Red Cat Holdings, Inc. (RCAT)·Q1 2024 Earnings Summary

Executive Summary

• Q1 FY2024 revenue was $1.75M, up ~55% YoY, with >70% of Enterprise sales to U.S. government agencies; GAAP EPS was $(0.11) as the company scaled production of Teal 2 and carried under‑utilized factory burden .
• Management introduced revenue guidance of $3.0M for Q2 FY2024 and $5.0M for Q3 FY2024, citing ~$6M of signed purchase orders and seasonally strong federal budget activity as visibility drivers .
• Backlog and inventory conversion provide near‑term funding and output: ~$6M in booked orders; plan to spend ~$3M to convert ~$11M of inventory into 1,200 drones ($18M revenue) as manufacturing scales, supporting margin improvement and operating cash flow later in FY2024 .
• Strategic/tactical catalysts: Blue UAS list, GSA listing and FAA Remote ID certification de‑risk procurement and regulatory compliance; management also highlighted the DoD Replicator initiative as a potential mid‑term demand accelerant .

What Went Well and What Went Wrong

• What Went Well

  • Record Enterprise revenue from the Teal 2 ramp; >70% of Enterprise sales to U.S. government agencies, with announced orders for 344 drones (~$5.2M) and ~$6M in booked orders supporting near‑term shipments .
  • Strengthening regulatory and channel position: Blue UAS approval, GSA listing for Teal 2, and FAA Remote ID certification remove procurement friction and enhance compliance in U.S. airspace .
  • Management tone confident on scaling and visibility: “The Teal team brought a brand new product, the Teal 2, from zero revenue to almost $10 million in sales in just 4 months… We expect to be at a $20 million revenue run-rate next quarter, our fiscal Q3” (CEO) .

• What Went Wrong

  • Gross margin and bottom line remain pressured by factory under‑utilization and OpEx; Q1 gross margin dollars were $0.175M on $1.748M revenue and GAAP EPS was $(0.11) as the company scales production .
  • Continued operating losses from continuing operations (Q1: $(5.57)M) while Consumer segment is held for sale and reported as discontinued operations .
  • Estimate benchmarking absent this quarter: S&P Global consensus data were unavailable at time of analysis, limiting external beat/miss assessment; management, however, provided internal revenue guidance for Q2–Q3 .

Financial Results

• Income statement summary (GAAP)

Notes: Consumer segment is classified as discontinued operations pending sale; revenue presented reflects continuing (Enterprise) operations .

• Balance sheet and operating KPIs

• Segment view (discontinued operations)
  • All reported revenue in Q1 FY2024 press release pertains to Enterprise (Teal/Skypersonic); Consumer (Fat Shark/Rotor Riot) is presented as discontinued operations pending sale to Unusual Machines .

Guidance Changes

No formal guidance was provided for margins, OpEx, OI&E, or tax rate; management indicated OpEx around $5M is a reasonable run-rate .

Earnings Call Themes & Trends

Management Commentary

• CEO (strategic positioning): “We designed the Teal 2 to meet the technical requests and features sought by our target customer, the warfighter, such as advanced proficiency for nighttime operations… We expect to be at a $20 million revenue run-rate next quarter, our fiscal Q3” .
• CEO (regulatory tailwinds): “DJI… can no longer by law be bought by anyone that receive Federal dollars… This has created a very large market… for only us and one other manufacturer in the U.S. that can build at scale” .
• CFO (backlog and inventory conversion): “We are already beginning to receive repeat orders and presently have an order backlog of approximately $6 million… it will cost approximately $3 million to convert our existing $11 million of inventory into approximately 1,200 drones, which represents revenues of $18 million” .
• CFO (margin trajectory): “We will manufacture these additional drones at a lower unit cost, which will increase gross margins and operating cash flows” .

Q&A Highlights

• Capital needs and runway: Management outlined ~$10.4–$14.4M in potential non‑dilutive capital (inventory conversion proceeds, Consumer sale cash, SRR prototype funding, research projects, and credit lines), indicating this is “more than enough to get us to cash flow positive” as revenue scales .
• Gross margin scaling: With factory fully utilized, management believes gross margins could reach “up into the 70%” range; current burdened gross margin on near‑term inventory conversion implied ~22% given under‑utilization .
• Contract structure and pricing: SRR and GSA sales are fixed‑price; replicator program could provide up‑front payments, improving working capital dynamics .
• Competitive landscape: Active bake‑offs with Skydio and Vantage Robotics for Border Patrol; SRR competition ongoing with next down‑selection expected around year‑end/early January (timing subject to Army process) .
• OpEx run‑rate: ~$5M quarterly viewed as a reasonable level; higher revenues expected without “dramatic” OpEx step‑ups .

Estimates Context

• S&P Global/Capital IQ consensus estimates for Q1 FY2024 revenue and EPS, and for near‑term quarters, were unavailable at the time of this analysis due to a data access limit. As a result, we cannot provide an independent beat/miss comparison against Wall Street consensus this quarter. We anchor near‑term expectations to company‑provided revenue guidance of $3.0M (Q2) and $5.0M (Q3) .

Prior Two Quarters – Trend Markers (Qualitative)

Key Takeaways for Investors

• The Teal 2 ramp is real: YoY growth, government mix >70%, and ~$6M booked orders plus a clear inventory conversion plan support management’s $3M/$5M Q2/Q3 revenue cadence .
• Margin is the swing factor: Under‑utilization depressed Q1 gross margin, but scaling output on fixed‑price programs and software/partner attach should lift margins through FY2024; management’s long‑run target at scale is materially higher .
• Procurement friction is falling: Blue UAS, GSA, and FAA Remote ID validation should accelerate order flow and ease compliance risk for federal buyers .
• Optionality from U.S. programs: The DoD Replicator initiative and SRR Tranche 2/3 consolidation could be material catalysts; timeline commentary suggests potential order activity in the next 3–6 months (subject to program timing) .
• Liquidity levers exist: Inventory conversion, Consumer divestiture proceeds/equity, SRR prototype funding, and government‑receivable lines reduce near‑term dilution risk as the company approaches cash flow breakeven with scale .
• Near‑term trading setup: Watch for order announcements, SRR down‑selection milestones, and margin commentary on the next print; confirmation of the Q2/Q3 revenue guide and signs of utilization improvement are likely stock drivers .

Supporting Documents Cited

• Q1 FY2024 8‑K Results/Press Release (Sept 19, 2023): financial statements, backlog, and guidance .
• Q1 FY2024 8‑K 2.02 Press Release (Sept 11, 2023, corrected): revenue and Q2/Q3 guidance; CEO outlook/run‑rate .
• Q1 FY2024 Earnings Call Transcript (Sept 19, 2023): scaling plans, capital runway, margins, competitive landscape .
• FAA Remote ID Certification (Aug 22, 2023): compliance and technical differentiation .
• Teal 2 GSA Listing (July 20, 2023): procurement channel availability .