AVAV — Q1 2026 Financial Report Analysis

Record revenue on the surface, but the drone business without its newest acquisition shrank

AeroVironment (AV) makes military drones and related systems: small reconnaissance aircraft such as Puma and Raven, the Switchblade "loitering munition" (a drone that circles a target area and then strikes it), counter-drone systems, and, since it bought BlueHalo in May 2025, space, cyber and directed-energy (laser and microwave weapon) products. Its fiscal year ends on April 30, so this report covers fiscal Q1 2027, the three months ended August 1, 2026 (roughly May to July 2026), filed on Form 10-Q on September 10, 2026.

Revenue rose 6% to a first-quarter record of $480.5 million and the net loss shrank to $5.1 million from $67.4 million. Most of that improvement is accounting and financing, not a stronger business: the year-ago quarter carried heavier acquisition amortization, deal costs and interest. Underneath, revenue excluding the ESAero acquisition (closed March 2026) fell about 3.5%, Switchblade sales dropped $56.9 million on order delays, and adjusted EBITDA went down. The good news sits in orders: funded backlog hit a record $1.46 billion.

At a glance

• Revenue $480.5M, +5.7% — but $41.8M came from ESAero, a company AV did not own a year ago. Without it, revenue was about $438.7M, down roughly 3.5%.
• Funded backlog $1.46B, up 23% in one quarter (from $1.18B on April 30) — orders worth about $0.7B came in against $480.5M shipped, a book-to-bill of 1.4. This is the main reason to think the year can still recover.
• Adjusted EBITDA $53.4M, down 5.6% — the company's own measure of operating profit before non-cash charges fell even as revenue rose, so the margin slipped from 12.4% to 11.1%.

The numbers

"n/m" = not meaningful: a percentage change between two losses doesn't describe anything useful. Operating margin is the share of revenue left after running the business, before interest and tax; here it is still negative. Adjusted EBITDA is the company's own non-GAAP profit measure: earnings before interest, tax, depreciation and amortization, also excluding stock-based pay and acquisition costs.

Two segments moving in opposite directions

AV reports two segments:

AxS (drones, Switchblade, counter-drone and ground robots) grew $60.7M. The 10-Q breaks that down:

• Drone (UAS) products +$39.1M, which management attributes to "an increase in the global demand for UAS products."
• Customer-funded R&D services +$34.1M — development work the customer pays for, usually at lower margins than product sales.
• Precision Strike and Defense Systems -$6.8M net, which hides three very different pieces: Switchblade product revenue fell $56.9M "due to order delays," ESAero added $41.8M, and other defense systems added $18.5M.

Strip out ESAero and AxS grew about 6.6% ($304.2M vs $285.3M). The segment's margin held near 18% despite a mix shift toward services.

SCDE (mostly the former BlueHalo space, cyber and laser businesses) lost $34.9M of revenue. Space and directed-energy product sales fell $18.1M, "primarily due to the termination of the SCAR program in the prior year" — a Space Force satellite-communications antenna contract that received a stop-work order in January 2026 and was later terminated. Cyber and Mission Solutions services fell $18.3M on "reduced scope on certain contracts." The segment swung to an $8.9M adjusted EBITDA loss.

What the headline numbers hide

• Organic growth was negative. BlueHalo was owned for the whole of both quarters (it closed May 1, 2025), so it does not inflate this year-over-year comparison. ESAero does: it closed March 16, 2026 and contributed $41.8M. Excluding it, revenue fell from $454.7M to about $438.7M (-3.5%). The "record revenue" headline depends on the acquisition.
• The profit improvement is mostly lower non-cash charges and deal costs. Amortization and other purchase-accounting charges (the write-down of intangible assets bought with BlueHalo, a non-cash cost) fell to $43.4M from $79.7M. Acquisition-related expenses fell to $2.1M from $23.7M. Those two items alone explain about $57.9M of the $58.4M improvement in operating loss. Gross margin rose from 21% to 26% "primarily due to decreased amortization and other non-cash purchase accounting expenses," in the 10-Q's words — not because the products got more profitable.
• Adjusted EPS rose 84% while adjusted EBITDA fell. Non-GAAP EPS went from $0.32 to $0.59, but adjusted EBITDA dropped from $56.6M to $53.4M. The gap is below the operating line: interest swung from $17.4M of expense (including a $6.7M write-off of loan fees when the BlueHalo bridge loan was repaid) to $4.1M of income on cash raised in July 2025. That roughly $21.5M pre-tax swing is about $0.43 a share before tax — more than the whole $0.27 EPS gain. R&D also fell $9.2M, which management calls "timing of planned expenditures" and expects to rebound to 7%–9% of revenue for the full year (it was 5% this quarter). Meanwhile, the share count was 6.3% higher (49.8M vs 46.9M weighted shares) after the July 2025 stock sale and the shares issued for ESAero.
• Cash conversion relied on collecting old bills. Operating cash flow was a positive $13.5M against a $5.1M net loss, but that came from a $128.3M drop in accounts receivable. Inventory rose about $98M in the quarter (to $410.8M from $312.9M, +31%) and unbilled receivables rose about $68M, both much faster than revenue. Management links the inventory build to expanding manufacturing capacity; it also fits Switchblade orders that slipped. After $44.0M of spending on property and equipment, free cash flow was about -$30.5M. Cash and investments fell to $675.0M from $713.4M, against $730.1M of 0% convertible notes due 2030. In August AV also spent $29.3M on a new Southern California campus.
• Credit losses ticked up. The bad-debt provision rose to $4.6M from $0.2M, and the allowance for doubtful accounts went from $2.0M to $6.5M in one quarter. The amounts are small, but the jump is worth watching.
• Contract estimates were a small net drag. Net cumulative catch-up adjustments (revisions to expected cost on long contracts) reduced revenue by $3.2M, with higher-than-expected costs on 34 contracts.
• Accounting controls are still flagged. AV has two open material weaknesses — an auditor's term for a control gap serious enough that a material error could slip through. One concerns BlueHalo's financial-close and IT controls. The other is the goodwill-impairment review: in June 2026 AV restated its January-quarter results to add $87.3M of net loss (a larger non-cash write-down of the Space business's goodwill, the acquisition premium carried on the balance sheet). Fiscal 2026 ended with a $265M net loss including $241M of goodwill impairment. The 10-Q says the Space reporting unit is at "increased risk" of failing future impairment tests.

Takeaway: This quarter's profit improvement comes almost entirely from lower amortization, deal costs and interest. Underneath, revenue without the ESAero acquisition fell about 3.5% and adjusted EBITDA dropped. The bull case rests on the record $1.46B funded backlog turning into Switchblade and drone deliveries over the next three quarters.

Outlook: a back-loaded year

Management reaffirmed its fiscal 2027 guidance:

That guidance is demanding. Q1 delivered 22% of the midpoint revenue, so the remaining three quarters must average about $548M–$582M each, 14%–21% above Q1. Adjusted EBITDA needs about $252M–$272M over three quarters after $53.4M in Q1, so the margin has to jump to roughly 15%–16% from 11.1%. That has to happen while R&D rises back toward 7%–9% of revenue.

The backlog is the evidence that it can. Funded backlog (orders with money already appropriated by the customer) rose $274.8M in the quarter to $1,457.8M, and AV holds another $1,366.5M of unfunded backlog (awarded contracts where the customer hasn't yet appropriated the money, which can be cancelled). If the delayed Switchblade orders are among what was booked, they should show up as revenue in Q2 and Q3.

Our read: the drone franchise is healthy. Non-Switchblade UAS products and ESAero are growing, and AxS margins are steady. SCDE, the main BlueHalo-era addition, is shrinking and loss-making after the SCAR termination, and that is where most of the fiscal 2026 write-downs landed. Over the next two quarters, watch whether Switchblade revenue recovers, whether inventory starts turning into deliveries rather than piling up, whether SCDE returns to positive adjusted EBITDA, and whether the material weaknesses are fixed by the fiscal year-end audit. A second quarter near Q1's run-rate would put the full-year revenue range in doubt.

Fiscal-year note: AV's fiscal 2027 runs May 1, 2026 to April 30, 2027. This site files fiscal Q1 2027 (quarter ended August 1, 2026) under calendar 2026, Q1. The next report, fiscal Q2 2027 (quarter ending October 31, 2026), is likely in early-to-mid December 2026, based on last year's December 9 release.