Negative Points

• International revenue declined approximately 15% year-over-year due to temporary slowdowns in deliveries from a contract manufacturer ramp-up.

• Q4 gross margin decreased to 30.6% from 31.0% in the prior year, impacted by program mix and higher net EAC changes.

• FY27 free cash flow conversion is expected to be below the 50% target at approximately 35%, with Q1 anticipated to be a larger outflow due to inventory investments.

• Operating expenses increased $13 million in Q4, driven by higher compensation and R&D costs, partially offsetting margin gains.

• GAAP net loss for FY26 was $30 million, though improved from the prior year, reflecting ongoing profitability challenges.

• The outlook does not incorporate potential tailwinds from increased defense budgets or multi-year agreements, which could be delayed or not materialize.

Q & A Highlights

Q: Can you provide more detail on the fiscal 2027 revenue outlook and how much it reflects recent large framework agreements or European defense growth versus a better outlook on the core business? A: Bill Ballhaus (CEO) stated the increased outlook is a reflection of broad-based demand across the portfolio, driven by record bookings and backlog. He emphasized that very few of the market tailwinds discussed are reflected in the current outlook. The visibility for FY27 and into FY28 is high due to the record next 12-month backlog of $1 billion, but potential tailwinds in areas like CPA, effectors, munitions, space, and missile defense, as well as improvements in backlog conversion (including the Palantir partnership), are not incorporated into the guidance and represent potential upside.

Q: How should we think about the margin expansion trajectory for fiscal 2027? Is it driven by pricing, mix, or volume leverage? A: Bill Ballhaus (CEO) explained that the margin expansion is a continuation of the progression of backlog margins. The company is burning down lower-margin backlog in the first part of the year, with margins increasing as they move through the year. By the end of fiscal 2027, they expect to be operating in line with their target profile, which is a low-to-mid-20s adjusted EBITDA margin.

Q: Can you provide more detail on the Palantir agreement? Is it more of an EBITDA enhancement or a real top-line opportunity? A: Bill Ballhaus (CEO) stated that while it is early, the sole focus of the DOW-sponsored initiative is to get technology to the warfighter faster. Naturally, this could lead to increased revenue tied to deliveries, increased margins due to operating leverage, and improvements in cash. He noted that these are the primary KPIs that could be positively impacted, but they are early into the relationship and will provide updates as results materialize.

Q: How does the record backlog and visibility affect your ability to manage production efficiency, supply chain, and facilities utilization? A: Bill Ballhaus (CEO) stated that the increased next 12-month backlog provides great confidence in the outlook and execution. The even larger increase in backlog beyond the next 12 months gives them the ability to plan further ahead, work with the supply chain to optimize across the full lifecycle, and provides more degrees of freedom to drive improvements in performance.

Q: What are the capital priorities for the upcoming year given the improved free cash flow and working capital performance? A: Bill Ballhaus (CEO) reiterated that the primary focus is on the organic value creation opportunity. Due to strong demand signals, they will make targeted investments in inventory, facilities, and CapEx to help scale and accelerate organic growth. The main priority remains capturing the market tailwinds they see.

Q: Is there anything limiting growth in the FY27 and FY28 outlook, such as budget certainty or strategic inventory constraints? A: Bill Ballhaus (CEO) framed it less as constraints and more as the natural progression of the portfolio from development to higher-rate production. The outlook reflects a move from low-to-mid single-digit growth to approaching double-digits and then into double-digits. He reiterated that there are opportunities to outperform this outlook through improved backlog conversion and unincorporated market tailwinds.

Q: What is the revenue opportunity for CPA-based ruggedized servers, and are they higher or lower margin than other programs? A: Dave Farnsworth (CFO) did not dimension the specific revenue opportunity but reiterated strong demand and growth ahead of expectations. He pointed to the radar line item as a significant piece of this growth. Bill Ballhaus (CEO) added that they are seeing new program opportunities, including interest in smaller form factors, which could open up a new TAM and act as another accelerator for the CPA area.

Q: Can you provide more detail on the agreement related to securing memory? How significant was it to bookings, and does it fall within the typical margin of the rest of the backlog? A: Bill Ballhaus (CEO) stated it was one of the more significant multi-year bookings for the year and that this part of the business tends to run at the higher end of the margin profile. Dave Farnsworth (CFO) added that this was a case where the customer proactively wanted to secure the supply early, which is a critical signal of customer demand and partnership.

Q: Are there any segments or markets that are outsized contributors to the duration of agreements and multi-year partnerships? A: Bill Ballhaus (CEO) noted a small number of multi-year orders across the business. However, the munitions agreements and multi-year strategic frameworks are still considered potential tailwinds. These are in the pipeline but have yet to materialize in bookings. Dave Farnsworth (CFO) added that they expect more clarity on these in the first and second quarters of fiscal 2027, and they have not included any of this in the current outlook due to uncertainty in timing and structure.

Q: What were the drivers of the strong growth in the domestic business, and what caused the decline in international sales? A: Bill Ballhaus (CEO) highlighted that 86% of the business is domestic and grew at 13%, reflecting strong growth tailwinds. The decline in international sales was attributed to a temporary slowdown in deliveries as they ramped up a contract manufacturer for their international business. He expects these issues to be worked out over the next couple of quarters, noting that the international backlog and demand remain strong.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .