capabilities quickly. Looking ahead, cost-efficient autonomous drones and counter drone systems enabled by AI and machine learning will define the battlefield. Known for unmanned aircraft systems and leading AI integration, we believe AV is uniquely positioned to capitalize on this transformation. AV Halo, our open architecture software platform, is designed to unify command and control, intelligence analysis, synthetic training, and autonomous targeting across all domains, creating advanced communication among critical assets during conflict. By integrating AV Halo into our portfolio and other platforms, we're delivering a powerful hardware-agnostic ecosystem that enhances the speed, autonomy, and interoperability of AV's platforms for our customers. Moreover, we expect that AV Halo's ability to enable competing products to operate on a common command and control software system will play an increasingly crucial role in US defense procurement decisions. Our investment and development in AV Halo is just one example of how AV is ahead of this transformation and is well positioned within the industry. Our level of internal R&D investment and proactive capex strategy enable us to accelerate development and scale production ahead of demand. Using internal R&D to advance new products allows our technology to outpace our peers and leads to a faster time to market. We believe this core competency is a key differentiator that allows us to stay ahead of our customers' needs. Unlike traditional contractors that wait for contract vehicles before building prototypes, we innovate first, bring solutions to market faster. These forward-looking investments are not only fueling the launch of new products, but also translating into significant contract wins, reinforcing our ability to capture emerging opportunities. For example, in our autonomous system segment, our P550 was recently down selected by the US Army's long range reconnaissance program or LRR, estimated to be worth approximately $1 billion. Internal investments made on this group two unmanned solution allowed us to quickly meet the needs and requirements included in the LRR program and we're confident that our P550 is the best solution for the US Army. We've also prudently invested in upgrades to our group 3 unmanned aircraft system Jump 20 and Jump 20X, which was recently selected as one of four options on the US Navy's basic ordering agreement. This significant achievement allows AB to compete for specific US Navy intelligence surveillance and reconnaissance or ISR task orders over the next 5 years in a large and rapidly growing UAS maritime defense market. In addition to these domestic achievements, we're also expanding and experiencing an increase in international demand. Within our autonomous system segment, we were recently awarded an $874 million sole source IDIQ contract from the US Army for international sales of our small UAS products to include Raven, Puma AE, and Puma LE. This IDIQ contract vehicle also allows for the sale of our Jump 20 medium UAS and Titan series of counter UAS solutions. Our strategy is driving tangible results which is evident in the successful product launches this quarter. We recently unveiled several new offerings including our next generation of Switchblade loitering munitions with our Switchblade 600 Block 2, Switchblade 400, and Switchblade 300 Block 20. These products were mostly internally funded and developed quickly, helping to expand the Switchblade product line and create long endurance multi-domain anti-armor solutions, ensuring warfighters maintain tactical overmatch in contested environments. We also debuted our next generation Vapor compact long endurance helicopter or Vapor CLE. This group 2 VTOL UAV is fully autonomous and can deliver up to 2 hours of flight, which is double the endurance of typical group 2 quadrotor UAV platforms. Our newly integrated Nvidia Orin onboard computer makes the Vapor CLE fully autonomous and enables automatic target recognition through AV Halo Vision computer vision software and AV Halo Wizard artificial intelligence machine learning processing suite. On our last earnings call, we discussed the significance of our software solution AV Halo. Since then, we have announced that AV was awarded the US Army's contract for human machine integrated formation or HMIF program. This award accelerates fielding of multi-domain robotic formations using AV's unified interface of command and control, tactical awareness, and autonomy solutions at the tactical edge. As part of this win, AV is going to be the lead software and system integrator for robotic systems on the edge of the battlefield. This award also validates the strength of our approach to software solutions, common controllers, and user interfaces, and underscores the Army's confidence in AV's ability to deliver mission critical solutions. We also just released two new products from the AV Halo suite, including AV Halo Cortex, a next generation intelligence fusion and analysis environment, and AV Halo Mentor, a warfighter readiness suite that leverages virtual and augmented reality weapons training and mission rehearsal. AV Halo will continue to roll out more products and offerings that position AV as the core and leading developer in the space. Furthermore, we recently announced a collaboration with Open JAUS US or Open JAWS. Open JAWS is an open architecture software framework that allows robots, drones, missiles, and ground vehicles to speak the same language. This integration extends AV Halo compatibility to seamlessly incorporate robotics, allowing original equipment manufacturers to integrate their platforms faster and more easily. This collaboration strengthens AV's role as a driver and leader of the industry's push towards interoperability. In addition, AV won several key awards in our space, cyber, and directed energy segment with critical new contracts in laser communications, space related satellite communications, and directed energy. For example, AV received a $240 million contract for our long-haul laser communication terminals, one of the largest to ever be awarded in this category. This disruptive innovation is moving from lab to orbit, a critical step for AV and the industry. Long-haul laser communications use precision optical links to move enormous amounts of data between satellites faster, more securely, and without the vulnerabilities of traditional radio frequency or RF signals. This capability is critical because it creates a resilient high bandwidth backbone for future space networks, ensuring warfighters and decision makers get the right information instantly, even in contested environments. This win continues to push AV to the center of innovation in space. Additionally, AV secured a new firm fixed price option for two Badger phased array systems under the SCAR or satellite communication augmentation resource program. This program represents a tremendous growth opportunity for AV as more Badger systems move into production. Lastly, AV was awarded a contract valued at $499 million by the US Air Force Research Laboratory to develop material technology and deploy protective solutions to the front lines to guard warfighters against exposure to harmful electromagnetic radiation. Work under this large program known as Helmsman will help deter against directed energy strikes in the future. We continue to set the standard in advanced protective technologies and directed energy defense, positioning AV as a clear leader in safeguarding warfighters against emerging threats. Further, our disruptive solutions continue to position AV as a leader in next generation defense. From our family of Switchblade loitering munitions to advanced counter UAS solutions, we're redefining the battle space. We have unseated incumbents with our Locust laser weapon system and secured key wins like Freedom Eagle 1 or FE1, delivering cost-effective kinetic counter UAS solutions for group three and four drones and beyond. With our AI and machine learning driven platforms, we believe AV continues to set the industry standard, positioning us to fully capitalize on the generational opportunities ahead. During the quarter, we continue to form additional strategic alliances and collaborations that will help AV expand domestically and internationally. In September, we signed a memorandum of understanding with Taiwan's National Chungshan Institute of Science and Technology or NCSIST to collaborate on autonomous systems and technology to support Taiwan's defense and security needs. We also signed a memorandum of understanding with Korean Air to advance medium and large unmanned aircraft systems to the Republic of South Korea. Both of these agreements underscore our expanding international presence and steadfast commitment to providing flexible mission ready solutions for our customers. Both agreements are centered around AB's Jump 20 and Jump 20X systems. These systems provide the kind of operational versatility that continues to grow in popularity in international markets. We also announced a collaboration with Grand Sky to establish the foundation for a golden dome for America limited area defense architecture at Grand Forks Air Force Base in North Dakota. This collaboration is significant as it marks the first deployment of AV's critical counter UAS solution set to secure a US Air Force base, creating a model that can be replicated across other critical US national security sites. As the demand for our innovative offerings accelerates, we recognize the critical importance of scaling quickly. Since last year, we have been focused on securing a new facility in Salt Lake City to expand our Switchblade manufacturing further. Plans are progressing on a 100,000 square foot facility that will allow for multiple Switchblade lines and provide additional capacity. This new factory has the potential capacity to produce over $2 billion worth of Switchblades or other AV products per year. We anticipate this factory to be operational about a year from now. Beyond expanding our own footprint, we're also actively strengthening our supply chain to support anticipated demand, continuing to stay ahead of the market. As part of our distributed approach to manufacturing for resiliency and risk diversification, we now have manufacturing sites operating across 12 different states, reinforcing our ability to scale rapidly and reliably. In addition to scaling operations, we're transforming the defense technology landscape through our acquisition of Blue Halo. We are already realizing meaningful synergies from the Blue Halo acquisition, which Kevin will discuss in further detail. Together, we're building next generation platforms that fuse counter UAS, space technologies, directed energy, electronic warfare, cyber, and integrated software solutions, creating a suite of capabilities unmatched in the industry. This combination accelerates innovation and continues to position AV as the disruptor, driving rapid change in a market hungry for speed, agility, and advanced solutions. We are reshaping expectations and setting a new standard for what can be delivered to the US and our allied forces. Before turning the call over to Kevin, who will provide more financial details on our second quarter results, let me conclude with the following comments. Despite a challenging environment, we delivered a strong quarter. Our continued investment in R&D and capacity expansion is translating into strong growth and key program wins and positioning AB for even more growth in the coming years. We recognize there is a generational shift in the US Department of Defense's procurement strategy and product needs. Our offerings are designed to meet warfighter requirements and our strategy is fully aligned with these new practices. We're executing on manufacturing expansion and are confident that we can meet increased demand. Integration of Blue Halo is progressing well and this acquisition is helping to establish AV as a next generation defense technology company with unmatched capabilities across multiple domains. With that, I would like to now turn the call over to Kevin McDonald for a review of our second quarter financials. Kevin.

