AeroVironment, Inc. (AVAV) Q4 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the AeroVironment Inc. Fourth Quarter Fiscal 2016 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. With us today from the company is the President and Chief Executive Officer, Mr. Wahid Nawabi; Senior Vice President and Chief Financial Officer, Mr. Raymond Cook; and Vice President of Investor Relations, Mr. Steven Gitlin. And now at this time, I would like to turn the call over to Mr. Gitlin. Please go ahead, sir.

Thank you very much Latoya and welcome to our fourth quarter and full fiscal 2016 earnings call. 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 statement that may predict, forecast, indicate or imply future results, performance or achievements, and may 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. Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, reliance on sales to the U.S. government; availability of U.S. government funding for defense procurement and R&D programs; changes in the timing and/or amount of government spending; difficulty or inability to obtain required export authorization to sell our products to international customers, potential need for changes in our long-term strategy in response to future developments; the extensive regulatory requirements governing our contract with U.S. Government and international customers, the consequences to our financial position business and reputation that could result from failing to comply with such regulatory requirements, unexpected technical and marketing difficulties inherent in major research and product development efforts; changes in the supply and/or demand and/or prices for our products and services; the activities of our competitors and increased competition; failure of the markets in which we operate to grow; failure to remain a market innovator and create new market opportunities; changes in significant operating expenses, including components and raw materials; failure to develop new products; product liability, infringement and other claims; changes in the regulatory environment; and general economic and business conditions in the United States and elsewhere in the world. For a further list and description of such risks and uncertainties, see the reports we file with the Securities and Exchange Commission. The content of this conference call contains time sensitive information that is accurate only as of today June 28, 2016. The company undertakes no obligation to make any revision to the statements contained in our remarks or to update them to reflect events or circumstances occurring after this conference call. We will now begin with remarks from Wahid Nawabi. Wahid?

Good afternoon and welcome to our fourth quarter and full fiscal year 2016 earnings call. I’ll begin by expressing my appreciation to the entire AeroVironment team of passionate innovators, our Board of Directors, our customers, and our stockholders for your support in my new role of CEO. Since joining the company in 2011, I have worked closely with many of our talented and hard-working team members and developed a strong understanding of our operations. More recently, I have developed relationships with many other stakeholders including customers, stockholders, and analysts. Together as a team we’ve positioned AeroVironment as a company that develops innovative technology solutions to help customers accomplish their goals, is committed to making prudent strategic investments that enhance stockholder value, and above all is continually working to maintain and enhance its leadership position in large and growing markets. We’re continuing our ongoing efforts to articulate our value proposition to our stakeholders with clarity. Recently, we set out to fine tune our corporate brand and positioning by speaking with employees, customers, stockholders, and analysts to explore their perceptions of what we do, how we do it, and why it’s important to each of our stakeholder groups. The conclusion from that process is encapsulated in the following statement, which powerfully conveys who AeroVironment is today. AeroVironment is a courageous technology company that provides customers with more actionable intelligence so they can proceed with certainty. The key message here is, proceed with certainty. I believe this describes our core value proposition, which is how we help customers succeed. This is our goal across all our operations. In defense, frontline troops use Raven, Puma AE, and WASP AE small UAS to gain critical intelligence that enables them to make better decisions and move forward safely. Our Switchblade systems give them the ability to neutralize lethal threats more accurately and with less collateral damage than ever before. In emerging commercial applications, the detailed analytics we deliver to our customers provide growers, engineers, and railroad operators with a much better understanding of their operations so they can make more informed decisions that improve outcomes. In our EV charging solutions, we provide drivers with the confidence to go farther, knowing they have received a safe and reliable charge. From an investor's perspective, at