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Edited Transcript of AVAV earnings conference call or presentation 5-Mar-19 9:30pm GMT

Q3 2019 AeroVironment Inc Earnings Call

MONROVIA Mar 7, 2019 (Thomson StreetEvents) -- Edited Transcript of AeroVironment Inc earnings conference call or presentation Tuesday, March 5, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Steven A. Gitlin

AeroVironment, Inc. - VP Corporate Strategy, IR & Corporate Communication

* Teresa Covington

AeroVironment, Inc. - Senior VP & CFO

* Wahid Nawabi

AeroVironment, Inc. - CEO, President & Director

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Conference Call Participants

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* Joseph William DeNardi

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst

* Kenneth George Herbert

Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst

* Louie Dipalma

William Blair & Company L.L.C., Research Division - Analyst

* Peter J. Arment

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Steven A. Gitlin, AeroVironment, Inc. - VP Corporate Strategy, IR & Corporate Communication [1]

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Good afternoon, ladies and gentlemen, and welcome to AeroVironment's Third Quarter Fiscal Year 2019 Earnings Call. This is Steven Gitlin, Vice President of Investor Relations for AeroVironment. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

Joining me today from AeroVironment are President and Chief Executive Officer, Mr. Wahid Nawabi; and Senior Vice President and Chief Financial Officer, Ms. Teresa Covington.

Please note that on this call, certain information presented contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statements that may predict, forecast, indicate or imply future results, performance or achievements. And they contain words such as believe, anticipate, expect, estimate, intend, project, plan or words or phrases with similar meaning.

Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control that may cause our business, strategy or actual results to differ materially from the forward-looking statements. For further information on these risks, we encourage you to review the risk factors discussed in AeroVironment's periodic reports on Form 10-K and Form 10-Q filed with the SEC and the Form 8-K filed today with the SEC, along with the associated earnings release and the safe harbor statement contained therein.

The content of this conference call contains time-sensitive information that is accurate only as of today, March 5, 2019. The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after this conference call.

We will now begin with remarks from Wahid Nawabi. Wahid?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [2]

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Thank you, Steve, and welcome to our third quarter fiscal year 2019 earnings conference call. On today's call, we will focus on 3 key messages. First, we are delivering outstanding results. Second, we are positioned very well to achieve our increased fiscal year 2019 financial goals. And third, we continue to make progress on our key growth initiatives that drive long-term value.

I will begin by reviewing our third quarter fiscal year 2019 financial and operating performance, and then provide an overview of some notable developments during the quarter. Next, Teresa Covington will provide a detailed review of third quarter and year-to-date financials. Then I will discuss our increased guidance for fiscal year 2019, which reflects our continued strong momentum. Teresa, Steve and I will then take your questions.

We are successfully executing our fiscal year 2019 plan and continue to deliver strong results, as evidenced by the following year-over-year comparisons. Third quarter revenue of more than $75 million increased by 38%. Gross margin of 40% increased by 7 percentage points from 33%. Earnings per diluted share from continuing operations of $0.35 increased significantly from a loss of $0.02, and funded backlog of $133 million increased by 17%. We continue to maintain a high funded backlog, contributing to evenly distributed quarterly revenue this year.

Year-to-date, our performance reflects strong improvement over last year. Revenue of $226 million for the first 3 quarters increased by 46%. Gross margin of 40% increased by 3 percentage points from 37%. And earnings per diluted share from continuing operations of $1.49, including a $0.26 onetime gain on a litigation settlement, increased by $1.37.

Given our strong results in the quarter and year-to-date, along with the continued progress we're making to strengthen our financial and operating performance, we have raised our full year guidance, which I will discuss after Teresa's comments.

Now let's review highlights that contributed to our success in the quarter and year-to-date performance. In our core defense business, our market-leading small UAS and Tactical Missile Systems represented 78% of third quarter revenue or $59 million. International end customers for small UAS represented about 36% of third quarter revenue or $27 million. This data point is available by subtracting HAPS revenue from international revenue in our 10-Q. Note that in our 10-Q filing, we provide information on the distribution of revenue by customer category and geographic location. The U.S. government category in this presentation includes foreign military sales or FMS, which has grown this year as compared to direct commercial sales or DCS.