Thanks, Kevin. Before turning the call over for questions, I'd like to reiterate some of the positive momentum entering the third quarter of fiscal year 2026. First, record second quarter awards with a total contract value of $3.5 billion bolstered bookings to reach an all-time high of nearly $1.4 billion driven by key program wins that support AB's long-term growth. Second, we also achieved another record second quarter revenue of nearly $473 million. Third, we launched several new innovative products aligned to our customers' highest priorities and continue to execute on expanding our manufacturing capacity to meet accelerated demand. And fourth, with 93% visibility to the midpoint of our guidance range, we are raising the lower end of our fiscal year 2026 revenue guidance and now expect revenues between $1.95 billion and $2 billion. Our strong second quarter results reinforce our confidence in AV's future and our role in shaping the next era of defense with integrated capabilities across multiple domains of modern warfare, advanced technologies, and the ability to scale rapidly. We believe we are well positioned to meet the Department of War's highest priorities and sustain significant growth in a demand-driven market. The Department of War has reiterated a sharpened focus on speed, scale, and commercially-driven procurement strategies, all of which plays directly to AB strengths. This has been our strategy from the very beginning: investing in innovative solutions ahead of demand, scaling rapidly, and driving innovation to deliver decisive advantages for our customers. Our alignment with these priorities, combined with our successful track record and best-in-class production capacity, creates a powerful competitive advantage and positions AV as a trusted partner ready to deliver at the pace the mission demands. I want to thank our employees, shareholders, and customers for their continued commitment to AV and our mission. We're honored to support the most critical defense missions at this pivotal moment and we're ready to seize the tremendous opportunities ahead. And with that, Kevin, Denise, and I will now take your questions.

