AeroVironment, Inc. (AVAV) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for attending today, Goldman Sachs Industrials Conference. We're really excited to have AeroVironment with us today, both CEO, Wahid Nawabi, and the CFO, Kevin McDonnell.

So let's kick it off. I want to spend the majority of the conversation talking about the longer term, but I would like to talk a little bit about some of the recent happenings with the DoD. And what I think would be a good idea to start is to talk a little bit about the government shutdown, any impacts that, that has had to the business although it's short term and maybe specifically on order flow.

Sure. Thank you. Great to be with you. Thanks for having us. Obviously, shutdown is not good for anybody in the industry. We're in our quiet period because of the second quarter results, which is going to come out about a week or so. So I'm not going to comment on Q2 results specifically. And we have, by the way, our -- the statement on the...

Safe harbor.

Safe harbor statement disclaimer on our website. And please read that, if you can, on our website. It's here as well. Generally speaking, the -- we said at the beginning of the quarter that we are in the right categories. And we -- obviously, it's not good for anybody, but we're going to be, generally speaking, we should be looking okay at that time. That's what we said last quarter. And so I can't make any comment on that specific because of the quiet period of the quarter.

Totally understand.

Fundamentally, long term, it should not matter. If you ask about long term, there's lots of funding that's going in our categories, a tremendous amount of money, and I don't think that's going to matter.

Is there a way to think through the percentage of revenue in any given period that is from orders in that period?

Not a lot. Usually, the orders -- there is some in the BlueHalo side when we bought the company because their services business -- the services business, the engineering, high-end services, even though engineering services when -- if a customer says that we can't actually authorize you to do the work, then you have to stop the work. And that's what -- could affect short term. In terms of products, we are high churn, but not that high churn in terms of 1 month or 2 months' worth of period. Usually, it's about 3 to 6 months long.

Okay. That's helpful. Maybe to shift to Russia, Ukraine. It seems like there's some talks now about potentially there being a ceasefire and some sort of agreement. I know that you guys have done a great job diversifying your business away from some of the Ukraine spike that you had a few years ago. How should investors be thinking through what Ukraine will be this year? And then going into calendar year '26 and beyond, what is the new baseline for that business?

Yes. So the Ukraine really positive effect for us was 2-plus years ago. It was 2 years ago that we got a bump in that. We always said that as soon as that starts, we're going to pivot and switch over, pivot to other areas and diversify. Last year, we said that it's going to be less than 10% of our revenue. And this year, it will be even less than that -- less than 10%, probably less than 5%. So Ukraine fundamentally is almost a nonissue, and it relates to -- related to our financials this year. The main reason is because we've already pivoted besides pivoting ourselves, the U.S. DoD and our allies have a tremendous amount of demand for the things that we make. So we're positioned really well for a lot of that demand that's going to come in the next 2 to 3 to 5 years. And essentially, Ukraine has become a nonissue, insignificant number, nonmaterial in our financials.

Yes, that makes a ton of sense. And that's a great segue. There's been a lot of talk about the replenishment demand that's required on the back of Russia-Ukraine conflict and then also some of the heightened conflicts that are happening in the Middle East. Is there a way to think through what that demand looks like over the next 24 months? And maybe like how long it will take for current production to refill or like to replenish that inventory?

