Edge Autonomy Operations LLC (RDW) Earnings Call Transcript & Summary

Greetings, and welcome to the Redwire Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Jeff Zeunik, SVP, Financial Planning and Analysis and Investor Relations. Thank you. You may begin.

Good morning, and thank you, Darryl. We appreciate everyone joining us today to discuss this exciting development. We hope that you've seen our announcement press release, which we issued yesterday afternoon. It has also been posted in the Investor Relations section of our website at redwirespace.com. Let me remind everyone that during the call, Redwire management may make forward-looking statements that reflect our beliefs, expectations, intentions or predictions of the future. Our forward-looking statements are subject to the risks and uncertainties that are described in more detail on Slide 2. Additionally, to the extent we discuss non-GAAP measures during the call, please see Slide 3 of this investor presentation on our website for the calculation of these measures and the reconciliation to U.S. GAAP measures. I am Jeff Zeunik, Redwire's Senior Vice President of Financial Planning and Analysis and Investor Relations. Joining me on today's call are Peter Cannito, Redwire's Chairman and Chief Executive Officer; and Jonathan Baliff, Redwire's Chief Financial Officer. For those who may be joining us for the first time, I would like to provide a bit of biographical detail for Pete and Jonathan before turning the presentation over. Please turn to Slide 4. Pete has more than 25 years of experience in aerospace and defense. In addition to his roles at Redwire, he is the Chairman of the Board for BigBear.ai. Prior to Redwire, Pete previously held various roles of increasing responsibility, including that of CEO for Polaris Alpha, a private equity-backed high-growth defense technology company that was acquired by Parsons. Pete has also led defense programs at Booz Allen Hamilton and began his career as an officer in the United States Marine Corps. Pete currently holds high-level security clearances with special accesses. Jonathan has been an aerospace, energy and infrastructure executive for more than 30 years. Along with being Redwire's CFO, he is also a member of Redwire's Board, and he previously held the roles of CFO and then CEO at Bristow Group, one of the largest vertical flight and helicopter companies in the world. Prior to Bristow, Jonathan worked at NRG Energy, Credit Suisse First Boston and JPMorgan. Like Pete, Jonathan is a veteran, having served as an Air Force officer and aviator flying the F-4 Phantom. Please turn to Slide 5. With that, I would like to turn the call over to Pete. Pete?