We have more than 45 international customers for our small UAS. We believe there is strong international demand for our Switchblade Tactical Missile Systems and continue to work with international customers who are interested in the solution. However, we have yet to receive U.S. government approval to export this game-changing capability. We remain confident in the international potential for Switchblade among the U.S. DoD's strongest allies.

Each and every one of our target market segments has been highly competitive. Beginning with the initial U.S. Marine Corps Program of Record competition in 2003 for Dragon Eye, which we won. We proceeded to win the next 3 sole-source U.S. DoD competitions: the Army in 2005, the Air Force in 2006 and the USSOCOM in 2008. We were selected as one of multiple awardees of the Army program recompete in 2012 and won more than 90% of the task order dollars under that contract until it's recompete in 2017. We are now one of awardees competing for task orders on that contract.

In the international markets, we continue to compete across the globe and maintain our high win rate. While we have not won every small UAS opportunity, including the U.S. Army's most recent Soldier Borne Sensor order, we remain focused on competing effectively with our solutions today and developing the capability that will drive customer success and shareholder value tomorrow.

In our Tactical Missile Systems product line, strong U.S. government funding is in place to fund procurement of Switchblade systems. As Teresa reported in prior quarters, due to new accounting standards, revenue from Tactical Missile Systems contracts is now recognized over time, which generally accelerates the timing of when revenue is recognized and results in an increase to unbilled receivables. This effect contributed to our unbilled receivables balance of $52 million at the end of our third quarter. Another reason for this additional buildup in unbilled receivables is ongoing test and evaluation of our Switchblade systems, which is part of our customer's long acceptance process. We believe this unbilled receivables balance will decline over the coming months.

As a technology innovator, we're developing future-defining capabilities that will make tomorrow's solutions even more compelling than those we offer today. For example, our solutions already benefit from basic levels of autonomy such as GPS waypoint navigation, Follow Me modes of operation, sensor-driven flight controls, visual tracking, autonomous mission planning and other capabilities.

Our Quantix system delivers a high level of automation, including flight planning, takeoff and landing, data transmission, georectified image stitching and more. During the quarter, we deployed Quantix to help the National Park Service rapidly survey extensive damage caused by devastating wildfires across the Santa Monica Mountains National Recreation Area.

With a different solution, AeroVironment recently demonstrated a completely automated sense, launch, target identification and strike capability for our military customers. This is an important and innovative capability that we are investing in and believe will play a vital role in protecting our troops, reducing the cognitive load they must deal with in combat, neutralizing threats and helping defense and commercial customers proceed with certainty.

We continue to make progress on our $76.6 million customer-funded HAPS development and demonstration program. Please be aware that the HAPS design and development agreement provides significant flexibility for additional program funding as it progresses through its current phases.

At the beginning of our fourth quarter, we determined that we would exercise our onetime option to increase our investment in the HAPSMobile, Inc. joint venture, doubling our ownership from 5% to 10%. This will require an additional investment of approximately $5.7 million in the fourth quarter. We have the option to increase our ownership from 5% to up to 19% of the joint venture and select the 10% based on several factors. First, we chose to increase our ownership because we strongly believe in the long-term value-creation potential of this business. Developing, demonstrating, certifying and deploying this capability will support the success of the JV. Our partner is an expert in the global telecommunications industry, and we believe that, together, we have the potential to create significant value.

Second, for the HAPS business, we are presented with a portfolio of potential investment opportunities requiring our capital. These include participating in additional rounds of funding for the JV, establishing a large-scale manufacturing capability, building a global operations and maintenance capability, adapting HAPS and applying it to defense markets and incrementally investing in R&D to secure critical intellectual property. All of the above have the potential to consume significant capital, and we must balance these investment opportunities against one another on a continuous basis.