Yes. So that demand is really fundamentally a massive, massive sort of wind in our sail, if you ask me. What's happened is 2 or 3 things. Number one, drones, floating munitions, one-way attack from Group 1 through 3 has become a very standard part of the military's operations and needs. So whatever the militaries of the world -- our military and as well as our allies had, it's probably going to go up to 10 to 50x higher, not 20%, but 10 to 50x higher, number one. Number two, vast, vast majority of the inventories of the U.S. DoD and our allies, European allies specifically, is completely depleted because they've basically given a lot of that stuff to Ukraine and are utilized. So the third thing is that because of the funding process and the budgeting process being delayed so much, the money hasn't actually arrived to the accounts, but there's billions and billions of dollars that are actually focused and programmed towards long-range programmatic acquisitions in our category. So we expect that demand to be significant over the next 3 to 5 years, a; b, the second thing is that you've seen from this quarter in the last quarter, the amount of long-term sole-source IDIQ contracts that we've won. We've announced over $2 billion worth of contracts just in the last 3-plus months. And these are all sole-source IDIQ contracts with a total contract value of that amount. But the funding for those has not come in yet because the money that Congress approved for reconciliation, for example, hasn't received arrived into the accounts of the customer to be able to actually then authorize us to do that. We have been building in advance of that this year, and we're going to continue to do that. So majority of that demand is going to come in the next 6 months to 1.5 years in terms of orders and funding. And then we will continue to deliver over the next -- obviously, every quarter, but for the next 2 to 3 to 5 years maybe. So I think that we're just at the beginning of the cycle of the militaries first realizing we need to equip ourselves with a lot more of these things, a; b, a significant amount of dollars being shifted, tens of billions of dollars, to these categories and then stockpiles are depleted, and we're positioned really well. And the thing that really matters the most is whoever can produce now and whoever has ready products that are relevant and they work in the theaters and the kind of conflicts that we have; they're going to have the lead -- the biggest and best advantage. And there's no one that I can think of that is positioned better than us. I mean we check all those boxes really well as a company.

I mean it's just as much about a shift in warfare as the replenishment story though. It's not like replenishment is going to happen, and that's going to be the end of the cycle. We're in for a long haul here of decades plus of building up the types of categories that we're in, in UAS or lethal weapons or things like this or counter-UAS. So we're just at the beginning of a cycle of a shift in warfare.

Understood. Wahid, you just made a comment about like the funding isn't into the customer's account yet. What's stopping that? Are you talking about the reconciliation bill funding?

Correct. Yes. So the reconciliation bill that was passed, obviously, the shutdown happened right after that. And we have experts within our company that has actually been part of that process on the customer side, the department, the various offices of management, the budget, et cetera, et cetera. And we know the process. We know exactly how the money gets flowed, authorized, approved, appropriated and then makes its way. And so based on our real close contact with all those different touch points, we have not seen the money flow through yet. And so the effect of this shutdown on the government side was significant because a lot of the folks that are actually working on these things, administrative folks, literally were not working. And so that is going to take not a long time, maybe another 2 to 3 months, but it's going to flow into those accounts quite soon. And we've been given a lot of indicators that you got to get ready, and that's why they've actually put the contracts in place, a couple of billion dollars within 1 quarter, and there's more coming down the pipeline. Now those contracts are not a 1-year contract. Those are 2-, 3-, 4-, 5-year contracts. As Kevin said, this is a seismic shift in the market as to how the categories that we play in is going to be part of a bigger force structure.

Yes. So talking about shifts in the market, I'm curious to get your thoughts on Hegseth's recent announcements about the transformation of the procurement process. And whether it's a way to kind of push the primes along and kind of give them enough of like a demand signal so that they can lay down investment for future demand? Or if it's more of a signal to them of, hey, the commercial model that a lot of these defense tech players like your company are deploying is where you need to start shifting to. I'm curious just on your take of like what the goal is of that and whether it's better for you guys or for the defense primes or how you see it?

Yes. We are absolutely jazzed about that because the recipe that Secretary Hegseth is talking about is the recipe that we actually have been following and implementing for the last 2-plus decades. If you look at our financials for the last 2 decades, ever since we've been public, our investments in R&D has been high, our EBITDA margin is relatively higher than most of the industry players. Our growth rates have been higher and primarily because the recipe has been to invest ahead of the requirements, in fact, help the customer develop the requirements based on innovating and disrupting the market. So that is fundamental to our strategy and DNA. Now what you see is dozens and dozens of other companies that are trying to copy the same model. In fact, lots of them benefit from very high valuations because they believe that this is the future. And so in our view, we welcome that. We've been playing that game, so to speak, or that strategy for the last 2 decades. And we love it, number one. Two, because our systems are readily producible today and we have systems that are relevant from the latest set of conflicts that are out there, Ukraine, Armenia, Azerbaijan, Afghanistan, et cetera, we stand to be the leading player to benefit from this because our system is the easy button to push. So we look forward to that actually.

