AIRO Group Holdings, Inc. Common Stock (AIRO) Earnings

Management highlights

### Core Strategic Direction & Portfolio Focus - Arrow's primary strategic focus is the unmanned drone market, with priorities including diversifying the revenue base, scaling manufacturing, reducing quarterly revenue variability, accelerating new product introductions, and embedding AI across all product and service offerings. - Management remains disciplined on capital allocation, actively evaluating accretive inorganic (M&A) opportunities that enhance the core drone, avionics, and electronics portfolio, with M&A viewed as a lever to reduce quarterly revenue variability over time. ### Drone Segment Milestones & Development Progress - The RQ-35 drone achieved official Blue UAS certification, making it eligible for U.S. Department of Defense (DOD) and federal government procurement under NDAA requirements, opening new large-scale domestic defense opportunities. - The new RQ-70 long-range ISR platform was unveiled; it leverages RQ-35 battle data and existing NDAA-compliant supply chains, offers flexible configuration, 8 hours of endurance, 100km of range, and resilience in GPS-denied environments. Production start is confirmed for January 2027, with strong early customer interest already reported. - Development of the JC-250 and JX-250 cargo/ISR drone variants is progressing on schedule, with first flight still on track for late 2026. Development costs are tracking low double-digit percentages below internal expectations, driven by shared platform design, favorable supply chain negotiations, cross-platform synergies, and efficient R&D execution. ### Cross-Business Operational Updates - Avionics and drone operations have been consolidated at a single facility in Phoenix, Arizona, with expected cross-segment synergies expected to materialize in coming quarters. Bringing avionics systems in-house for drone platforms will reduce supply chain complexity and improve long-term gross margins. Next-generation avionics solutions received positive customer feedback at the 2026 EAA Air Show. - Management is evaluating strategic alternatives for the training segment, with an update expected by the end of 2026. While the segment has long-term growth potential for close air support training, ongoing task orders from the U.S. government do not align with Arrow's core strengths, and the business remains capital-intensive. - As of July 31, 2026, Arrow's preliminary cash balance was approximately $56 million, driven by collection of late-quarter international drone delivery receivables, strengthening the company's balance sheet and liquidity position.

Guidance

- Management reaffirmed full-year 2026 revenue growth guidance of 15% to 25% year-over-year, maintaining the prior guidance range. - A material drone delivery originally expected in Q3 2026 was pulled forward to Q2, resulting in first half 2026 revenue representing ~50% of full-year expectations. Management expects second half 2026 revenue to be in line with or modestly above first half revenue, with Q3 revenue expected to decline sequentially from Q2, followed by stronger Q4 2026 revenue that is projected to be modestly above Q2 levels. - Full-year 2026 gross margin is expected to be broadly in line with first half 2026 levels (which was 64% in Q2), with modest gross margin compression versus 2025 expected. - Full-year 2026 adjusted EBITDA is expected to be negative mid to high teens millions of U.S. dollars, aligned with the quarterly revenue cadence. - Management expects revenue stability benefits from new product introductions (RQ-70, JC-250/JX-250) to begin materializing in 2027, with continued quarterly volatility reduction in subsequent years. Positive free cash flow is projected for 2027 and beyond.

Segment performance

1. Drone Segment: Generated total Q2 2026 revenue of approximately $43.2 million, with outperformance versus expectations driving the 76% year-over-year total company revenue growth. The segment contributed over 90% of total reported drone backlog of $163 million, almost entirely from RQ-35 orders with a very small share from RQ-70. Total drone backlog grew 9% quarter-over-quarter to $163 million, with the majority expected to convert to revenue within 12 months. 2. Avionics and Electronics Segment: Delivered largely flat revenue quarter-over-quarter, with demand stable and consistent with the prior quarter. Revenue performance underperformed expectations in Q2 2026, partially offsetting drone segment outperformance. 3. Training Segment: Underperformed relative to expectations, and remains capital-intensive requiring significant ongoing investment. The segment has limited strategic synergy with Arrow's core drone business, and management is currently evaluating strategic alternatives for the segment.

Risks & headwinds

- The company's business currently exhibits significant quarterly revenue variability, driven by the timing of large drone deliveries, which creates earnings volatility. - Foreign exchange headwinds are expected to be greater than previously anticipated in the second half of 2026, with an estimated incremental negative revenue impact of a few million U.S. dollars. - The Nord and Bullitt joint ventures in Ukraine face significant permitting delays, as the Ukrainian government has halted most aircraft and technology licensing transfers to the U.S. amid ongoing conflict, creating uncertainty for these partnerships. - The training segment requires significant ongoing capital investment, has underperformed performance expectations, and has limited synergy with Arrow's core drone business. - Forward-looking results are subject to general market and macroeconomic uncertainties, and actual performance may differ materially from management's projections due to known and unknown risks.

Analyst Q&A

• Q: What is the mix of U.S. vs international orders in the current drone backlog, and what milestones will drive backlog growth going forward? /

  A: The current reported $163 million drone backlog is 100% international orders, composed almost entirely of RQ-35 with a tiny RQ-70 share, with most expected to convert to revenue in 12 months. Blue UAS certification for RQ-35 is the key milestone opening U.S. defense procurement, with a growing pipeline of U.S. RFQs that will add to backlog as they convert to orders. Early customer interest in RQ-70 is very strong, as it fills a gap in the high-end long-endurance ISR market.

• Q: How is liquidity tracking, what is the investment pace for JC-250/JX-250 development, and when do you expect to reach positive free cash flow? /

  A: Liquidity is tracking in line with internal expectations, with cash reaching ~$56 million as of July 31 after collection of late Q2 receivables. Development costs for the cargo/ISR variants are low double-digit percentages below initial projections, as shifting focus from the passenger variant significantly cut expected development costs. Management expects to reach positive free cash flow in 2027 and beyond.

• Q: What is the current status of the Nord and Bullitt joint ventures in Ukraine? /

  A: Ongoing conflict has led the Ukrainian government to halt most aircraft and technology licensing transfers out of the country, creating significant permitting delays for the JVs. While Arrow is still working with local counsel to resolve the permitting issues, the company is not dependent on these JVs for growth, and is evaluating additional complementary drone market partnerships to expand access globally.

• Q: What is the update on strategic alternatives for the training segment? /

  A: Management expects to finalize a decision on the training segment's strategic direction by the end of 2026, and is currently evaluating a full range of options. While the training segment has long-term market opportunity, it is capital-intensive and has limited synergies with Arrow's core drone and avionics business, so the company is prioritizing capital allocation to its core drone-focused strategy.