11JUL

Growth soars, margins split the field

2 min read

10:27UTC

Unusual Machines and Red Cat both filed quarterly revenue growth above 500 per cent on 6 August, at gross margins twice apart, while Kratos raised guidance on rockets rather than drones.

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Key takeaway

Two drone makers grew above 500 per cent at gross margins twice apart.

Unusual Machines, which makes components certified under the National Defense Authorization Act, reported second-quarter revenue of $16.7 million on 6 August, up 687 per cent year on year and 106 per cent on the quarter, with gross margin recovering to 34.7 per cent ¹. Headcount ran from 81 at the end of 2025 to 141 by the first quarter and 240 by the close of the second. On 12 August the company dismissed its small regional auditor and engaged Ernst & Young, recording no disagreements, which is the audit standard institutional investors and federal contracting officers look for before writing large cheques. Chief executive Allan Evans describes the third quarter as a deliberate pause to build capacity, so the growth rate is not a trend line.

Red Cat Holdings filed the same day with revenue of $20.2 million, up 527 per cent, at a gross margin of 16.1 per cent ². Gross profit on that revenue came to about one dollar in six. Growth bought at that price is market share rather than profit, and it leaves less room to absorb an import bill that rises in September. Red Cat also confirmed completion of the Quaze Technologies wireless-recharging acquisition, still pending when the company raised capital in June , and confirmed that its Teal Drones subsidiary remains a finalist in the Pentagon's Gauntlet II build sprint .

One set of numbers cuts against the mood. Kratos reported unmanned-systems backlog of $374.6 million at the end of the second quarter, fractionally below the $375.4 million it held three months earlier, while lifting full-year group guidance to between $1.750 billion and $1.810 billion on 30.5 per cent growth driven by rockets and turbines ³. The company has taken 106,000 extra square feet in Oklahoma City for Valkyrie and Firejet production . Floor space went in; the drone order book behind it did not move.

Deep Analysis

In plain English

Three US drone companies reported very different results in early August. Unusual Machines and Red Cat Holdings, both small companies that sell drone parts and finished drones, saw sales more than quintuple compared with a year earlier, though their profit margins remain thin. Kratos, a larger, more established defence contractor, grew much more slowly in drones specifically, and its drone order backlog actually dipped slightly. Kratos still raised its overall guidance for the year, but on the strength of its rocket and turbine businesses rather than drones.

Deep Analysis

Root Causes

Small-cap drone makers are riding Pentagon volume-procurement programmes such as Gauntlet II , which order thousands of low-cost units on tight timelines, favouring firms that can scale production fast even at thin margins over primes built for fewer, higher-margin, exquisite platforms.

Unusual Machines' auditor change, filed the same week as its earnings, is a governance event distinct from the growth story: the 8-K gives no reason for the change beyond the Item 4.01 disclosure requirement, so it should not be read as confirmation of an accounting problem without further filings.

What could happen next?

Meaning
Fast top-line growth at thin margins for the smallest drone makers signals a market still being won on volume and price, not yet on profitability.
Consequence
Kratos's decision to lean on rockets and turbines for growth guidance suggests larger primes see drone-specific margins as less attractive than adjacent defence hardware right now.

Sources:US Securities and Exchange Commission·US Securities and Exchange Commission·US Securities and Exchange Commission

Mentions:Red Cat Holdings →Kratos Unmanned Systems →Pentagon →Quaze Technologies →Oklahoma →Firejet →Gauntlet II →

First Reported In

Update #17 · Two walls close on the drone supply chain

US Securities and Exchange Commission· 20 Aug 2026

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Causes and effects

Caused by

Red Cat raises $225m and wins Japan

Red Cat's June raise and pending Quaze deal (ID:4199) preceded this quarter's completed acquisition.

Occurred 12 Jun 2026

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Pentagon orders 120 drones in five weeks

The Pentagon's July Gauntlet II cut to 19 finalists (ID:4772) is the programme in which Teal Drones is now a confirmed finalist.

Occurred 1 Jul 2026

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Kratos pours concrete before the orders

Kratos's July Oklahoma City expansion (ID:4949) added floor space its flat Q2 drone backlog has not yet filled.

Occurred 6 Jul 2026

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This Event

Growth soars, margins split the field

Comparable growth rates at 34.7 and 16.1 per cent gross margin describe two different businesses wearing the same label.

Different Perspectives

Conservative opposition

The Conservative opposition called on the Government on 9 August to 'urgently audit' equipment for hidden Chinese components, after the Telegraph's K3 SCOUT report. No named MP has been quoted on the record; the call came at party level, alongside the Ministry of Defence's own 10 August statement that no data had been compromised.

Netherlands Ministry of Defence

The Netherlands Ministry of Defence authorised Dutch Naval Design on 4 August to design 12-metre anti-submarine warfare uncrewed vessels for the Dutch-Belgian frigate programme, and to buy an adapted Compact FLASH dipping sonar from Thales Underwater Systems France. The order commits money and a named supplier while Britain's own certification body remains at the market-engagement stage.

Kraken Technology Group

Kraken Technology Group is a UK maritime-defence company based in Portsmouth that builds the K3 SCOUT, and crossed a $1bn valuation in July on a single-sourced $175m raise. The camera components reached the fleet under a third party's written security assurance, which the Platform Authority, which does not yet exist, was never positioned to check.

Navy Commercial

Navy Commercial at Whale Island published two notices on 5 August: 074032-2026, asking industry how to build a Platform Authority to certify uncrewed vessels, and 074351-2026, a GBP10m multi-role USV testbed for the Defence Chief Technology Officer. Responses on the Platform Authority close 19 August, ten days after the cameras were found transmitting to China.

Ministry of Defence

The Ministry of Defence said on 10 August that a routine cyber vulnerability assessment found the camera fault, and a thorough investigation found no evidence that MoD data or systems had been accessed, compromised or transmitted externally. It stripped the cameras of internet connectivity but did not say whether it acted against the supplier.

Thales

Thales converted its 6 July engaging accord with Exail into a definitive combination agreement on 30-31 July, but the tender offer for Exail's remaining shares now closes by early 2028, later than July's timetable implied. Thales integrates its new undersea prime while still bidding against Kongsberg and DRASS's 2027 target for the AUKUS Pillar II contest.