Yes, that makes a ton of sense. Let's talk about Golden Dome for a second because it seems to me, similar to some of the comments that you were making on the funding is there, but not in the customer account. I think people are expecting that we were going to have -- like the investment community is going to have an understanding of what the architecture was going to look like by the end of November. Like how should we be thinking through when we will know what it's going to look like? Whether it's completely new incremental funding with that $25 billion? Or if it's like repackaging existing things under the Golden Dome umbrella? What are you guys hearing? And like what should we be looking out for?

Sure. So let me make a couple of points on this topic because it's somewhat misunderstood and not well understood in the industry. The Golden Dome effort initiative is a very large effort. There's lots of pieces to it. We're not trying to solve the entire problem of the Golden Dome. We're focused on a very specific part of the Golden Dome, the inner layer defense, what we call the Halo Dome. The Halo Dome is our currently available solution set that's off-the-shelf, commercially available that's actually already deployed. It includes our RF detection systems. We have RF jamming systems like the Titan, our counter-UAS for direct energy, the laser systems that we have called LOCUST, our software suite of products such as AV_Halo and AV_Halo COMMAND, et cetera. So that is the layer that we're talking about. So the bigger piece or another piece of that is the space and above, group 5 hypersonic and above type of capabilities that we want to defend against. So we worked and we partnered with SNC to actually develop the solution set. And we -- as late as yesterday, I had meetings within the Pentagon related to the specific topic. So that's what Golden Dome is about, and that's what our solution is about to address a very specific but very important part of the Golden Dome initiative and strategy and objective. Second thing is that the money part. The money -- the way the department is thinking about funding today, they don't have very specific dollars as to where they want to buy -- what they want to buy and what they want to spend money on and how much it's going to cost. So they are getting budgets and funding for large categories from Congress that allows the department to then actually make decisions as to how to deploy the funding and capital into what areas. So there's lots of flexibility within the DoD -- DoW on how to move money around from accounts to accounts on different categories to be able to spend that. And so the dollars, there's certainly going to be billions of dollars spent on Golden Dome. Certainly. No question. Is it going to be $50 billion or $25 billion or $100 billion? We don't know. And in fact, the department has very good ideas, but they still haven't defined specifics yet. But we're very involved in that category. We believe we have a very good solution. The reception from our customers has been significantly positive, very positive, and we continue to actually work with them in architecting the solution set because it has to fit as a jigsaw puzzle as a whole. All layers across the whole domain, all domains, and we look really good because our solution set actually is relevant. It's commercially available. It's already deployed. We're actively engaged in these things, including the southern border of the United States and other sites. And so we're just waiting for the department to work through its design and efforts to then basically fund it and go forward. And there's also a question of how fast the money comes from the accounts to hit the accounts as well.

Right. And in addition to that, we will benefit other areas of business like our BADGER business and our [ space com ] business and things like that, where all these areas will see increased investment over time.

Yes. Okay. I want to get to the products and the growth. But before we do that, I just want to get one last one in on the funding environment.

Sure.

What do you think will happen with the budget next year? Is it going to be the base budget plus some sort of growth? Or is it the base plus the reconciliation with some growth? Or is it that there's going to be a base budget growth and another reconciliation bill?

I really -- I'm not an expert to be able to comment on that specifically. What I can say is that whether the budget is flat or higher, I don't personally have a very strong knowledge of that or opinion on that. But what I can tell you is that the categories that we play in is expected to be funded very aggressively, very aggressively. And I see not like 1, 2 single-digit percentage growth in our categories. I see significant, in some cases, actually order of magnitude more money being reallocated from other areas. As Kevin said, there's a shift in warfare. The 2 to 3 areas of the U.S. DoD and all of our allies are really focused on to double down and emphasize a lot more. It's this war of drones, right? We see it every day. And so that fundamentally is what we are as a company, unmanned systems. That's one area. Directed energy space, RF jamming, counter-UAS, one-way attack, these are very, very focused areas that the department is going to invest billions and billions of dollars more than what they did before. I mean, one-way attack 3 years ago was a 0 market, almost none. So all of a sudden, it's turning into billions and most likely they become tens of billions of dollars worldwide in the next decade. So whether the budget is flat or slightly higher, I don't have an opinion, but I do know that the areas we're in continues to get significant funding.