Hi Greg.

Well, I think mix is going to be a big part of that as Kevin just mentioned about the Badger program and going into fixed price product revenues. Some of our other programs and Locust and things like that being product revenues and a ramp up in delivering across the other business units increasing the proportion of product revenues versus service revenues. We don't see the service revenues growing significantly in the second half whereas the product revenues are going to drive most of that growth. So that's going to give us better mix and that's why we're going to be able to achieve the high 30s adjusted gross margins by the fourth quarter. And Greg, let's also keep in mind that we have secured nearly $3.5 billion worth of almost all sole source IDIQ contracts that allows us now to receive task orders underneath those contracts once the funding from the big beautiful bill and the budgets for the Department of War comes through as a result of the shutdown that has been delayed. Those product revenues and task orders are going to be received in the next one or two months, that's what we expect, and we want to convert those to revenues. So the volume goes up, the mix improves, and also the profile of the profitability of some of these products and businesses are going to improve, and that's precisely what we expected at the beginning of the fiscal year.

Anthony, yes, of course. Be glad to provide some more color there. We certainly have a significant amount of opportunity for growth and value creation here in the next not only a couple of quarters but next few years. We're positioned really, really well. If you look at the key catalysts for growth, loitering munitions of course we continue to grow that category, the Switchblade and one-way attack drones that are in that bucket. Our RF counter UAS solutions, the Titan family of products, is another contributor of significant growth year-over-year. Our medium UAS product line, which is Jump 20 and Jump 20X, is another category of strong growth and contributor to our growth in general as well as profitability. Our P550, we expect significant orders for that in this third and fourth quarter of this year. The US Army is intending to purchase a lot. There's a lot of dollars in the budget for that and we expect to have a fairly large share of that spend with the US Army and we're also lining up a bunch of international customers for that product line. The SCAR and Badger program and product is also transitioning to production and we're going to deliver more CL numbers and we're going to ramp up revenue. The profile of that revenue is higher margin as well as the volume is higher, that helps. So in a nutshell, if you look at across our portfolio, we've got growth across almost every one of our key product lines. Some of them are contributing to some smaller extent, but overall we're very well positioned.

versus larger ones, but they're all growing quite rapidly. One area that may not grow as much is our cyber security business, and that's primarily because it's a customer-funded engineering services and software solution business that really doesn't ramp up aggressively in terms of growth. But overall, we're very pleased with the performance. We're looking for multiple quarters and years of growth. We're positioned really well with the shift in the US DoD and the administration strategies. The kind of business model and products and go to market strategy that we have is precisely what the US Department of War is looking for and we're positioned incredibly well. There's going to be a lot of money spent. It is really hard to predict exactly how much. There's a lot of demand coming our way and we're getting ready for it as we speak.

Thank you, Anthony.

Good afternoon, Lou. Afternoon.

Thanks, Louie. I personally attended the Reagan National Defense Forum this past weekend. The overall sentiment is that we are the role model company that the US Department of War and the current administration wants to see a lot more of. We're setting the pace for everyone else. The procurement strategies are shifting to companies that develop things on their own dime. They're doing it ahead of product program requirements. They're doing it at agile and warp speeds. Then we're transitioning it to production quickly. They're focused on all the right areas that the US Department of War needs and has major capability gaps. These are critical areas of capability gap, and it's required for the future defense of the US and our allies. We believe we're positioned incredibly well, and I think we're going to see continued demand come our way because of the fact that we can also produce at scale. Today we're one of the very few companies in these categories that actually has the capacity today and continues to expand it even further to deliver reliable, battle-proven products to our customers at scale. That is a huge competitive advantage that we have compared to everyone else in the market and we're setting the pace for everybody. So I think the sentiment is very positive and strong for AV.

So, Louie, I can only speak to that program at a very high level due to sensitivity of that program and customer. We are incredibly delighted and pleased with the success that we're having in long-haul laser communication terminal. Essentially, we all know from the conflicts of Ukraine that RF communication is very susceptible to jamming. Every satellite that the US has in space essentially is susceptible to that jamming problem. If we cannot control and talk to our satellites, especially in the geosynchronous satellites, we've got a major problem. Those assets are not useful. And we are one of the only companies that we know of that has been awarded a contract of this magnitude, up to $240 million, to actually provide the laser communication terminals to overhaul and upgrade the US geosynchronous satellite constellation for national security. That is a massive, massive step forward for a company and our nation. And we beat many of the major prime contractors in that competition. And so there's certainly a lot more upside on that contract because we're just beginning to deliver systems. We haven't delivered much yet. We continue to work with the customer. Our systems are performing really well and it takes a while for that to happen. That's part of the program. So we're very excited and there are options for them to increase that significantly.