a time of increasing global uncertainty AeroVironment offers the unique combination of a core business focused on some of the most dynamic segments of the defense market, a strong balance sheet and the prospects of a potentially large commercial UAS market. Identifying and investing strategically in the development of innovative solutions for our customers enables us to create new opportunities for value creation. However, to deliver on our promise of certainty, we must also continuously improve our corporate planning and business processes. I have spent the past two months collaborating with our team members and senior leadership leading to multiple initiatives focused on achieving that goal. You can see how we are communicating our identity more effectively in the new website we just launched this week and you will see and hear more of it as it propagates throughout and beyond our company. Now let’s discuss our successes here in the quarter and full year and the bright future ahead for AeroVironment. On today's call, I will highlight three key messages. First, profitability. Our core business remains profitable with leading market positions and strong customer pull. Second, growth. We are progressing on our strategy to deliver high long-term growth with continued progress and key initiatives targeting very large market opportunities. It is important to note that these opportunities may take time to materially contribute to our results. And third, confidence in our future. Our prospects for fiscal 2017 and beyond are promising. Today, I will briefly review our fourth quarter financial results, then discuss progress across our business in fiscal 2016, Raymond Cook will provide a detailed financial overview, then I will wrap up our prepared remarks and provide our outlook for fiscal 2017 before Raymond, Steve, and I take your questions. Now, fourth quarter and full fiscal year 2016 results. Our profitable core business continues to create value. Fourth quarter revenue of $84.8 million and gross profit margin of 45% contributed to full-year revenue and gross profit margin of $264.1 million and 42.4% respectively. This represents 2% revenue growth and a 230 basis point increase in gross profit margin year-over-year. A government contract reserve reversal along with favorable product mix contributed to our strong gross profit margin during fiscal 2016. The high gross profit margin produced a 380% increase in operating income and an R&D tax credit help drive a 200% increase in earnings per share year-over-year. Revenue in our UAS business segment, increased by 6%, over fiscal 2015, reflecting continued customer demand and solid performance. Please note that we experienced typical AeroVironment seasonality in fiscal 2016 with 42% and 58% of revenue occurring in the first and second half respectively. Additionally, the first quarter fiscal 2016 revenue represented slightly more than 40% of first half revenue. Before I continue, I would like to remind you of the way we define our core business and growth portfolio. Core business refers to products and services we sell to customers on a regular basis. Growth portfolio refers to initiatives underway that have not yet transitioned to full production and sales, but have the potential for significant long-term value creation and growth. In some cases these growth initiatives also produce revenue through customer funded R&D. Some of our product lines contribute to both our core business and growth portfolio. Now I will review the specifics of each of those product lines and clarify how we think of them, while also updating you on our progress in fiscal 2016. I’ll begin by turning to the operating performance of our Unmanned Aircraft System segment or UAS, where we focus on global defense and commercial markets with small UAS, tactical missile systems, and commercial UAS. I will update you on each of these areas separately starting with small UAS. Our core small UAS business consist of selling Raven, Puma AE, and WASP AE systems to U.S. government customers and sustaining them with spare parts, upgrades and training. Small UAS continues to serve as the main driver of our overall business. In fiscal 2016, we supported our U.S. customers, primarily through sustainment of their large fleet as illustrated by the $47 million spare parts order we received in August. In November, we announced our $13 million Marine core contract for new Puma AE systems reflecting the strong continued demand for our small UAS. In May 2016, we introduced our new i45 gimbaled sensor suite for Puma AE, which delivers unmatched imagery capabilities for small UAS. In the past, these types of upgrades have contributed meaningfully to our revenue base. Similarly, today we are confident that customers will find the i45 to be an attractive and compelling upgrade opportunity. While our domestic small UAS business is part of our core, we view the international opportunity for our small UAS as a growth driver. In fact, our international small UAS business generated record revenue in fiscal 2016. During the year, we received orders from a growing list of countries, including Australia, Spain, Saudi, Arabia, and seven Allied nations. We believe the international market for our small UAS is about a decade behind that of the U.S. Department of Defense. This means the 35 international customers we have today and new customers were pursuing represent significant future growth potential for the business. Our small UAS continues to demonstrate capabilities above and beyond those of even larger competitors. In January, a joint AeroVironment Nova team operated Puma AE as an advanced scout for the Coast Guard Ice Breaker Polar Star in Antarctica. Even in such a challenging environment, operators were able to fly Puma AE more than 25 miles from the ship, demonstrating their ability to rely on our technology, while keeping people out of harm’s way and helping the Polar Star and Coast Guard proceed with certainty. Small UAS is our primary core business and potential new requirements such as the U.S. Army's short-range micro UAS, the soldier born sensor in a pending Army program to relocate the frequency spectrum on which our small UAS operate represent potential growth opportunities within it. Our Shrike VTOL could potentially satisfy the short-range micro UAS requirement. Another one of our micro UAS in development could potentially satisfy the soldier-borne sensor. Successful evaluation of our Tether Eye, a virtual observation and communication tower for building fixed installations in vehicles would bode well for its adoption and contribution to small UAS growth. In small UAS, we see additional opportunities for adoption, in the U.S. Navy, which has already deployed Puma AE systems on federal vessels; in the Coast Guard, and for Homeland Security applications. We are working hard to achieve all of these opportunities. Next, our relatively new tactical missile systems business includes switchblade, our recently unveiled Blackwing ISR system, and several Switchblade variants that address new customers and new concepts of operation. We've been delivering switchblade systems designed for use by dismounted infantry units to our U.S. Military customers under urgent needs of requirements within our core business. The potential U.S. Army program of record for lethal miniature aerial missile systems or LMAMS, represents a significant growth opportunity. In May, we announced that our Block 10C switchblade upgrade has transitioned from development into production. Block 10C integrates are digital data link to position us even more favorably to address existing demand, as well as the pending LMAMS program of record once the customer initiates a competition. As we announced in May, we recently unveiled Blackwing, a small tube-launched UAS that deploys from under the surface of the sea, from manned submarines and unmanned underwater vehicles. You can think of it as a stealthy, sly periscope for submarines. Blackwing represents a growth opportunity and is a compelling capability that is currently being adopted by the U.S. Navy. Instead of housing an integrated warhead, Blackwing carries extra batteries, providing longer endurance and shorter range, greater range. Blackwing's command and control system is tightly integrated into U.S. Navy submarine fire control systems, part of the integral system similar to a periscope. At AeroVironment, we are very excited about the Blackwing opportunity, which I will provide some context to. According to publicly available data, the U.S. Navy currently operates about 70 submarines. Outfitting each submarine in the fleet with multiple Blackwing’s, for example, would represent a total opportunity for hundreds of these single used units. Unmanned underwater vehicles, some surface ships, and Allied vessels could provide additional opportunity. In assessing this opportunity, it is important to consider that the DoD's five-year future years defense program, or FYFYDP, envisions a multi-year procurement for providing this capability to U.S. submarines. Our emerging family of tactical missile systems is the direct outcome of prior year investments that are continuing to yield results. Having the strategic foresight to invest our own funds into the development of Switchblade and its variant has positioned us extremely well as the leading supplier of this capability as illustrated by the revenue growth we have experienced for this product line. In fiscal 2011, we generated about $6 million from tactical missile systems. That amount grew to approximately $41 million in fiscal 2016. In fiscal 2016, we also began shipping production units of one Switchblade variant in addition to Blackwing, and we could see another variant transition to production this fiscal year. Beyond military applications for our small UAS, we continue our investment to develop solutions for the commercial UAS opportunity, which we will introduce to the market once we are confident our solution is robust and scalable. Today, the commercial UAS initiatives include two significant potential growth opportunities. One, the deployment of small UAS with other sensing technologies and data analytics to provide customers with more actionable intelligence. And two, atmospheric satellites for high altitude long