Yes. And I think what I'm hearing from you too, is that, one, you don't make the decision on the budget, right? But it doesn't really matter. Like the stuff that you are involved in and you're aligned to is going to grow regardless based on the demand signal.

Absolutely.

So I think that, that's important.

Yes. And we're such a small percentage of the total overall budget. As $1 trillion budget, we're a very small percentage of that whole budget. And -- but that budget is probably going to double, triple, quadruple. It already has. We're -- another indicator to realize, if you look at our business today, we're involved in a dozen different billion-dollar programs of records. And we've mentioned many of these in several quarters, right? And we have a very high win rate. And we're generally the #1, #2 contender for these programs. So if you add that up, it's several billions of dollars of opportunity over the next decade or 2.

What is the win rate?

Generally speaking, we are rarely -- if we engage in a program, we lose a competition, it's high 80s up to 90% generally. It's very high for us usually.

And does that make you think -- like in a strategic way that maybe you should bid on more things and it should be a lower win rate? Or is that like your 80% to 90% is like your sweet spot, you guys are comfortable there?

Well, it's really not based on because our win rate is high, let's go after more things. We do it because we're very disciplined and we're very focused and systematic on how we go after things. If we believe that we have the right solution and there's a market and there's an opportunity and we can have a differentiated compelling solution that we can then defend long term, and you could see that in our margins, you could see it in our profitability, you could see it in our growth line, we then go after it. And because we're very methodical and systematic in my view, it, itself, lends to an outcome that has been very, very positive. And so if you look at the programs that are out there today, we're the leading contender, and there's a couple of them that the government actually just announced. LRR is a great example, Long-Range Reconnaissance. Our P550 is purpose developed and designed for that particular program of record opportunity for the U.S. Army. That's a $1 billion opportunity just with the U.S. Army alone. And most likely, internationally, that will be a $2 billion product over the next decade. And so we're very focused on where we think things are going to go and how we should go after it and make sure that we win.

And when you're talking about those numbers, the $1 billion opportunity, the $2 billion opportunity, that's not annual, right? That's over -- over 5 years?

Over 5 years. That's right. The Army is actually published already. What is the force structure implementation of the -- that solution set, the LLR? If you add up the number of systems that they want to deploy, it comes out to about $1 billion worth of acquisitions over the next -- and the time frame is about 3 to 5 years. And so they would buy most likely as fast as they can as whoever can produce it the fastest. And we're the only 2 contenders left. And we were already down selected. And so in my view, that's a perfect example of the kind of programs you're going to see that we're going to be engaged in. LASSO is another one. That is a U.S. Army program for the loading munition for Switchblade 400, 500 that we actually announced at the last AUSA conference. So we've designed that product specifically for that mission and for that requirement.

Makes a ton of sense. The biggest pushback that I get broadly on defense tech is that, right now, it's difficult to measure and model out what each of the different products can potentially grow to. And I guess my question for you is we pick 2028 or 2030, whatever the right time frame is, what are the maybe 5 biggest product lines, programs, growth vectors for the company? And how should investors think through modeling that out between now and then in the ramp-up? And maybe Switchblade is probably a good place to start given, sure, you just mentioned it and the fact that you guys are building the new facility in Utah with the new production facility?

That's right. So it's not that we don't want to help our investors and the market and yourself and others to build the most accurate models possible. We would love to help as much as we can. First, and we -- I'm going to try to answer the question in more detail. But first, let me describe the backdrop. Our strategy fundamentally is we're going after very large categories that we can disrupt and be the leader and innovate and have high growth and high value creation. We've got a dozen-plus shots on goal, literally a dozen plus, that we're actively pursuing. Each one of these opportunities is $1 billion, slightly less than $1 billion or a couple of plus billion dollars large.