No. So, Louie, vast majority of that contract is not funded yet. As Kevin said earlier, one of the reasons why our funded backlog is nearly the same as last quarter and it did not grow as much is because there's two things that have happened. One, the government shutdown put employees of the government not coming to the office and being able to actually put contracts and award things. But the bigger problem was that because of the continuing resolution in the budget that just passed with a big beautiful bill, those dollars have not made it into the accounts of our customers to be able to then award task orders against those IDIQs. So, we expect a significant number of additional funded task orders in Q3 and Q4. All of which is going to improve our backlog and will allow us to deliver more products and more revenue in third and fourth quarter this year. Additionally, it will set us up really well for fiscal year 27. We're not ready to provide any guidance for that yet, but that is going to be benefiting from the demand that's coming our way in terms of task orders and more funding.

Thank you, Louis.

Yeah. And their product mix is going to increase over their service mix. So that is going to drive their EBIT margins up.

Thank you, Peter.

Hey Andre, how are you?

So, Andre, yes. The nearly $900 million sole source IDIQ contract multi-year of course from the US Army for our products now includes Raven, Puma, Puma Allie, but we could also sell our Titan counter UAS solutions as well as potentially in the future the Locust directed energy solutions. This is a significant milestone because the US Army could have purchased these things under the existing contracts that we have, but they chose to actually add an additional contract with an additional $900 million nearly ceiling for it to allow us to deliver more products over the next three to four years to our international customers. So that's very positive news. Secondly, the margins for international sales historically and in the future will continue to be slightly more favorable than the domestic markets. Those customers do not buy as much as US DoD and generally the margins are a little bit better. If we sell FMS, the margins are not a lot better. The best margins are international DCS sales, but FMS has less expenses too because we do not have the responsibility for exporting it. The US military does. So we deliver the product to the US military and they deliver that to the international customer. The market opportunity internationally is massive for us. Really we're at the beginning phases of that for our counter UAS, for directed energy, for our Switchblade for our one-way attack, and for our SCAR Badger systems that we have in our product portfolio. We're just scratching the surface on those items and some of them are literally just starting with no international sales. The area we're really strong is our small UAS, but we've got tremendous potential here. I expect the international market over the next several years to grow significantly and be a major contributor.

Sure. So, Andre, as we keep building these new factories, we're also improving a lot in terms of automation and ability for us to produce and ramp up production. So, we're ramping up production for Switchblade significantly already. We've already doubled and tripled every year for the last couple years. And we're going to continue to improve it even further. The new facility that we have now in Salt Lake City, which is going to come online later next calendar year, towards the end of next calendar year, has the potential to go above $2 billion worth of production with multiple shifts. If we get to that level, it's going to be well over a $2 billion factory. And I expect that to even go higher than that because there's so much more potential room for growth in terms of automation and efficiencies in the production processes. Lastly, that factory is also very flexible. We can produce any variance of Switchblade, but we could also produce other products such as our one-way attack product solutions and our non-lethal UAS and other platforms that we have such as Freedom One, etc. So we're setting the factory to be flexible and agile for lots of our products and we can shift production on that factory as we go forward.

Thank you, Andre.