Third, we balance the portfolio of potential HAPS-related investments with other business opportunities, including small UAS, Tactical Missile Systems and Commercial Information Solutions. We continuously evaluate relative investment requirements, timing and risk to optimize our returns. For all of the above reasons, we decided to double our ownership position in the HAPS joint venture.

In summary, we are in a strong position to deliver great results to our -- all of our stakeholders. With a strong core business and progress in our growth initiatives, we're delivering value now and remain well positioned to build onto our successes and drive even greater value over the long term.

Now I will turn the call over to Teresa Covington for a summary of the quarter and year-to-date financials. Teresa?

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Teresa Covington, AeroVironment, Inc. - Senior VP & CFO [3]

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Thank you, Wahid, and good afternoon, everyone.

AeroVironment's fiscal 2019 third quarter results are as follows. Revenue from continuing operations for the third quarter fiscal 2019 was $75.3 million, an increase of $20.7 million or 38% from the third quarter fiscal 2018 revenue of $54.6 million. The increase was due to an increase in product deliveries of $10.6 million as well as an increase in service revenue of $10.1 million. Third quarter fiscal 2019 revenue by major product lines/program is as follows: small UAS was $47.7 million, Tactical Missile Systems was $11.3 million, HAPS was $13.6 million, and other was $2.8 million.

Gross margin from continuing operations for the third quarter fiscal 2019 was $30.4 million or 40% of revenue compared to $18.3 million or 33% of revenue for the third quarter fiscal 2018. The increase in gross margin was primarily due to an increase in product sales margin of $8.7 million and an increase in service margin of $3.5 million. Gross margin as a percentage of revenue increased from 33% to 40% primarily due to the increased sales volume, which resulted in a decrease in the per unit fixed manufacturing and engineering overhead support costs as well as favorable product mix.

Looking at the rest of the income statement. SG&A expense from continuing operations for the third quarter of fiscal 2019 was $14.5 million or 19% of revenue compared to SG&A expense of $11.5 million or 21% of revenue for the third quarter of fiscal 2018. R&D expense from continuing operations for the third quarter of fiscal 2019 was $8.1 million or 11% of revenue compared to R&D expense of $6.6 million or 12% of revenue for the third quarter of fiscal 2018.

Income from continuing operations for the third quarter of fiscal 2019 was $7.8 million or 10% of revenue compared to $0.2 million for the third quarter of fiscal 2018. The increase in income from operations was primarily due to an increase in gross margins of $12.1 million, partially offset by an increase in SG&A expense of $3 million and an increase in R&D expense of $1.5 million.

Net other income for the third quarter of fiscal 2019 was $2.2 million compared to net other income of $0.4 million for the third quarter of fiscal 2018. The increase in net other income was due to income from the transition services agreement with the buyer of the Efficient Energy Systems business and higher interest income on our investments.

The effective income tax rate from continuing operations was 9.4% for the third quarter of fiscal 2019 compared to an effective income tax rate of 139.9% for the third quarter of fiscal 2018, which included the impact of a onetime deferred tax expense resulting from the remeasurement of our existing deferred tax assets and liabilities of $3.1 million. The decrease in our effective tax rate for the third quarter fiscal 2019 was also due to the reduction in the fiscal 2019 federal statutory rate from 34% -- 30.4% to 21%.

Equity method investment activity, net of tax, for the third quarter of fiscal 2019 was a loss of $0.7 million or $0.03 per diluted share compared to a loss of $0.4 million, net of tax, for the third quarter of fiscal 2018.

Net income from continuing operations attributable to AeroVironment for the third quarter of fiscal 2019 was $8.4 million or $0.35 per diluted share compared to a net loss from continuing operations attributable to AeroVironment of $0.6 million or $0.02 per diluted share for the third quarter fiscal 2018. The net loss from discontinued operations, net of tax, for the third quarter of fiscal 2019 was $62,000 compared to a loss from discontinued operations, net of tax, of $129,000 for the third quarter fiscal 2018.

Now moving through to our results for the first 3 quarters of fiscal 2019. Revenue for the first 3 quarters of fiscal 2019 was $226.3 million, an increase of $71.5 million as compared to $154.8 million for the 9 months ended January 27, 2018. The increase in revenue was due to an increase in product deliveries of $45.7 million and an increase in contract service revenue of $25.8 million.

The first 3 quarters of fiscal 2019 revenue by major product line/program is as follows: small UAS was $131.1 million, Tactical Missile Systems was $49.1 million, HAPS was $38 million, and other was $8.2 million.

Gross margin for the first 3 quarters of fiscal 2019 was $91.4 million or 40% of revenue as compared to $57.1 million or 37% for the first 3 quarters of fiscal 2018. The increase was due to an increase in product margins of $28.6 million and an increase in service margins of $5.7 million. Gross margin as a percentage of revenue increased from 37% to 40% primarily due to the increase in sales volume, which resulted in a decrease in the per unit fixed manufacturing and engineering overhead support costs.

SG&A expense for the first 3 quarters of fiscal 2019 was $40.1 million or 18% of revenue compared to SG&A expense of $35.5 million or 23% of revenue for the first 3 quarters of fiscal 2018. R&D expense for the first 3 quarters of fiscal 2019 was $22.6 million or 10% of revenue compared to R&D expense of $19 million or 12% of revenue for the first 3 quarters of fiscal 2018.

Net other income for the first 3 quarters of fiscal 2019 was $13.9 million compared to the prior year net other income of $1.3 million. The net other income increase was primarily due to a litigation settlement, income earned under a transition services agreement from the buyer of the Efficient Energy Systems business and an increase in interest income resulting from higher short-term interest rate and higher cash balances in fiscal 2019.

The effective income tax rate from continuing operations was 11.1% for the first 3 quarters of fiscal 2019 as compared to an effective income tax rate of 25% for the first 3 quarters of fiscal 2018. The effective income tax rate for the first 3 quarters of fiscal 2018 included the impact of a onetime deferred tax expense resulting from the remeasurement of our existing deferred tax assets and liabilities of $3.1 million. The decrease in the effective income tax rate was also due to the reduction in the fiscal 2019 federal statutory rate from 30.4% to 21%.

Equity method investment activity, net of tax, for the first 3 quarters of fiscal 2019 was a loss of $2.1 million or $0.09 per diluted share compared to a loss of $0.4 million, net of tax, for the first 3 quarters of fiscal 2018.

Net income from continuing operations attributable to AeroVironment for the first 3 quarters of fiscal 2019 was $35.8 million or $1.49 per diluted share compared to $2.7 million or $0.12 per diluted share for the first 3 quarters of fiscal 2018.

Net income from discontinued operations, net of tax, for the first 3 quarters of fiscal 2019 was $5.9 million or $0.25 per diluted share compared to a loss from discontinued operation, net of tax, of $1.7 million for the first 3 quarters of fiscal 2018 or a $0.07 loss per share. The first 3 quarters of fiscal 2019 included an $8.5 million gain, net of tax, on the sale of the EES business and a $2.5 million loss, net of tax, from discontinued operations.

Our funded backlog as of January 26, 2019 was $132.5 million, an increase of $19.2 million or 17% from the third quarter fiscal 2018 and a decrease of $31.4 million or 19% from the second quarter of fiscal 2019.

Turning to our balance sheet. Cash, cash equivalents and investments at the end of the third quarter fiscal 2019 totaled $322.1 million, an increase of $24.3 million from the end of fiscal 2018 cash, cash equivalents and investments of $297.8 million. Net accounts receivable, including unbilled receivables and retention, at the end of the third quarter fiscal 2019 totaled $85.7 million. The unbilled receivables and retention balance was $51.6 million, inclusive of $13.6 million related party amounts. The unbilled receivables and retention balances arise due to timing difference between revenue recognition and billings.

Total days sales outstanding from continuing operations for the third quarter fiscal year 2019 was approximately 99 days compared to 48 days for the fourth quarter fiscal year 2018. Net inventory at the end of the third quarter fiscal year 2019 was $50.4 million compared to $37.4 million at the end of the fourth quarter fiscal year 2018. Days in inventory outstanding for the third quarter fiscal year 2019 was approximately 97 days compared to 62 days for the fourth quarter fiscal year 2018.

Accounts payable at the end of the third quarter fiscal year 2019 was $11.6 million compared to $21.3 million at the end of the fourth quarter fiscal year 2018. Total days payable outstanding for the third quarter fiscal year 2019 was approximately 26 days compared to 23 days for the fourth quarter fiscal year 2018.

Turning to capital expenditures. In the third quarter fiscal year 2019, we invested approximately $2.7 million in property improvements and capital equipment for continuing operations and recognized $1.9 million of depreciation and amortization expense.

Now an update to our fiscal 2019 visibility. As of today, we have year-to-date revenue in fiscal 2019 of $226 million; third quarter ending backlog that we expect to execute in fiscal 2019 of $74 million; Q4 quarter-to-date bookings that we anticipate to execute in fiscal 2019 of $4.3 million; unfunded backlog from incrementally funded contract that we anticipate to recognize revenue during the balance of the year of $0.5 million. This adds up to $305 million or 100% at the midpoint of revenue guidance. We anticipate a full year effective tax rate for continuing operations in the range of 11% to 13%.

Now I'd like to turn things back to Wahid to discuss AV's expectations for fiscal year 2019.

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [4]

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Thanks, Teresa.

AeroVironment is a system solution provider at the intersection of robotics, sensor, software analytics and connectivity. We have achieved leading market positions in U.S. government small UAS and Tactical Missile Systems. We see continued strong demand for our small UAS across the globe. We're making solid progress on our customer-funded program to design and develop the next generation of solar-powered high-altitude pseudo-satellites for global connectivity. We are getting additional insight on customer demand as we expand awareness of our innovative commercial information solutions to the agriculture market.

We're also transforming our company through initiatives focused on enhancing our operations, attracting top talent and developing our people to accelerate our progress. We remain focused on effective execution in the fourth quarter to deliver on our commitments.

With continued strong performance this year, we now have 100% visibility to the midpoint of our revenue guidance range of $300 million to $310 million. However, the recent extended federal government shutdown did introduce some risk on schedule. As a result, we are maintaining our revenue guidance of between $300 million and $310 million.

Year-to-date, we have generated earnings per share from continuing operations of $1.49. Due to our strong performance, we're now raising our expectations for diluted earnings per share from continuing operations to between $1.60 and $1.80.

We expect higher research and development investments in the fourth quarter, with annual R&D investment to approach 11% of full year revenue. Additionally, as a result of strong domestic and international demand for our solutions, we are investing more in SG&A to pursue and capture those opportunities.

In summary, to reiterate our main points for today's call. First, we're delivering outstanding results. Second, we are positioned very well to achieve our increased fiscal year 2019 financial goals. And third, we continue to make progress on our key growth initiatives that drive long-term value.

Thank you to AeroVironment's team members for your relentless drive to serve our customers and stockholders. Thank you to our customers who place their trust in AeroVironment to support their critical missions. And thank you to our stockholders for recognizing the value-creation potential of our people and our company.

Teresa, Steve and I will now take your questions.

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Questions and Answers

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Steven A. Gitlin, AeroVironment, Inc. - VP Corporate Strategy, IR & Corporate Communication [1]

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Thanks, Wahid. (Operator Instructions) Our first question comes from Peter Arment at Baird.

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Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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Just first question, I guess, on HAPSMobile. It seems like -- and obviously, we'll get some additional details with the Q, but you've been -- it looks like you're on pace to generate probably close to -- over $40 million in revenue in fiscal '19. I guess thinking -- I'm really thinking more about just how that trend is going forward. Any color you could give us on what progress you're making on the prototype vehicles, et cetera?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [3]

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Sure. So Peter, as I said on my remarks, that we're making very good progress with our design and development program phase of this project with our joint venture partner in this case. AeroVironment has a very strong history and track record of success and achievements in this space. We continue to believe that this is a very large, long-term global opportunity for AeroVironment. Also keep in mind that there are significant flexibility in the current cost-plus contract, the design and development contract that we have with HAPSMobile joint venture, that allows us to further our progress and continue to execute our objectives under this contract. We are not in a position to detail more specifics on the actual program due to competitive reasons. However, we remain very bullish on this opportunity and the value-creation opportunity that this represents for us long term.

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Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Okay. And just as a follow-on question, if I could just ask about -- you gave us some details around the Soldier Borne loss. Maybe you could just talk to about what other opportunities there are for the Snipe product.

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [5]

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Sure. So as you know, our position in the small UAS, the defense small UAS market, is very, very significant, both domestically as well as internationally. We pride ourselves for being able to compete over decades very successfully, not only with domestic large players, very large conglomerates, as well as with international large players and domestic small and large players internationally as well. And we have a very high win rate. We were very much aware of the Soldier Borne Sensor opportunity from the get-go. As you recall, on the first tranche of that, we received a small amount of funding, and we fielded some products. We did not win the subsequent award. However, we remain ready to be able to compete on that opportunity or several years of that, and we expect more opportunities to arise from that. We believe that there are more opportunities in the space for us, both domestically and internationally, and we continue to work on those opportunities as we progress through our business. And as we -- as our customers are ready to publicly disclose more about them, we'll be glad to share that with you as well.

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Steven A. Gitlin, AeroVironment, Inc. - VP Corporate Strategy, IR & Corporate Communication [6]

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Our next question comes from Ken Herbert at Canaccord.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst [7]

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I just wanted to first ask about the -- sequentially, the TMS revenues have been sort of trending down each quarter. Can you talk about maybe visibility on -- any particular programs you can highlight within this -- within the TMS portfolio? And maybe any color on sort of what you're implying in the fourth quarter for this business and any sort of visibility into fiscal '20? I know you're not giving guidance there yet, but sort of what's happened to the TMS product line? And how should we think about this moving forward?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [8]

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Sure, Ken. So first and foremost, as you know, we have built a very strong business with our Tactical Missile Systems category with our Switchblade. We continue to be the solution of choice for our customer, U.S. Military's needs for this capability, and we have delivered and grown this business very significantly over the years. Any given day or quarter or year, we'll have -- we will -- naturally, we'll have fluctuations between our different portfolio of products and contracts in terms of the amounts of revenue which we recognize and ship. One of the things that's changed on the Tactical Missile Systems business and Switchblade specifically is that due to the new accounting 606 rules, we now recognize the revenue for TMS over time instead of a point in time. So that is an -- that has changed this year. However, in general, as you see from the government fiscal year '18 budget dollars, which we're in the process of executing that, there's significant -- there was significant funding there. And additionally, there was close to $100 million worth of additional funding on government fiscal year '19 budget, most of which is not yet in our backlog. So we have a significant, what I consider, demand signals and demand potential for Switchblade, and we continue to execute on that as we progress throughout the year and the remainder of this calendar year.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst [9]

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Great. That's very helpful. And if you could, I apologize if I missed it, but how much of the small UAS revenues in the quarter were international versus for U.S. customers?

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Teresa Covington, AeroVironment, Inc. - Senior VP & CFO [10]

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So Ken, this is Teresa. So in the third quarter, we had -- small UAS revenue was at $47.7 million for the quarter. Of that amount, $27.3 million of it was international.

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Steven A. Gitlin, AeroVironment, Inc. - VP Corporate Strategy, IR & Corporate Communication [11]

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Our next question comes from Joe DeNardi at Stifel.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [12]

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I like the new format. Wahid, I know you'll provide guidance for FY '20 next quarter, but could you maybe talk directionally about what you're expecting on the top line? I mean, you mentioned the Army budget pretty supportive of LMAMS, which sounds like a tailwind for Switchblade from an accounting standpoint. Can you just talk about your expectations? Any significant items we should be considering positively or negatively for next year just on the top line?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [13]

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Sure. So first of all, I'm very pleased with our team's ability to execute this quarter and the year-to-date so far. We have built a very strong foundation for achieving our goals for this year. We still have some time left or fourth quarter to execute and complete that successfully. That's why we provided the guidance for this year. In terms of the following year, as I mentioned in my remarks, we feel very strong about the general overall demand drivers for solutions across the board. We see strong demand domestically for our small UAS. We see strong demand for our small UAS internationally. We continue to win more and more countries as well as larger order sizes, as you've seen in our recent announcements that we have done in the last several quarters. We also see potential strong demand for the HAPS opportunity that we have globally. As you've seen, there's lots of news out there in terms of the potential prospects of that. And given -- on top of all that, there's strong budget dollars already allocated into the government fiscal year '19, majority of which is not yet reflected in our backlog currently. So while we don't provide specific guidelines for fiscal '20 until our next quarterly earnings call, we -- I believe that we've built a very strong foundation to not only even out our revenue for this year but also position us also for a strong fiscal '20.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [14]

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Can you quantify the -- you or Teresa, can you quantify the revenue impact from the new accounting treatment on Switchblade for next year?

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Teresa Covington, AeroVironment, Inc. - Senior VP & CFO [15]

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No. I think what we have is we have reported under the new 606. We have not gone back and said what that would have looked like under the old standard.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [16]

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Okay. If I could just sneak a quick one in. Wahid, when the budget comes out shortly, is the first thing you're going to look at Army funding associated with LMAMS? And maybe what's your expectation for what that funding is? And what are some of the other things that you kind of look at first when that comes out?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [17]

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Sure. So Joe, on government fiscal year '19, those budgets have been already published publicly. In fact, I believe on the last conference call, I detailed out the specific funding dollars that are allocated for our products specifically. There are funding dollars for LMAMS close to about $100 million. There's close to $13-plus million for our Puma systems for the Air Force, and there's also a considerable amount of funding, over $40 million, for our Raven for the U.S. Army. And there are also additional future long-term opportunities for new potential programs, Soldier Borne Sensor being one of those particular opportunities, but there are more than just the SBS program. So overall, in government fiscal year '19 budget that was just announced and published, there's, historically speaking, very strong and robust funding for our products and solutions. We have not seen the details of our -- of the proposed government fiscal year '20 budgets, but that's due to come out sometime in the near future. And as it does, we will absolutely keep you informed.

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Steven A. Gitlin, AeroVironment, Inc. - VP Corporate Strategy, IR & Corporate Communication [18]

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(Operator Instructions) We'll now take a question from Louie Dipalma with William Blair.

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Louie Dipalma, William Blair & Company L.L.C., Research Division - Analyst [19]

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Wahid, in your scripted remarks today and previously, you indicated that AeroVironment, sometime ago, began the process for the Switchblade to be approved for foreign sales. Investors view this as a potentially large catalyst, but the details behind the State Department approval process are somewhat murky. Can you describe the steps involved, such as whether it involves the Tri-Services Committee and ExCom? And I was wondering if you could explain what milestones have yet to be achieved for the approval.

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [20]

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Sure, Louie. So overall, we are in full agreement with you that Switchblade has a significant potential value proposition and opportunity internationally with many of our strongest allies across the globe. We have been a believer of that in the past. We continue to be a believer of that today. And we are also very aggressively working that with both our international potential interested customers as well as with the U.S. Department of State and other agencies that influences this process and make that come to a reality. So far, we have not been able to receive the final approval to export these, as I mentioned on my remarks, but it does not mean that it's not achievable. We still feel very strongly that it's a matter of when versus if, and we continue to work with that. The process is pretty long. And knowing that this is a very differentiated, innovative capability, obviously, our U.S. government, rightfully so, is being very careful in accessing it and granting the export license. But as with all of our other products, defense products, we have a strong track record of being able to achieve that, and we understand the process. We work very closely with our U.S. government, and we feel optimistic that we will be able to achieve that sometime in the near future.

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Louie Dipalma, William Blair & Company L.L.C., Research Division - Analyst [21]

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Okay. Sounds good. And I was wondering, does AeroVironment have plans to expand its vertical takeoff and landing UAS portfolio beyond the Snipe and your commercial Quantix UAS?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [22]

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Sure. So Louie, that's a very good observation. As you know, we've been at the forefront of innovation in our category for decades. We have set the standard in the space. We've been one of the first companies that have achieved many of the industry first and a lot of the category solutions. And today, we offer a Family of Systems portfolio, a system solution that has a Family of Systems products and end products. At any given time, we're in constant search and assessment of what type of platforms and what type of feature set in those platforms are the best solution set for our customers' needs. And certainly, Quantix and our Snipe 2, as you saw, are examples of that. The recent announcement that we made a few months ago with General Dynamics Land Systems, where we have actually incorporated our multipack Switchblade launchers and our hybrid VTOL -- I refer to it as hybrid VTOL fixed-wing airplane, next-generation small UAS with one of their armored vehicle for a proposed competition that they're going to are specific examples of exactly what you're referring to. So we have been in the forefront. We continue to be, and our portfolio of Family of Systems will continue to expand over the horizon as we move forward.

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Steven A. Gitlin, AeroVironment, Inc. - VP Corporate Strategy, IR & Corporate Communication [23]

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Let's take a follow-up question from Joe DeNardi with Stifel.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [24]

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Wahid or Teresa, can you just remind us how much of the HAPS development contract you guys have fulfilled to this point? And then, Wahid, should we take your comments around flexibility on the contract as meaning that you can generate revenue in excess of what the development contract was for?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [25]

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Sure. First, Teresa will give you the numbers. Teresa?

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Teresa Covington, AeroVironment, Inc. - Senior VP & CFO [26]

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Yes. So Joe, as Wahid mentioned, we have in our DDA contract the total amount, $76.6 million. Our inception-to-date revenue against that contract is $60.1 million, and so the current to go under that agreement is $16.5 million.

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [27]

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And Joe, to your point related to should we assume that, I would say that we intentionally, both ourselves and our strategic partner, structured this contract such that it provides for flexibility as this program progresses through its execution. And as you can see from inception-to-date performance, that we have already generated more revenue and backlog than the original DDA's dollar amount, which was roughly around $65 million. So we expect this contract to continue. We feel good about this opportunity in the long term, and our partner and us are very excited about the long-term prospects of value creation here.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [28]

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Okay. And then, Wahid, 12 months into -- roughly 12 months, I think, into selling Quantix, thrilled, content, disappointed, how are you feeling about your progress on that part of the business so far?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [29]

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Well, Joe, as you know, the entire commercial drone industry has been, in general, not as pleased with the outcomes and the pace of adoption and the speed of adoption in that market. I must also add that from the inception, if you go back and remember some of my personal comments, I've always thought -- we have always believed that this is not an overnight sprint. It's a long-term marathon. And as such, large opportunities and adoption cycles take considerable time and effort. We believe that our solution is extremely differentiated and highly, highly valuable, and our customers are telling us and the adoption so far that we've received informs us of that and supports that belief that we've had so far. So I am personally not surprised. Always could be better, of course, but we remain focused on executing. We're learning more and more as to how we can improve our value proposition and expand our reach within this market. However, we're still in the very early stages of adoption. And keep in mind, when we launched this product in the North American market, we were towards the end of the seasonal growing season or growing cycle. And really, our Quantix and AV DSS have not had a full growing season under its belt yet. This upcoming season is going to be the first one where we're actually shipping product in time for -- to take advantage of that opportunity. And we'll keep you posted as we progress through this process in the near future, Joe.

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Steven A. Gitlin, AeroVironment, Inc. - VP Corporate Strategy, IR & Corporate Communication [30]

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We have no more questions at this time, so this will conclude today's call. Thank you for your engagement and your interest in AeroVironment. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website, www.avinc.com.

We look forward to speaking with you again following next quarter's results. On behalf of every member of the AeroVironment team, we wish you a good evening. Thank you.