In terms of the total opportunity?

Total opportunity over the next 3 to 5 years. 5 years, call it, right? LRR being an example. LRR is one of a dozen such opportunities that we're involved in. And we have a leading position, 1, #1, #2 in most of these things. In some cases, we're the only player. Like SCAR, as Kevin mentioned, we've been already selected. So which one is going to happen when is incredibly difficult to predict in terms of timing. That's the fundamental reason why we don't provide that level of granularity because it is really difficult to be able to time that from the customers' behavior and processes.

And Golden Dome is a perfect example.

Golden Dome, exactly. LRR, et cetera. Exactly. Now having said that, these are -- there are certain areas that I can very confidently think that over the next several years, it's going to be major contributors to growth, okay? Number one. Two, overall, our business has the ability to be double the size we are easily over the next 3 to 5 years, easily. Our own internal long-term planning process tells us over and over again that we are absolutely in this mode. And if you look at our track record, it actually also suggests that we are able to deliver on that CAGR that we have talked about, both on top line and bottom line. So the best way to look at it is, you can decide which one you think is going to happen, but I can give you a basket of things that's going to contribute to the growth. The categories are loading munition, like Switchblade, is going to be big. We already engaged in multiple programs. And we've got 10 to 20 different international customers that are lined up. They are going to buy Switchblade. They already starting to buy Switchblade, and we've been announcing those left and right. The other category is one-way attack, the products that we've announced in that area. The other area is SCAR and BADGER. That's a program that we've won. It's $1.7 billion worth of funding that's going to be put into that to modernize the entire U.S. space satellite, geosynchronous satellites with our systems phased arrays. Counter-UAS, RF jammers such as Titan is going to be a very key contributor to our growth. The LOCUST directed energy system, long term, should be a significant contributor to growth. We have the world's best solution in that category and almost every single one of these actually. And then another one will be laser communications. We just announced a program that was very significant, tune of almost $0.5 billion plus, and we were selected as the company that is going to essentially provide that capability to the U.S., okay? And so these are fundamental categories that I believe -- the 2 I want to mention is our small UAS, which includes JUMP 20, JUMP 20-X and P550, absolutely is going to be also another contributor. So if you look at our portfolio, pretty much almost every product line in our portfolio is going to be growing. The only one that I think is not going to have above average growth is most likely the cyber, cybersecurity that is really people oriented, that's very exquisite capabilities that we have. That is not going to have hyper growth right away. But the rest of them are all going to contribute very handsomely to the overall growth of the company, and we believe that we're going to continue to deliver on that growth. Do you want to add anything else?

Yes. I mean, we're looking at 15% to 20% growth over this time. And as Wahid said, I think doubling in the next 3 to 5 years is very realistic for us. All those categories he mentioned, all have the potential of being close to $1 billion in themselves. So that's not even perfection to double in that amount of time.

Yes. And even the question that we struggle with ourselves is, should we invest more and accelerate investment even more to have even higher growth than that? The likelihood of us having higher growth than what we were even expecting is way higher than the opposite. So -- because we're sitting in such a great position in the market. I mean in my career at AV, it's never been this great in terms of the...

It's a good problem to have. Yes.

It is a perfect storm of how things are lining up and how we're positioned to benefit from that trend.

Does that mean that you guys would consider increasing the level of IRAD as a percentage of sales? Or are you guys comfortable with the level that you're at?

For this year, we're comfortable where we're at. Absolutely, there is demand for a lot more, a lot more. And we have always said, Kevin and I have on every single call that, that's a level that we believe is a very strong indicator for the long-term higher growth. And so we've been high in general, relative to the industry. But I think this year, we're okay. And over time, I believe there's opportunities for us to even go higher if we needed to and also go lower if we needed to. So we're going to just play year-by-year to see how the customer and the market reacts, and we're going to play it accordingly.