Yes, of course, Trevor. So, let me provide you some color on that. First of all, I'm really excited about the AV Halo suite of software solutions. It's not just one particular product. Think of it as a very robust and broad portfolio of solution sets, a software stack and an ecosystem that provides lots of different capabilities with different modules such as AV Halo Command, AV Halo Cortex, AV Halo Pinpoint, etc. So, we launched two new modules, and we're going to continue to launch more new modules to that. The best way to think about it in a very simplistic way is like the Microsoft Office suite of products. Excel, Word, Outlook, all these different modules are underneath the Office suite. The same thing applies to AV Halo. AV Halo has several modules. In terms of deployment, we already have thousands, if not tens of thousands, of some of the modules already deployed in the field. That is the beauty of our system that is all interoperable and integrated. And so what we've done is try to actually bring the ecosystem cohesively together and mesh it all together into one umbrella software solution. Secondly, it is also a very open architecture. We can integrate with any other platform including competitor platforms and we can also talk to any other systems and other battle management systems. And so our belief is that our solution set is incredibly not well understood yet and we have a long way to go in terms of the opportunity set here over the next several years. One example of that success story is in my comments about the US Army who selected us for the Human Machine Integrated Formation (HMIF) program record. That is a very strategic and critical program. We competed with very large companies and small companies that are trying to copy our model and we won. The US Army selected us. That means that the future battle space on the edge of the battlefield, the systems and the controllers that they're going to use to operate these robotic systems whether on the ground or air or on land or sea, is going to be ours. And we are open, interoperable, and we will integrate with many other systems that are there. And so we have a lot more coming in this area and I can't be more excited about it in the future.

We support not only our own platforms, we support more competitor platforms today than our own actually. And that's a testament to how open we are with our architecture and our platform for our customers. And that's one advantage that we have that most other systems are not that open.

You're welcome, Trevor.

Yeah, Jonathan, that's a very well-put comment because the reason why we do not want to or hesitated to raise the guidance even more is because there's still some timing risk on when we are going to get some of these task orders. The government came out of the shutdown, but still the budget for the fiscal year is not fully approved. We have funding until the end of January. And while we expect some task orders to come in, exactly when they're going to come in is anybody's guess. And so we are confident that we're going to achieve our guidance that we've just provided. And anything above and beyond that, we're going to update you as we go in the next quarter. Lastly, we did really well. We are on track with our plans on first quarter and second quarter and we are exactly where we wanted to be despite the fact that the whole industry was dealing with a month of complete government shutdown. So I think our results are very good and we're very pleased with our results and we're looking forward to the second half of the year. We've got aggressive goals but we're very confident that we can achieve that. We've got the capacity, we've got the team, and we've got the demand from the customer and the support from our customers to get it done.

Thank you, Jonathan.

Well, Austin, we do not break down the specific backlog by customer regions or by specific products. What I can tell you is the following. We have derisked and pivoted from the Ukraine demand almost entirely. It represents less than 5% of our revenue for the full year. Number one. Number two, so far we're on track with our plans. And international demand is still back-loaded a little bit because of the government shutdown and the contracting process, some of those FMS sales have not made it yet to actual contracts to us. Do we continue to get contracts? Yes. But there's a lot more to come towards the second half as well as the next fiscal year. Overall, our backlog is pretty strong. $1.1 billion worth of funded backlog. We had $1.4 billion worth of funded bookings. Very strong orders and backlog and visibility numbers given where we are with the quarter.

Austin, no. The short answer to that question is no. We do not expect that to take share away from Switchblade primarily because they're designed for very different mission sets. The missions that loitering munitions such as Switchblade 300, 600, and now 400 do are very different than the missions of one-way attack drones such as our Red Dragon. And our family of Red Dragon is expanding. We believe both of those two product lines are going to grow significantly over the next few years. The demand for those systems is very robust from more than one service and more than one customer and country. And so I think we're going to continue to see significant growth on both categories. They're actually complementary to each other in many ways as to how they engage with different targets and different missions for our customers.

You're welcome, Austin.

More the latter, Pete. So what the army has done, and this is consistent with many programs within the US Army and even other branches of the US Department of War services, is that the traditional construct and concept of a program of record single winner probably is not going to be that popular or common. What they're going to do is pick at least two players, and from those two players they want to field some systems and see who performs better. As the performance of that system is better, that vendor or supplier most likely is going to get the lion's share of the volume of that program or requirement or capability gap. We believe our solution set is the best performing. We have very strong feedback from the customer that the customer is extremely satisfied with our systems. Yes, we announced a couple of orders and awards, but we expect more. We're actually expanding and ramping up production in anticipation of more P550 orders from the US Army as well as additional international customers. We believe that the P550 product is a billion dollar plus franchise for the company over the next several years. We are such strong believers in that product. I am personally very, very high on that product. Now in terms of going forward, is it going to be just us? Most likely not. Do we expect to get a very large share of that spend? Yes, we expect to get a large share of it and that's probably going to be consistent across multiple programs, not just the LR.

Yes, Pete, that's a great question. That product line was developed from the ground up. Number one, to be MOSA, modular open systems approach, interoperable and compatible and compliant. Number two, it was developed primarily with our own R&D dollars. So it's a non-ITAR product in its base configuration. There are modules within it that can make it ITAR, but we believe that we can sell the P550 to almost every customer that we sell our Pumas and Ravens and other products today. So the market for P550 internationally is equally as large, if not larger, than our domestic market. And I believe that we're going to have several customers internationally that are going to come online and place orders for that capability later this fiscal year and even beyond this fiscal year.

You're welcome, Pete.

Yeah. And I gave color in my script on SG&A and R&D and margins for the year. So that's really how you get there. It really comes from improved gross margins and some leverage on things like SG&A, partly because we realize some of the synergies that we've established in the first half but don't really realize until the second half of the year. And in terms of capacity, those numbers really represent where we're at in terms of capacity where we are increasing incrementally in many places in the second half or prior or even today, and those are reflected in the numbers.

For the year.

Peter.

And plus, as we mentioned in the script, the amount of unbilled business is significant particularly with the service businesses and the revenue over time portion of our overall revenue is also increasing, primarily because of the Blue Halo. So that also is playing a factor in this equation, Peter. But just one other comment to make on this topic is that we're really more focused on the top line growth and making sure that we capture the opportunities and not lose momentum on the significant upside that we have in our long-term plan. So we're really optimizing to make sure that we deliver for our customers, we deliver capabilities, develop the products. We're anticipating a lot more task orders in the second half of the year. And so we have to really start building products in advance, we can't wait until the last moment. And while we're not taking all the risk, we are taking some calculated risk to position ourselves to deliver for our customers because we know that they need these systems very desperately.

Yeah. Thank you, Pete.

No, Austin, we are expecting multiple task orders and orders in the second half that we believe we're going to be able to convert to revenue. In order for us to overperform, it's going to be more difficult because of the timing, how long it takes to go build those products, get them tested and accepted by the customer and then delivered to our customers. So we're confident about our full year guidance. Number two, we do expect contract awards and task orders in the second half that will convert to revenue and that's part of our forecast, and we're confident that we can achieve that.

So, Austin, it's a very nice portfolio or basket of contracts and awards that we expect. It's basically the critical areas that the US DoD needs them desperately and we've been talking about. So P550, more Switchblade, more one-way attack, more counter UAS, more directed energy, more SCAR and Badgers. Those are the key areas that we expect more of in our second half of the year. There's obviously orders for cyber and other businesses too, but those five or six categories make up the lion's share of the expected additional contract awards and task orders for the second half.

You're welcome, Austin.

Sure. So first of all, the comment about the change in policy. Absolutely. We believe that the new policy and definition that the US Department of War and government came up with, how they categorize drones and how they categorize loitering munitions and one-way attack, is very favorable to us because they're trying to lax the definitions as to how it's treated versus a true missile that goes very long distances and is categorized as a missile. So an armed drone or an FPV is not categorized the same. That is going to help us significantly over the next two to three years. It's not immediate but it is over the next 2-3 years. Secondly, yes, the sole source nearly $900 million IDIQ is directly related to that because the US DoD expects us to ship a lot of products because of the demand that they see from different allies. Obviously the US Department of War is in contact with those international customers and they see the uptick in demand for our solutions. So we do expect that to happen but most of that is not going to happen overnight. It's still a process that takes some time and we work it. Overall, we feel very positive about the general demand for our solutions from international markets, including directed energy, counter UAS, one-way attack, loitering munition, P550, Jump 20.

You're welcome.