endurance UAS for remote sensing and communications. Our investments to develop an integrated information systems solution for the commercial opportunity focus on four primary industries. First position, agriculture; second, energy; third, transportation; and fourth, utility infrastructure with hardware and software as part of an integrated system solution. Our commercial software solution includes a functioning cloud-based analytics portal that provides powerful and easy-to-use geo-rectified data products. This secure portal gives customers their own environment in which to perform analyses, store and compare historical data, and identify anomalies that may pose risks to their operations. While this solution is still in its early stages, initial pilot customer response is very positive. Even though we're still in the early stages, we have several small, but important customer contracts in commercial UAS, which demonstrates the opportunity and potential of this market. In fact, we are currently seeing positive feedback from customers on our work. For example, we were engaged with a global energy customer on a pipeline surveying project in the lower 48. We have worked with two Top 10 U.S. electric utilities to provide them with greater insights into their infrastructure such as power lines and associated right-of-ways. We’re also under contract for information solution as a system integrator with one of the largest U.S. railroads. In May 2016, we announced that we are working with NASA and others to demonstrate a next generation traffic management solution for unmanned aircraft integration in the national aerospace. We continue to choose early adopter customers selectively based on their appreciation for the value or solution can deliver to enhance safety, improve risk management, and address regulatory compliance. We are working with these customers to demonstrate our capabilities and understand how best to integrate them in today operations. Beyond these information solutions, we continue to pursue opportunities, deploy atmospheric satellite systems for remote sensing and communications, an opportunity that remains binary; that is, it will either happen or not. If this opportunity does occur, it would be meaningful to our growth strategy. Now moving to our EES business segment, we consider EV test systems, PosiCharge industrial EV charging systems, and passenger EV charging systems components of our core business. The introduction of ProCore, a new charging solution for electric forklifts demonstrates continued progress in EES towards strengthening our position and building pathways to growth. The potential upside for passenger EV charging should global EV adoption increase rapidly is another growth opportunity for which we had established a leading market position. Our accomplishments in fiscal 2016 produced results within the range of our expectations and advance or progress towards our long-term objectives. Now Raymond will provide a detailed review of our financial performance in the year.

Thank you, Wahid, and good afternoon, everyone. AeroVironment’s fiscal 2016 fourth quarter results are as follows: Revenue for the fourth quarter was $84.8 million, a decrease of 2% from fourth quarter fiscal 2015 revenue of $86.5 million. The decrease in revenue was due to a decrease in product deliveries of $3 million, partially offset by an increase in contract services revenue of $1.3 million. Looking at revenue by segment, UAS revenue was $75.9 million, a decrease of $2.8 million or 4% compared to the fourth quarter of 2015. The decrease is primarily due to a decrease in product deliveries of $4.3 million, a decrease in customer funded R&D work of $1.2 million, which was partially offset by an increase in service revenue of $2.7 million. EES revenue increased $1.1 million or 14% to $8.9 million in the fourth quarter versus the same period in 2015. This increase was primarily due to an increase in product deliveries of $1.4 million that was partially offset by a decrease of $0.3 million of service revenue. Turning to gross margins, gross margin for the fourth quarter was $37.9 million or 45%, a decrease of $7.4 million as compared to $45.4 million or 52% in the fourth quarter of 2015. The decrease in gross margin was primarily due to a decrease in product margins of $8.1 million, partly offset by an increase in service revenue margins of $0.7 million. By segment, UAS gross margin for the fourth quarter was $35 million, a decrease of $7.4 million as compared to $42.3 million for the fourth quarter of 2015. As a percentage of revenue, gross margin for UAS decreased from 54% to 46%, primarily due to product mix. EES gross margin for the fourth quarter was $2.97 million, a decrease of $0.1 million, as compared to $3.04 million for the fourth quarter of 2015. As a percentage of revenue, EES gross margin decreased from 39% to 33%, primarily due to product mix. SG&A expense for the fourth quarter was $16.8 million or 20% of revenue compared to SG&A expense of $15.6 million or 18% of revenue in the fourth quarter of fiscal 2015. R&D expense for the fourth quarter was $14.3 million or 17% of revenue