Perfect segue there to the margin discussion. I think there's just a lot of debate broadly with defense tech that there's a narrative that because there's more IRAD spend, there's more commercial pricing, and therefore, the margins can be higher. So I guess my first question is, when you're thinking through that decision tree of should we increase our level of IRAD, is the expectation that you will be able to get higher margins on the back of that? And then number two is, when you guys get through this growth spurt that you have here, given that a lot of the business today, I think, is already commercial, where do you think you can get margins to? And I'm not trying to give you a -- not looking for an exact number, but like a framework, are we talking about 20% to 25%, 20% to 25%, 25% to 30% on EBITDA margins, would just be helpful.

Yes. So look, we think that our R&D investment is going to continue to be high because we see so much growth, and that's a fundamental part of our recipe and our strategy and our business model. Where we're going to get scale is by having larger scale of operations in production, supplier input costs, variable costs and fixed costs are going to probably be lower. SG&A as a percentage of revenue could be lower. So we will get synergies in those areas. Now lastly, I do believe that because of our recipe over the years, you could see our margins, we've been very successful at not only maintaining but it's actually increasing, in some cases, our gross margin percentages overall. And our EBITDA margin, really, we're high. Relative to the market, we're much, much higher.

Yes, the highest in the industry.

Could we go higher? Yes. But the challenge for us, not challenge, the real question is how much do we invest in the long-term growth because we want to capitalize on this 5- to 10-year trend very aggressively and very strongly. And so that tells us that we need to keep the R&D investments high enough until we think that we need to lower it so we can increase the margin. So overall, I think that the margins could be high teens. Could it be above 20%? Sure, it could be. But we are trying to balance between short term and long term primarily in the R&D space. I'm not sure if you have anything.

I would totally agree. I would say to remember that things like LOCUST, BADGER are going more to products and more commercial pricing over time. And so with that, you might see higher gross margins, but a little bit higher R&D percentages. But we're definitely committed to at least where we're at, if not a little higher, as those gross margins expand a little bit. But hopefully, at the same time, increasing the adjusted EBITDA percentage.

And it seems like the international demand is really strong. Is it right to think that the margins on the international business are higher than domestic broadly speaking?

Absolutely. It always has been, and it should continue to be so. Because the U.S. DoD is our biggest customer, we negotiate a lot of the contracts with them first. They're the first adopter of these systems. When we sell internationally, both FMS and DCS, which we actually sell in both categories, and we're very successful doing that, probably one of the most successful companies that have been doing that for a decade plus, the margins are higher. DCS sales internationally is, by far, the highest margin. Yes. And those margins will continue to be very positive, and that should contribute to the overall mix and help the margins be strong as well.

Okay. And then sticking on the margin conversation and maybe just a little bit more towards pricing. I know that we've spoken about this before, but there's a narrative that now that there's more competition in the drone space and maybe I think it's specifically on Switchblade that, that could negatively impact pricing over time and there would be margin degradation. I'm curious of how you guys think through that narrative and why you think that's not true. It seems to me like the capability set is just completely different, but I'll give you the opportunity to answer it.

Sure. So I've been with the firm for 15 years or so, a little maybe more, I've heard that argument from the day that I joined the firm, which is, by the way, it's a valid argument, right? You -- hey, it's a legitimate argument. But we have demonstrated over and over and over and over again that we can maintain our margins, number one. And then the second question is also, there's this thesis that these new players are coming in and they're going to offer lower-cost solution and they're going to beat us. We do not lose on price. We are the price leader in the market. We are the largest producer in those categories as well. And so time and time again, we actually win against players that claim to be lower priced. In fact, I can give you examples after example after example of companies who've tried to compete with us that are no longer in existence because they went out of business not being able to actually compete against us. I was talking about one of them last night. It was a company down in Florida. I won't mention them. But for a decade plus, they try to copy the Puma. And the performance of that product is nowhere near. They eventually went out of business, okay. It's just several -- we've seen -- I've seen a half a dozen to a dozen international players. In every country that we compete, whether it's Puma or P550 or Switchblade, there's at least 1 or 2 or 3 other international players that claim that they have a similar solution with much lower price. Show up in the competition, we prevail, we win. And so we are the lowest cost producer. We have been able to successfully maintain our margins. And the last point I want to make is that we have an incredibly strong competitive differentiators and compelling value proposition. For competitors to come and unseat us in these areas, it's not easy. When you have an army that uses several of your products, and we have software stack, avionics, a vertically integrated IP and technology stack, it becomes a very, very differentiated heart to actually unseat and replace. That is something that we work on very, very strongly and systematically all the time. That's why we invest in R&D. That's why we invest in our family of portfolio of solutions. That's why we have common controllers for our product lines and our competitors. So I believe that we're in a very good position when it comes to that particular issue.