Thanks, Jeff, and thank you all for taking the time to join me for the announcement of this important and transformational combination. During today's call, I will introduce you to Edge Autonomy and then take you through the industrial logic and benefits of the combination of Redwire and Edge Autonomy. Jonathan will then present a financial overview and strengths of the transaction. After which, we will open the floor for Q&A. Please turn to Slide 6. In this transaction, Redwire is acquiring Edge Autonomy for $925 million, expected to be paid in using $150 million in cash and $775 million in stock. Edge Autonomy is a leader in providing field-proven, innovative, autonomous uncrewed airborne systems, advanced optics and resilient energy solutions. We view the Edge Autonomy acquisition as complementary to and an extension of the investments Redwire has already been making in joint and autonomous platforms for the warfighter. Together, Redwire and Edge Autonomy will deliver multi-domain autonomous space and airborne platforms and associated enabling technologies in the areas of avionics, sensors, power, communications, digital engineering, computer vision and AI-enabled autonomy software. Redwire expects the transaction to significantly expand our total addressable market, support organic growth, high-growth opportunities as a defense tech company and be immediately accretive to revenue, adjusted EBITDA and free cash flow. Post transaction, Redwire expects to have a strong balance sheet with significant improved liquidity. The transaction is expected to close during the second quarter of 2025 and will be subject to customary approvals and closing conditions, including a shareholder vote. In connection with the transaction, entities affiliated with AE Industrial Partners, Bain Capital and Genesis Park have agreed to vote in favor of the proposals relating to the transaction, representing approximately 73% of Redwire's aggregate outstanding voting pool. Please turn to Slide 7. Let's start by talking a bit about Edge Autonomy. Edge Autonomy is a vertically integrated and competitively differentiated leader in uncrewed airborne systems or UAS technology that have proven critical to national security. Edge Autonomy's uncrewed technology has been sold in approximately 80 countries and is brought to market by Edge Autonomy's 600-plus employees that operate out of 6 locations across the United States, Canada and Europe. Edge Autonomy offers a fully integrated and comprehensive suite of products, including the VXE30 Stalker and Penguin series of uncrewed aircraft systems. Both systems can be set up in a matter of minutes by teams of 1 or 2 operators, are transportable on the back of a pickup truck or SUV and can take off, operate and land in inclement conditions. Additionally, the range and endurance of these systems is practically unmatched within their classification. The VXE30 series of UAS can sail off for 8 hours or more, while the Penguin series can remain airborne for in excess of 20 hours. Along with their UAS systems, Edge Autonomy provides critical enabling technologies, including solid oxide fuel cells, optics and gimbals, ground systems and AI-enabled autonomy software. Edge Autonomy produces their UAS platforms electro-optical and infrared payloads and ruggedized power solutions from a manufacturing footprint that spans more than 265,000 square feet. Finally, Edge Autonomy serves a diversified global customer base as shown through the selected customers in the lower right-hand corner of this slide, ranging from the U.S. Department of Defense to a wide variety of Allied Ministries of Defense across the globe. As this slide shows, Edge Autonomy's field-proven capabilities have competitive differentiation within the rapidly growing UAS market segment. Please turn to Slide 8. Similar to Redwire, Edge Autonomy is a complete solutions provider to its customers with a mission-ready product set that ranges from platforms to subsystems and components. Led by an experienced management team and supported by a highly technical global workforce, Edge Autonomy offers over 3 decades of proven progressive design, development and production, and embodies Redwire's tagline of Heritage plus Innovation. Edge Autonomy's heritage has come in the form of sustained field operations across 6 continents with direct mission relevance and even the most austere conditions. They have achieved this level of heritage by delivering on multiple programs of record for the U.S. Department of Defense and NATO Allies. The Edge Autonomy business model reliably achieves strong and growing financial results by providing a vertically integrated end-to-end mission-ready product suite. Please turn to Slide 9. Redwire's investors, analysts and stakeholders have heard me discuss the Redwire growth strategy throughout 2024, and we see the Edge Autonomy acquisition as accelerating our goal of rapidly scaling the company. As you recall, protecting the core means continuing to deliver on our strong foundation of existing products with proven reliability and demonstrated flight heritage. In this context, Edge Autonomy has a highly defensible position with platforms embedded across the U.S. and allied forces. Scaling production refers to winning and delivering on increasingly larger orders and delivering production capacity to fill critical gaps in the supply chain. Edge Autonomy has scalable manufacturing capabilities in the United States and European Union. Like Redwire, Edge Autonomy has global manufacturing capacity to deliver on increasingly larger orders worldwide. Moving up the value chain means leveraging our proven capabilities in developing and deploying subsystems and components into next-generation mission platforms and integrated mission payloads. As an integrated prime contractor for UAS platforms, Edge Autonomy extends Redwire's focus on foundational platforms that are mission essential. And finally, venture optionality