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Red Cat Holdings, Inc. (RCAT)·Q3 2024 Earnings Summary

Executive Summary

  • Q3 FY2024 delivered record revenue of $5.85M, up ~250% YoY and ~49% QoQ, and came in ~16% above prior guidance; gross margin was ~19%, with operating loss improving sequentially .
  • Management raised Q4 FY2024 revenue guidance to ~$7.0M and reiterated expectations for continued double-digit sequential growth into FY2025 .
  • Backlog remained strong at ~$5.1M; combined cash and accounts receivable totaled ~$12.7M at quarter-end, bolstering near-term liquidity .
  • Strategic focus on Teal 2 adoption, AI/software partnerships (Prism AI, EW radio features, Primordial Labs voice control) and SRR program positioning is expected to lift margins meaningfully over time .

What Went Well and What Went Wrong

What Went Well

  • Record revenue on third consecutive quarter of double-digit sequential growth, exceeding guidance by ~16%: “our third quarter results were exceptional, and we once again exceeded our guidance by 16%” .
  • Strong pipeline/backlog and international expansion: backlog ~$5.1M; “we have now sold our products to customers in over 10 different countries” .
  • Margin roadmap supported by software attach and manufacturing scale: management believes software features can drive margins to ~65%+ with potential to approach ~85% when multiple features are purchased .

What Went Wrong

  • Gross margin variability persists due to SRR engineering mix and generous warranty practices; Q3 margin ~19% was down sequentially vs ~30% in Q2 as mix and warranty costs weighed .
  • Operating loss remains material ($4.45M) and net loss was $5.49M; cash used in operations was significant on a YTD basis, underscoring the need for scale and efficiency gains .
  • Consumer segment divestiture creates transitional complexity (discontinued ops), though simplifies enterprise focus; CFO transition announced during the period .

Financial Results

Quarterly Trend (oldest → newest)

MetricQ1 FY2024 (Jul 31, 2023)Q2 FY2024 (Oct 31, 2023)Q3 FY2024 (Jan 31, 2024)
Revenue ($USD)$1.748M $3.9M $5.848M
Gross Margin %10% 30% ~19%

Q3 FY2024 vs Prior-Year Q3

MetricQ3 FY2023Q3 FY2024
Revenue ($USD)$1.668M $5.848M
Gross Margin ($USD)-$0.097M $1.102M
Operating Loss ($USD)$5.184M $4.447M
Net Loss ($USD)$5.666M $5.489M
Diluted EPS ($USD)-$0.10 -$0.10
Weighted Avg Shares (MM)54.294 55.688

Actuals vs Consensus

MetricQ3 FY2024 ActualQ3 FY2024 Consensus
Revenue ($USD)$5.848M N/A – S&P Global consensus unavailable
Diluted EPS ($USD)-$0.10 N/A – S&P Global consensus unavailable

Note: We attempted to retrieve S&P Global consensus estimates but they were unavailable due to an access limit at time of request.

KPIs

KPIQ3 FY2024
Funded Backlog ($USD)~$5.1M
Cash + Accounts Receivable ($USD)~$12.7M
Q4 FY2024 Revenue Guidance ($USD)~$7.0M

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueQ3 FY2024~$5.0M (issued in Q2) Actual $5.848M Beat; ~16% above guidance
RevenueQ4 FY2024N/A~$7.0M Raised/Introduced
Gross Margin (Full Year)FY2024N/A25–30% expected Introduced
LT Gross Margin TargetLTN/A~50% (ex-software); higher with software Introduced

