SES AI (SES) Q3 2026 earnings review
SES AI finishes its drone factory, but gross margin drops
SES AI, a maker of lithium batteries for drones and energy storage, grew sales from last quarter while clearance discounting wiped out its gross profit. Third-quarter revenue rose 31% from the second quarter to $6.6 million, but gross margin fell from 23% to 5% as the company cleared out older energy storage hardware. Chief executive Qichao Hu kept the full-year sales plan at $30 million to $35 million, which leaves $14 million for the fourth quarter at the middle of the range — more than double this quarter's pace.
| Product revenue | $6.6M more than doubled from $3.2M a year ago |
|---|---|
| Total revenue | $6.6M +31% from last quarter; -7% from a year ago |
| Gross margin | 4.9% 22.6% last quarter |
| Full-year revenue outlook | Unchanged $30–35M (leaves $11.6–16.6M for Q4) |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because finishing the South Korea drone battery line balanced out weak earnings quality and a steep fourth-quarter sales hurdle. The Chungju factory now has the capacity to build 1 million defense-compliant drone cells a year and is shipping to customers. One caution: although reported net loss narrowed by a quarter to $13 million, $4 million of that improvement came from non-cash accounting gains while operating loss barely budged and cash reserves dropped by $26 million.
The question now is whether initial drone orders can double quarterly sales before year-end. Either the newly audited South Korea line converts its 50-customer pipeline into volume shipments immediately, or the company misses its full-year revenue target. Fourth-quarter revenue and gross margin will settle it.
🐂 Bull Case
South Korea Drone Factory Reaches Full Scale
"Drones and unmanned systems are our central growth priority, and that is where our incremental capital is going," chief executive Qichao Hu said. SES AI makes high-energy lithium batteries for unmanned aircraft at its plant in Chungju, South Korea. Because the facility uses no prohibited Chinese components, its cells meet US National Defense Authorization Act (NDAA) rules for military suppliers.
The battery maker finished upgrading the Chungju line to a capacity of 1 million cells per year in the third quarter and started running it in early October. It won purchase orders from winners of a US defense drone competition, built a pipeline of more than 50 drone makers, and passed six customer factory audits. Meanwhile, its energy storage unit contributed about $3.1 million, or 47% of sales, while materials and early drone samples provided the remaining $3.5 million.
Passing factory audits matters because defense buyers do not place volume orders until they inspect a working line. Customer talks now point to potential demand above 3 million cells a year, so the group has started removing line bottlenecks to triple capacity to 3 million cells by the end of the second quarter of 2027.
What to watch: fourth-quarter drone battery revenue. A figure of $2 million or more would show that sample orders are turning into volume contracts.
Research Spending Cuts Lower Operating Costs
SES AI pledged earlier this year to cut its full-year operating expenses — the day-to-day costs of research and overhead — by more than 20% from 2025 levels after pausing its electric-vehicle battery development work.
Operating expenses fell 15.9% from a year ago and 7.9% from last quarter to $18.7 million. Research and development spending dropped from $15.6 million a year ago to $9.6 million, a decrease of 75.0 percentage points as a share of revenue by our math, which more than offset higher general and administrative overhead of $9.2 million. Across the first nine months of 2026, total operating expenses fell 23.2% to $58.2 million.
Keeping overhead down is essential because the business generates almost no gross profit from product sales yet. Every dollar saved in the lab directly slows the drain on its cash reserves.
What to watch: fourth-quarter operating expenses. Holding spending near or below $18.7 million will lock in the full-year cost-reduction target.
🐻 Bear Case
Reaffirmed Outlook Needs Fourth-Quarter Sales to Double
Hu and finance chief Ray Liu kept their full-year revenue forecast at $30 million to $35 million. Third-quarter revenue rose 30.9% from the second quarter to $6.6 million. Headline revenue fell 6.7% from a year ago because last year included $3.9 million of one-time automotive engineering contracts, whereas physical product revenue more than doubled from $3.2 million a year ago by our math.
- Nine-month revenue delivered: $18.4 million across the first three quarters
- Fourth-quarter revenue implied by the outlook: $11.6 million to $16.6 million ($14.1 million at the middle of the range)
- Required fourth-quarter jump: up 112% from the third quarter and up 209% from a year ago by our math
Hitting the full-year plan requires the company to generate nearly as much revenue in the next three months as it did in the past nine. The company expects a "more meaningful revenue contribution from the drone business starting in Q4 as sample orders convert into mass production purchase orders", but its energy storage business is in the middle of a product changeover and it did not disclose the dollar value of signed drone orders.
What to watch: full-year 2026 revenue against the $30 million bottom of the outlook range when fourth-quarter results arrive.
Hardware Clearance Wiped Out Gross Profit
SES AI gets about half of its revenue from Charge, its energy storage systems business built around UZ Energy, a Chinese battery pack assembler it bought in September 2025. Earlier this year, the company projected a full-year gross margin — the share of sales left after direct manufacturing costs — of about 15%.
Third-quarter gross margin dropped to 4.9%, down 17.7 percentage points from 22.6% in the second quarter and down 46.2 percentage points from 51.1% a year ago, when high-margin automaker engineering fees dominated sales. Cost of revenues — the direct cost of making battery packs and materials — jumped from 77.4% of revenue in the second quarter to 95.1% by our math, leaving just $327 thousand in gross profit. The company blamed "lower-margin sales of older energy storage hardware inventory due to line and product upgrades" as the team switches from 5-kilowatt-hour units to a 16-kilowatt-hour model for 2027.
Clearing old stock brought in top-line revenue but contributed almost nothing toward covering $18.7 million in operating costs. Through nine months, gross margin sits at 14.6%.
What to watch: fourth-quarter gross margin. A rebound above 15% will show whether the margin drop was a one-time inventory clearance or pricing pressure in energy storage.
Accounting Gains Drove the Smaller Net Loss
"SES has reached a significant turning point. We have successfully delivered on the three commitments we made last quarter," Hu said, pointing out that the third-quarter net loss narrowed by 25.3% from the second quarter to $13.4 million.
The income statement shows that core operations barely improved. Operating loss — revenue minus manufacturing costs and operating expenses — moved from $19.2 million in the second quarter to $18.4 million in the third, because the $820 thousand drop in gross profit ate up half of the $1.6 million savings in operating expenses. Instead, the smaller bottom-line loss came from $4.0 million in non-cash accounting gains: $1.8 million from revaluing sponsor earn-out share liabilities and $2.2 million from writing down the acquisition payout owed for UZ Energy. Without those two book gains, the net loss was $17.4 million by our math.
What to watch: fourth-quarter operating loss and operating cash burn. Those two lines measure whether new drone battery sales actually reduce the cash drain.
Cash Burn and Buybacks Drain Liquidity
SES AI relies on its cash pile to fund operations while it scales battery production. Total liquidity — cash and short-term investments — fell 15.8% from $163.0 million at the end of June to $137.3 million at the end of September.
Operations and capital equipment consumed $16.5 million in cash during the quarter. On top of that burn, Hu and Liu spent $9.2 million in September to buy back 16.2 million shares at an average price of $0.57. One month later, in October, the company filed a proxy statement asking shareholders to approve a reverse stock split — combining multiple shares into one — to "broaden our eligibility for institutional ownership and support our continued NYSE listing". Spending cash reserves on buybacks increases the drain on liquidity before the business is self-funding.
What to watch: fourth-quarter cash burn and whether management pauses the remaining $19.1 million buyback authorization to preserve cash for the South Korea factory expansion.
Risks this quarter didn't answer
Three standing concerns from prior quarters received no new figures in the third-quarter shareholder letter or earnings release.
- Molecular Universe software revenue: the company launched version 4.0 (M-Lab) and said large battery makers are evaluating it, but still did not disclose subscription revenue.
- Customer advance payments: the release does not include the footnote table for contract liabilities — upfront cash from energy storage buyers that fell 18% in the first half of the year — which awaits the full quarterly Form 10-Q filing.
- Shareholder litigation: management did not mention the April 2026 securities class action or the July and August shareholder derivative lawsuits; the Form 10-Q legal footnote will carry any status update.
👓 Other Themes
US Defense Rules Shift Battery Demand From China
US and allied military buyers are moving their drone supply chains out of China to comply with National Defense Authorization Act (NDAA) sourcing bans. Even commercial buyers now request non-Chinese cells. That regulatory shift is sending drone makers to SES AI's South Korea plant, though future demand still depends on federal defense budget timelines and strict enforcement of foreign-sourcing bans.
💲 Other KPIs
Working capital tied up in unpaid bills and unsold stock climbed this year. Accounts receivable — money owed by customers for delivered goods — more than doubled from $4.8 million at year-end 2025 to $10.1 million. Inventories rose 63.4% over the same nine months to $8.4 million, absorbing $8.2 million in operating cash across the first three quarters.
Deferred consideration — the performance-based payout owed to the sellers of UZ Energy — dropped from $8.8 million at the end of 2025 to $5.9 million, all of which is now due within a year. The battery maker recorded a $2.2 million non-cash gain from marking down this liability in Q3, bringing nine-month downward adjustments to $3.2 million.
Average share count ticked down 0.5% from 336.3 million in the second quarter, reversing three quarters of steady upward drift from employee stock compensation. The 16.2 million shares repurchased happened in September, so the full reduction in average share count will show up in the fourth quarter.
🔮 Guidance
Unchanged. The battery group still plans to grow full-year sales to $32.5 million at the middle of the range, up 54.8% from $21.0 million in 2025. With $18.4 million booked through September, the outlook leaves $11.6 million to $16.6 million for the fourth quarter — a 112.0% jump from the third quarter at the middle of the range, relying on new South Korean drone cell shipments.
❓ Key Questions
How much fourth-quarter drone revenue is backed by firm orders?
Reaching the $30 million bottom of the full-year outlook requires fourth-quarter revenue to climb by at least $5.0 million from the third quarter. Investors need to know how much of that jump is already under binding purchase orders versus expected sample conversions.
Does management still expect a 15% full-year gross margin?
Nine-month gross margin stands at 14.6% after the third-quarter drop to 4.9%, and the third-quarter letter omitted the prior 15% full-year margin target. Management should clarify whether older 5-kilowatt-hour storage inventory is fully cleared or will weigh on fourth-quarter margins too.
What will tripling South Korea drone capacity cost?
The company plans to expand its Chungju plant from 1 million to 3 million cells per year by June 2027. After spending $2.5 million on equipment through nine months, management has not stated the capital bill for the new high-speed line.
Why write down the UZ Energy payout while maintaining revenue targets?
The company reduced the fair value of the UZ Energy acquisition payout by $2.2 million in Q3 and $3.2 million year to date. Because that payout is tied to UZ Energy's 2025 and 2026 revenue and cash targets, management should explain what missed.