is our continuous pursuit of breakthrough developments on advanced technologies that could create new markets with game-changing potential. Given Edge Autonomy's increasing levels of product performance, particularly in operational duration and range, we believe there are opportunities to scale capabilities to displace Group 3 UAS at a better price point. Although it is not modeled in our current forecast, we see venture optionality and the potential for Edge Autonomy to expand into Group 3 missions. Please turn to Slide 10. Now let's turn the focus towards the combination of Redwire and Edge Autonomy. Redwire is the leading provider of space-based platforms to national security, civil and commercial customers, and currently brings 5 space-based platforms to market: SabreSat, a VLEO or very low earth orbit platform focused on U.S. national security; Phantom, a VLEO platform that is focused on Europe and the rest of the world, including allied defense organizations; to LEO or low earth orbit platforms called Thresher and Hammerhead focused on U.S. National Security and Europe and the rest of the world, respectively; and finally, Mako, a uniquely positioned MEO or medium earth orbit and GEO or geosynchronous orbit platform for dynamic space operations. With the combination of Edge Autonomy, we extend our platform strategy to become multi-domain, which is critical to our national security customers as they start moving towards the future of their investment in advanced warfighting concepts such as the joint all-domain command and control, also known as the JADC2 strategy. Like our customers, we believe in a future where autonomous space and airborne vehicles collaborate using multi-domain operations to provide strategic advantage. Therefore, this combination provides competitive differentiation. The combination of Edge Autonomy with Redwire will support integrated operations from the surface of the earth to the surface of the moon and beyond. Please turn to Slide 11. One of the keys to our industrial logic, both from a customer and product manufacturing perspective, is that space and airborne platforms are not as different as one might think. Whether operating in space or as an airborne platform, there are shared technological building blocks, including the following: avionics, radio frequency systems, flight software, earth observation payloads, AI and autonomy, gimbals, alternative position navigation and timing or PNT, power systems, structures and computer vision. Bringing the Redwire and Edge Autonomy expertise into an integrated company creates critical mass to the design, development and manufacturing of these core technologies. I'd like to provide an illustrative example of just one of these shared capabilities, RF systems. In December 2023, Redwire announced that our L-Band Link 16 antenna has successfully demonstrated the transmission of a Link 16 signal from space, a major milestone for the future development of tactical war fighter networks in space. Link 16 is a tactical communications protocol widely used in existing ground and airborne tactical networks by both the U.S. DoD and our allies that provides the warfighter with rapid and secure communications across the battlefield. As space becomes increasingly tactical, communicating through Link 16 is important. But aerial assets like those Edge Autonomy provides can also use this tactical protocol messaging format, demonstrating how being a Link 16 antenna provider is not only relevant to space platform but also to airborne unmanned systems. One potential future opportunity is to demonstrate tactical communications between satellites and uncrewed aerial system systems using Link 16. Turning to Slide 12. It is not just the technologies these platforms share, but also the missions. Both space and airborne assets participate in the same types of missions, including remote sensing; intelligence, surveillance and reconnaissance or ISR; communications; alternative position navigation and timing; electronic warfare; entity resolution; smart power; JADC2; and finally, Battle Management Command, Control and Communications or BMC3. These are high-value missions that are well-funded areas of capability development for national security customers. But the clear trend is towards assets and platforms collaborating across all these missions, whether they are in space, airborne or even on the ground. By bringing together the Redwire and Edge Autonomy platforms, we move towards our customers' future concepts, resulting in Redwire being at the forefront of modern defense technology. Turning to Slide 13. In summary, there are significant tangible benefits to the combination of Redwire and Edge Autonomy, starting with unique multi-domain defense capabilities. Combining Edge Autonomy's autonomous airborne platforms and Redwire's space-based platforms into a single entity will realize mission requirements for integrated multi-domain operations. Next, the transaction will position Redwire as an end-to-end defense technology company with uncrewed airborne systems and advanced spacecraft. Further, Edge Autonomy uncrewed aerial systems require similar core technologies and perform complementary missions to Redwire VLEO and LEO/GEO spacecraft, strengthening both capabilities. This transaction accelerates Redwire's moving up the value chain growth strategy by adding leading UAS platforms to an existing portfolio of spacecraft. This portfolio enables larger bids for mission platform opportunities. With a common and expanded customer base, the transaction provides cross-selling opportunities with national security customers at the strategic level. And finally, Redwire and Edge Autonomy have complementary geographic growth targets, especially in Europe, that provide infrastructure synergy for global expansion. Please turn to Slide 14. With that, I'd now like to turn the call over to Jonathan Baliff, Redwire's Chief Financial Officer. Jonathan?