compared to R&D expense of $22.3 million or 26% of revenue in the fourth quarter of fiscal 2015. Operating income for the fourth quarter was $6.8 million or 8% of revenue compared to operating income of $7.5 million or 9% of revenue in the fourth quarter of fiscal 2015. The provision for income taxes for the quarter was $1.9 million or an effective tax rate of 26.4% compared to the benefit for income taxes of $0.1 million or an effective tax rate of negative 1.2% in the fourth quarter of fiscal 2015. Net income for the fourth quarter was $5.4 million or $0.23 per diluted share compared to net income of $7.1 million or $0.31 per diluted share for the fourth quarter of fiscal year 2015. Now moving through full year 2016 results as compared to fiscal year 2015, revenue for fiscal year 2016 was $264.1 million, an increase of $4.7 million or 2% as compared to $259.4 million for fiscal year 2015. The increase in revenue was due to an increase in contract services of $20.3 million partially offset by a decrease in product revenue of $15.6 million. UAS revenue was $233.7 million, an increase of $12.8 million or 6% compared to fiscal year 2015. The increase was primarily due to an increase in customer funded R&D work of $16.6 million, primarily driven by our tactical missile systems variant programs, an increase in service revenue of $4.5 million primarily due to an increase in sustainment activities in small UAS partially offset by a decrease in product deliveries of $8.3 million that was primarily due to a decrease in deliveries of Wasp and Switchblade system partially offset by an increase in deliveries of Raven and Puma systems. EES revenue was $30.4 million, a decrease of $8.1 million or 21% compared to fiscal year 2015 primarily due to a decrease in product deliveries of our industrial fast charge systems and passenger electric vehicle charging systems as well as the decrease in service revenue. Gross margin for fiscal year 2016 was $112.1 million, as compared to $104.3 million for fiscal year 2015 representing an increase of $7.8 million or 8%. The increase in gross margin was primarily due to an increase in service margins of $10.5 million, partially offset by a decrease in product margin of $2.7 million, both of which were impacted by the settlement and resolution of the prior-year government incurred cost audits during 2016. UAS gross margin increased $8.8 million or 10% to $101.5 million for fiscal year 2016 primarily due to an increase in service revenue as well as favorable product mix and the government contract reserve reduction. As a percentage of revenue, gross margin for UAS increased from 42% to 43%. EES gross margin decreased $1 million or 8% to $10.6 million for fiscal year 2016, primarily due to a decrease in sales volume partially offset by the government contract reserve reductions. As a percentage of revenue, EES gross margin increased from 30% to 35%. SG&A expense for fiscal year 2016 was $60.1 million or 23% of revenue compared to SG&A expense of $55.8 million or 22% of revenue for fiscal year 2015. SG&A expense increased $4.3 million primarily due to higher bid and proposal costs, an increase in sales commission expense, and an increase in severance related charges. R&D expense for fiscal year 2016 was $42.3 million or 16% of revenue compared to R&D expense of $46.5 million or 18% of revenue for fiscal year 2015. Operating income for fiscal year 2016 was $9.7 million or 4% of revenue compared to operating income of $2 million or 1% of revenue for fiscal year 2015. The increase in operating income was primarily due to increased gross margin of $7.8 million, decreased R&D expense of $4.2 million, partially offset by an increase in SG&A expense of $4.3 million. The effective income tax benefit rate for fiscal year 2016 was negative 11.1% compared to the effective income tax benefit rate from fiscal year 2015 of negative 52.9%. The variance in the effective income tax rate was primarily due to higher pre-tax income and an increase in federal R&D tax credits. Net income for fiscal year 2016 was $9 million or $0.39 per diluted share compared to net income of $2.9 million or $0.13 per diluted share for fiscal year 2015. Net income per diluted share for the fiscal year 2016 was increased by $0.10 due to the reserve reversal for the settlement and resolution of prior year government incurred cost audits, increased by $0.05 due to the R&D tax credits related to prior fiscal year primarily as a result of the reenactment of the federal R&D tax credit and decrease by $0.06 due to both the impairment loss and the loss on sale of our remaining holdings of CybAero equity securities during the first half of fiscal 2016. Looking at backlog, funded backlog as of April 30, 2016 was $65.8 million as compared to $64.7 million at the end of fiscal year 2015. Turning now to our balance sheet. Cash, cash equivalents and investments at the end of fiscal year 2016 totaled $261.6 million, a decrease of $14 million from $275.6 million as of April 30, 2015. Net accounts receivable as of April 30, 2016 including unbilled and retention receivables totaled $74.9 million, an increase of $24 million over 2015. