Palladyne AI Corp. (PDYN) Earnings

Management highlights

### Core Technology & Competitive Positioning - The company has built two core capabilities aligned with U.S. Department of War priorities: 1) decentralized embodied collaborative autonomy (DECA) for SwarmOS, which enables real-time on-machine decision-making and cross-platform collaboration without relying on constant cloud connectivity or human intervention (distinct from pre-programmed automated flight offered by competitors); 2) domestic aerospace manufacturing capacity to produce full autonomous weapon systems. - SwarmOS is hardware- and vendor-agnostic, allowing UAVs from different manufacturers to collaborate in swarms. It was successfully tested by U.S. Army soldiers (not just company engineers) in real operational conditions during the Q2 IVMAS exercise, and achieved further success at the larger PCC6 exercise announced the same day as the earnings call. The Army has exercised FY27 contract options and invited Paladine to additional exercises. SwarmOS is also being extended to space domain sensors under a $4.2 million U.S. Air Force contract. ### Product Development Milestones - Gremlin X reusable mini bomber drone advanced from TRL-6 to TRL-7 in Q2 after five rapid design iterations and successful customer field testing under battlefield conditions. Management is evaluating a modular payload version to support ISR and counter-UAS missions in addition to strike missions, with a cost per effect under $1,000. - SwarmStrike low-cost mini cruise missile was selected as one of only 14 participants (and the only small company) for the U.S. Air Force's Relentless Wolfpack Industry Day focused on networked autonomous weapon salvos. A major tier one defense prime also included SwarmOS in its own Relentless Wolfpack proposal, providing third-party validation of the technology. ### Strategic Partnership - In June 2026, Paladine entered an exclusive partnership with Israel Aerospace Industries (IAI) to Americanize, manufacture, and integrate IAI's combat-proven Harop, Harpy, and Mini Harpy loitering munitions for the U.S. Department of War. These systems address a perceived U.S. military capability gap at a far lower cost per mission than existing alternatives. Initial domestic production could be ready within 18 months of a formal government go-ahead, with long-term revenue potential potentially reaching hundreds of millions to billions of dollars. ### Commercial Autonomy (Paladine IQ) - Strategy is focused on high-value applications for dangerous, difficult-to-staff work (e.g., aircraft surface preparation and corrosion treatment). The company expanded its Air Force logistics center robot program this quarter with an additional $2.9 million contract, bringing total program value to over $10.6 million to date. - The business has shifted to a partner-led go-to-market strategy, and reports encouraging early interest from ecosystem partners, with more updates expected in coming quarters. ### Pipeline & Team Expansion - Paladine has submitted proposals for over 20 Department of War programs with an aggregate initial potential value of several hundred million dollars, a material increase in size and volume from six months prior. Most large proposals are for combined hardware-software integrated systems. - The company added retired Lieutenant General Sean Ganey, former head of U.S. Army Space and Missile Defense Command and founder of the Joint Counter UAS Office, to its Defense Advisory Board, a key endorsement of the company's mission and capabilities.

Guidance

- Management reaffirmed the full year 2026 revenue guidance range of $24 to $27 million, which represents 357% to 415% year-over-year growth over 2025 full year revenue of $5.2 million. No upward or downward revision was made to the prior guidance range. - Management also reaffirmed the full year 2026 operating cash burn guidance (inclusive of capital expenditures) of $32 to $36 million, which equates to an average of $8 to $9 million per quarter. Q2 2026 operating cash burn was $11.1 million, above the average quarterly guided rate, driven by increased business development, non-recurring capex, and engineering team expansion. Management expects cash burn to trend lower in the second half of 2026 as revenue and margins ramp, with total second half 2026 cash burn projected at approximately $12 million. - The company ended Q2 with $43.7 million in cash/cash equivalents/marketable securities, and had $24 million in remaining capacity under its ATM equity program, which management views as a flexible, low-cost tool to maintain operating runway.

Segment performance

Total Q2 2026 revenue was $5.8 million, a 470% increase year-over-year and 63% increase sequentially quarter-over-quarter. 1. Product segment (includes precision manufacturing and Brain avionics components): Revenue was $2.7 million, accounting for ~46.6% of total Q2 revenue. The segment booked a $2.3 million follow-on order for more than 1,000 Brain FC1 units, five times larger than the customer's prior order. 2. Engineering services segment: Revenue was $1.9 million, accounting for ~32.8% of total Q2 revenue. This segment serves UAV, missile, loitering munition, and spacecraft programs. 3. DECA AI/Software product development segment: Revenue was $1.2 million, accounting for ~20.7% of total Q2 revenue, with revenue acceleration at the end of Q2 after Q1 suppression from the government shutdown. Total backlog at the end of Q2 was $24.6 million, with a rough composition of ~50% product sales (components/avionics), ~30% software (primarily trial/development contracts, not yet high-volume licenses), and ~20% engineering services. A majority of the current backlog is expected to convert to revenue over the next 12 to 18 months.

Risks & headwinds

- The company's opportunity pipeline includes multiple large programs with varying timelines and probabilities of award; management notes it will not win all submitted proposals, and may not win any, with final outcomes dependent on government funding decisions and successful execution of development milestones. - Current gross margins are suppressed by manufacturing utilization below full capacity, and include upfront setup/investment costs for new programs that have not yet begun generating revenue. - Operating losses and cash burn are expected to continue in the near term as the company invests in product development, team expansion, and manufacturing capacity ahead of revenue scaling. - Contract revenue and backlog conversion timing can vary based on milestone achievement, government funding delays, and contracting processes, creating uncertainty around near-term revenue recognition. - There is no guarantee that successful field testing and positive exercise results will translate into production contracts or meaningful volume revenue. - Expanding domestic manufacturing capacity for the IAI loitering munition program will depend on government demand signals, and the company may need to secure larger facilities if volume demand materializes, creating execution risk.

Analyst Q&A

• Q: What progress has been made on the IAI partnership, including U.S. government outreach and domestic manufacturing planning? /

  A: Paladine has already held preliminary discussions with roughly half of its target U.S. government customers for the IAI loitering munitions, and has encountered meaningful interest across all outreach, with most customers already familiar with the combat-proven systems. The company currently has sufficient manufacturing space for low volumes, but is already shortlisting available existing facilities (to avoid long lead times from new construction) that can be activated quickly if the government approves large-volume production. (203 characters)

• Q: What milestone moved Gremlin X to TRL-7, and how much of the 2026 guidance revenue is already under contract? /

  A: Gremlin X reached TRL-7 after five rapid design iterations and successful independent testing by soldiers in real battlefield conditions, not controlled company demos; TRL-8 will require live fire testing in actual operational conditions. While all backlog is contractually committed, the timing of milestone and delivery recognition can vary, so management could not give an exact split of 2026 revenue from existing backlog, but reaffirmed confidence in the full year guidance range. (332 characters)

• Q: How do Paladine's real-world military exercises differ from competitive development programs like Swarm Forge, and what advantage does Paladine's vendor-agnostic SwarmOS hold? /

  A: Programs like Swarm Forge are early-stage development bake-offs run by acquisition teams to select new technologies, while Paladine has taken a path of putting its finished SwarmOS product directly in the hands of operating soldiers for real-world exercises with no company control over testing. The open architecture, vendor-agnostic model aligns with Pentagon priorities and enables cross-platform collaboration across drones from multiple manufacturers, which is a major unmet need for the U.S. military. (351 characters)

• Q: What is the next step in the sales process after successful IVMAS and PCC6 exercise results, and how will these turn into production orders? /

  A: Exercise results will be compiled into formal evaluations that shape future official requirement solicitations, which Paladine expects to be released within months, not years. There is already internal discussion about retrofitting SwarmOS onto large numbers of already-deployed fielded drones. For Gremlin X, management expects initial volume inquiries for hundreds of units in the near term, as demand for low-cost mini bomber solutions grows. (298 characters)

• Q: What is Paladine's potential involvement in the Golden Dome program, and what is the market opportunity for the Paladine IQ industrial automation product? /

  A: Golden Dome's current core priority is large exquisite interceptor systems for big threats, which is not Paladine's current focus, but management expects potential future opportunities for Paladine's counter-drone capabilities to support smaller regional defense layers of the program. For Paladine IQ, focused on automated dangerous industrial work like aircraft corrosion treatment, the global total addressable market is billions of dollars, with a land-and-expand go-to-market approach targeting deep vertical penetration. (326 characters)