Thank you, Pete. Before I provide a brief financial overview of this transformative transaction. On the right-hand side of the slide, we can see 2 pictures that express the power of Redwire's combination with Edge Autonomy. The first picture is of a U.S. warfighter operating one of Edge Autonomy's VXE30 Stalker uncrewed airborne systems. And the second is our VLEO SabreSat orbital drone platform that Pete talked about, which is expected to be in service for the warfighter as part of the joint domain strategy. So regardless of the operating theater, Redwire and Edge Autonomy will provide a seamless system of systems, multi-domain, creating a tactical and strategic advantage for our customers around the globe. Please turn to Slide 15. I will discuss the transaction specifics in a few minutes. But first, let's describe the combination with Edge Autonomy as now we are transforming Redwire into a high-growth, multi-domain space and defense tech company with global scale and diversity. As you've heard Pete and I say continually over the past few years, Redwire is executing on a growth and path to profitability financial strategy, and today's announcement of this combination significantly accelerates our progress to achieve high revenue growth and achieve sustainable profitability now in 2025 and beyond. The acquisition of Edge Autonomy will be immediately accretive across critical financial metrics in adjusted EBITDA, net income and free cash flow. Edge Autonomy has historically experienced excellent growth, and as you can see on this page, is a profitable company with terrific operating leverage through its outstanding products and solutions, globally scaled production, operating cost control and importantly, a highly motivated and effective team membership. This slide focuses on the last 12 months' results as of the third quarter of 2024. Starting with the top line, you can see that this combination scales Q3 2024 last 12-month revenues from $298 million in a combined -- to a combined $520 million, an increase of $220 million or 74.6%, and we believe this revenue growth is sustainable as Edge Autonomy stand-alone revenues grew 46.3% from $152 million to $222 million from fiscal year 2023 to the last 12-month period ended September 30, 2024. Edge Autonomy is a profitable company. Their 2024 Q3 last 12 months adjusted EBITDA is approximately $72 million, with an adjusted EBITDA margin of 32%. On a combined basis, that scales Redwire's operating leverage significantly with 2024 Q3 last full month's adjusted EBITDA as a combined company, increasing by more than 700% from $10 million to $82 million, and improves the associated combined revenue adjusted EBITDA margins from 3.4% to 15.7%. Turning to backlog. As Pete spoke about, the Edge Autonomy business model encompasses a diversified global customer base, ranging from the U.S. Department of Defense to a wide variety of Allied Ministries of Defense and Department of Homeland Security across the globe. Edge Autonomy has a mix of one, multiyear program of record contracts; and two, large fleet expansion, fleet replacement and fleet upgrades that are shorter in duration. Edge Autonomy is expected to grow these contracts at excellent margins, but it's important to note that Edge Autonomy is also expected to grow its program of record revenue. This significant increase takes our total combined 2023 backlog to approximately $408 million from $330 million. Besides being immediately accretive from a financial point of view, the acquisition of Edge Autonomy further diversifies Redwire's customer base as demonstrated by the charts on the bottom of this slide. Along with our existing customer types of national security, civil and commercial, we are now adding a fourth category of international defense. As you can see on the far right chart, on a combined basis, the 2023 results would have been split nearly equally among all the 4 customer types. This diversification will be a differentiator among the space and defense tech sector as it provides both resiliency, larger TAMs, tremendous optionality and global scale, all at a much higher and sustainable operating leverage. Please turn to Slide 16. As part of this announcement of our combination with Edge Autonomy and to provide insight into the financial strength of Redwire with this combination, management is providing financial guidance for fiscal year 2025 as if the transaction closed on January 1, 2025. Taking the sum of the stand-alone full year fiscal 2025 forecast for Redwire and Edge Autonomy, Redwire is guiding full year 2025 combined revenue to be in the range of $535 million to $605 million, which represents a 52.9% compound annual growth rate from FY '23 to the FY '25 revenue at midpoint. In addition, we expect the added scale from the combination will significantly increase operating leverage and cash flow. As a result and taking the sum of the stand-alone full year 2025 forecast for Redwire and Edge Autonomy into account, Redwire is guiding full year combined adjusted EBITDA to be between $70 million and to $105 million, which represents a 138.8% compound annual growth rate from FY '23 to FY '25 adjusted EBITDA at midpoint. It is important to note that these numbers are intended to be conservative and do not include run rate synergies, but actually do include continued investments and expenses, including integration planned in FY '25. Even taking these investments into account, we expect the combined company to be free cash flow positive in 2025. For the transaction specifics, as Pete spoke about, Redwire will acquire Edge Autonomy for $925 million on a debt-free and cash-free basis. The transaction consideration is expected to be paid using $150 million in cash and $775 million in shares of Redwire common stock based on the volume weighted average trading price for the 30-day trading days ending on January 17, 2025, or $15.07. The transaction consideration positions Redwire to have a significantly stronger balance sheet with enhanced credit quality as a result of better operational and financial scale and diversification. As part of this transaction, Redwire anticipates that the outstanding convertible preferred stock will convert shortly after closing. Redwire maintains significant flexibility to finance the $150 million cash portion of the purchase price with cash on its balance sheet, availability under its existing credit facility, proceeds from new committed debt facilities, and these take advantage of the projected significant expansion of its adjusted EBITDA on a combined company basis. Redwire, at its election, may also choose to use proceeds from a new issuance of Redwire common equity. I couldn't be more excited to join with the Edge Autonomy team members as we create a multi-domain space and defense tech company and accelerate our growth and as achieving the path to profitability in combination with this tremendous industrial logical transaction. With that, I will now turn the presentation back over to Pete to provide brief final remarks. Pete?

Thank you, Jonathan. Please turn to Slide 17. This transformational transaction positions Redwire as a scaled leader in multi-domain space and tech -- defense tech platforms, and we are excited to welcome the Edge Autonomy team to Redwire. We appreciate your continued support of Redwire and look forward to sharing additional information about this transaction in the coming months. With that, I want to thank the Redwire and Edge Autonomy teams. We will now open the floor for questions.

[Operator Instructions] Our first question comes from the line of Suji Desilva with ROTH Capital Partners.

Congratulations on this transaction. It's very exciting. Yes. So maybe we're getting -- all getting familiar with Edge Autonomy a little better. Perhaps you could talk about the competitive landscape there as a starting point so we can understand their differentiated competitive advantages here?

Sure. So Edge Autonomy primarily provides the UAS that fall into what's called Group 2 UAS or small UAS. This isn't the really small, what people think of as personal drones, these are operational military systems but tend to be more in that tactical field category that can be operated by 1 or 2 operators out in the field. And the primary competitors in that area include AeroVironment, Boeing, Textron and a few other small more start-up related organizations.

Okay. Great. And then maybe just on UAS business. Can you talk about the visibility of the revenue and any customer concentration that might be there so we can understand that? And also maybe you can touch on their ability to sustain the high EBITDA margins that they demonstrate?

Sure. Well, in terms of customer concentration, they have a pretty diversified portfolio, much like Redwire operating both in the U.S. and in Europe. As a matter of fact, when you talk about the competitive landscape for Group 2, the fact that a number of the UAS platforms, specifically the Penguin, is manufactured in Europe, I think, puts it on a different competitive footing that significantly increases the total addressable market as Europe looks to increase their spending in defense. So we're very excited about that. But they're pretty well diversified in terms of where the revenue is coming from. They do have some revenue that comes from the Ukraine, but that has been discounted in our forecast significantly. And what we really like about this is, those of you who have been following Redwire for a long time see is that diversity, when coupled with the diversity of Redwire's product portfolio really has a strong portfolio effect of giving us resiliency while at the same time, taking advantage of things like the complementary technologies as well as the complementary geographical positioning of having strong manufacturing presence in the U.S. as well as in Europe.

Okay. And just the sustainability of the profitability for Edge Autonomy seems very attractive there.

Yes, during our due diligence, we found no reason to believe that these are -- that there should be any degradation in their profitability. These are very mature product lines that have been out and being fielded for a while now.

Okay, great. Congratulations again, guys.

Our next questions come from the line of Brian Kinstlinger with Alliance Global Partners.

Congratulations on the transformative acquisition. Can you talk about how Edge's Group 2 drones compared to the competition, what differentiates them? And then the second part of that question is, how does being acquired by Redwire with its 5 space platforms improve their competitive positioning?

That's a good question. So if you -- probably the number one, and there's many, but the one that we're most excited about is the range and endurance. Edge Autonomy has some intellectual property based around batteries that allow them to have a significant advantages in terms of range and endurance. So that's one of the areas where we believe they are highly differentiated from their competitors in the Group 2. And when I talked about venture optionality in terms of moving into Group 3 missions, that additional range starts to enable their Group 2 UAS to start moving into missions that have traditionally been performed by Group 3 UAS. So that's a key competitive advantage for Edge Autonomy. Now we believe that as you get longer and longer, endurance or smaller UAS that have the ability to go further and longer that you're over the horizons, communications becomes critically important, and that's where satellites come in as you start looking at as they take on these more robust mission sets, the ability to communicate and even do command and control through space would be a key additional capability to improve their overall performance. And that's just when we're talking about traditional missions. When you start looking at all domain operations where you have emerging concepts, where groups of autonomous UAS platforms could receive command and control instructions or missions and data from space assets, that opens up a whole different set of new highly differentiated capabilities and mission sets.

Great. That's super helpful. As it relates to 2025 revenue guidance range, how are you thinking about the contributions from Redwire versus Edge?

So I'll take that one. Thanks, Brian. So again, I think the number one thing to think about as we give '25 guidance is, one, we're, again, assuming the combination happened on January 1, and obviously, we're closing in the second quarter of '25. And we'll update guidance once we're kind of closer to closing or through closing to give, again, more specifics. That being said, we have obviously given guidance for '24. We're reiterating that. But from a combination standpoint, we're not publicly giving the breakup. I will say that we're not also giving any synergies, right? Both companies, there are synergies, especially associated from a revenue standpoint with higher [ PWins ] and a number of different things, especially as we look towards Europe and a number of big programs here in the United States. I think the bottom line when looking at the revenue forecast especially, Brian, is that we're being very conservative. The company, Edge Autonomy, has had tremendous success in Europe in '23 and '24, especially in a number of Eastern European theaters, especially and obviously Ukraine. But we're being very conservative in 2025 on that just given kind of the macro view about where Ukraine is going. It doesn't mean that they don't have a tremendous capability in that theater. We're being very conservative for our '25 revenue there. So that will kind of give you a sense of. Obviously, from an EBITDA standpoint, we still believe that Edge Autonomy is going to be able to provide tremendous synergies associated with operating leverage to us, but a lot of the EBITDA will be provided by Edge Autonomy in the '25 period. As we get into '26 and beyond, again, we believe that both companies will benefit and you'll see, in essence, a merge contribution on that basis as we grow and get more operating leverage because this isn't just the end. But if you look at the $75 million to $105 million or the $70 million to $105 million, that range of EBITDA really also is conservative based on the revenue I already spoke about, but also importantly, there are investments we have to make in 2025. Those investments, as part of the combination, could be more lower than if you took the combination at a what I call run rate growth area. Does that make sense?

Yes. Great. I'm going to squeeze one last one and then get back in the queue.

No, please. It's okay. Go ahead, Brian.

We see leading indicators such as proposals, pipeline and bookings for Redwire. Is there similar metrics for Edge? Is there a quantifiable pipeline?