And is there a risk? There's been a lot of headlines about there being like trade deals essentially where we're going to be buying -- the U.S. and allies will buy drones from Ukraine given that they have capacity, something like 1 million -- I forget the number, but it's very high. Do you guys see a risk to that? Or is it more that, that's more of there's like bargaining chips and political negotiations that are going on with that and it kind of doesn't really matter for your space?

It's definitely the latter, number one. Number one, a lot of it is positioning, posturing, and part of it is also on the Ukraine side. They want to sell this stuff, and they all want to get aid from U.S. and other things. Other one is U.S. wants to do that, too. Secondly, the most important point, if you add up all those things, most of it is talking about these first-person view, FPV drones. That's less than like 5% of the budget. That is not where the value is. That's not where the market is. It is a very marginally small portion of the whole thing. In fact, an RFI came out, I think, this morning by the U.S. DoD that they're going to buy maybe a total of like $1 billion over the next 2 to 3 years. But if you do the math, it's like -- it's insignificant compared to the launch. And being able to actually have a business model to successfully make money in that category is not easy either. The war in Ukraine is very unique and different than what the kind of conflict that we're going to fight. They're making drones and they're using it next week. You can't do that in the U.S. DoD. There has to be systems that are going to sit on the shelf and stockpiles for months, if not years. There is a whole different set of requirements that goes into that. We're not into this close-combat fight which is shooting within a mile of each other. We had a conflict with China in the Pacific or somewhere, we're talking vast, large distances. They have to be marinized, they have to work a lot more complexity than those. Now I'm not deemphasizing that, that would not be part of the solution set. It will be part of the solution set, but it's a much, much smaller portion of it. And we've intentionally decided not to play in that market because we believe the much better value is all the other things that we play in, which we're the leader in.

Incredibly helpful. And we have about 40 seconds here. So I'll ask you my last one. Maybe just like an update on BlueHalo. It seems like there's been a ton of positives out of it, especially given all the application for Golden Dome. But now that you guys are about 6 months into being a part of the larger company, can you just give us an update of how it's going? Is it -- is there anything that's been much better than expected or worse than expected? That sort of thing?

Sure. Well, overall, we're incredibly satisfied and very happy and pleased with the acquisition. It's been tremendously good. We're aggressively integrating the 2 companies and businesses and product lines. We're doing very aggressive, deep integration. In terms of the synergies on the cost side, we committed -- we predicted about $10 million a year for the next 2 years. We're ahead of that. All of our projections show that we're actually going to overachieve that. We are -- generally speaking, we're doing great. The categories that play in, you've seen some of the wins that we've announced, we've invested over $1 billion worth of contract wins over the last 6 months that we've been together, less than 6 months, just as a result of the fact that Blue Halo is part of AeroVironment in AV. So I believe that we're doing great, number one. It was a great move for us as a company, and we're going to continue to give you guys an update on that, and we look forward to it. Has there been challenges? Of course. There's -- it's part of doing acquisitions and integration. But we've chosen to go very aggressively. The cultures are very similar. The businesses are complementary. We're even mixing not only leadership and organization, but also product lines are being integrated together. And so we're very pleased with that overall, and we're on track and sometimes ahead of schedule.

Yes. It seems like it's been incredibly successful so far. So thank you guys so much. We really appreciate your time. This was excellent.

Thank you.

Thank you.