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
SRR (Short Range Reconnaissance)Down-selected as Tranche 2 finalist; $3M amendment; winner-take-all expected; engineering mix affects margins Final prototypes due May; factory at 1.5 shifts; positioned on cost/requirements; expect award later in calendar 2024 Momentum building toward award
Replicator InitiativeMid-term revenue opportunity; DoD attritable swarms; fixed pricing; upfront funding potential Reinforced positioning (swarm capability, Four Ship; 8-hour perch-and-stare demo); limited public announcements expected Increasing strategic relevance
AI/Software PartnershipsN/A in Q1 detail (launch context); manufacturing ramp Teledyne FLIR Prism AI (+~25% margin), EW radio features (+~20%), Primordial Labs voice control; Athena AI/Reveal/Tomahawk integrations Expanding ecosystem; margin accretive
Manufacturing/ScaleFacility in Salt Lake City fully operational; utilization to improve margins Mass production mode; 1.5 shifts; tens of thousands capacity demonstrated Scaling up
International DemandRFPs in >10 countries in motion Expect announcements later in spring; “year of international” Strengthening pipeline
Supply ChainProactive inventory strategy (chips secured); conversion path “Fine for over 9 months”; not a daily concern Stable

Management Commentary

  • “We once again exceeded our guidance by 16%, achieving our best quarter ever… We believe the Teal 2 airframe is becoming the small UAS of choice… software partnerships… will significantly increase our gross margins.” – Jeff Thompson, CEO .
  • “Gross margin… ~19%… variability… SRR deliverables and generous warranty… We expect full year gross margin to end between 25% and 30%… and believe we can reach ~50% as production scales.” – Leah Lunger, Interim CFO .
  • “We believe customers who purchase [Prism AI]… will increase our gross margins by approximately 25%… radio software… increase margins by approximately 20%… could approach 85% gross margins [with multiple features].” – Jeff Thompson .
  • “Q4 guidance is approximately $7 million, putting us at almost a $30 million annual run rate.” – Jeff Thompson .

Q&A Highlights

  • Margin trajectory: Management sees path to ~50% GM with scale and improved yields/scrap, with software attachments pushing margins higher; warranty generosity to moderate over time .
  • Profitability threshold: At ~50% GM, profitability expected around ~$11M quarterly revenue, given ~$5.5M OpEx run-rate .
  • Replicator positioning: Strong fit with attritable swarms; limited public disclosures expected; Four Ship swarm and prolonged perch-and-stare demo cited .
  • International pipeline: >10 large RFPs, some larger than SRR; management expects announcements later spring .
  • Capacity/production: 1.5 shifts in Salt Lake City, able to scale; backlog managed to customer lead-times .
  • Pricing/Q2 context: GSA-based pricing; drone+controller ≈$15K; discounts only at high-volume tiers (≥100 systems) .

Estimates Context

  • Wall Street consensus (S&P Global Capital IQ) for Q3 FY2024 was unavailable at time of request due to access limits; we were unable to retrieve EPS, revenue, EBITDA, target price, or recommendation data. As such, comparisons to consensus are not provided.
  • Given actuals and raised Q4 guidance, sell-side models may need to reflect: higher near-term revenue run-rate, gross margin variability tied to SRR engineering mix and warranty costs, and upside from software attach over 2024–2025 .

Key Takeaways for Investors

  • Revenue momentum is resilient: three straight quarters of double-digit sequential growth; Q3 beat prior guidance by ~16% and Q4 is guided to another record at ~$7M .
  • Margin story is intact but lumpy near-term: expect 25–30% FY2024 GM with a roadmap to ~50% as scale improves; software attach offers substantial incremental margin uplift .
  • Catalysts ahead: SRR award (winner-take-all), Replicator program orders, and international RFP decisions could materially alter the revenue base and capital needs .
  • Liquidity supports execution: ~$12.7M cash+AR and strong backlog provide runway; Consumer divestiture streamlines focus on enterprise defense UAVs .
  • Operating leverage path: At ~50% GM and ~$11M quarterly revenue, profitability becomes achievable; watch quarterly OpEx discipline and margin mix .
  • Narrative for trading: Any confirmations on SRR/Replicator or large NATO/ally wins should be significant stock catalysts; margin prints tied to software uptake could reset expectations .
  • Risks: Near-term gross margin variability (SRR mix, warranty), timing uncertainty around government programs/announcements, and execution on scaling to second shift and international deliveries .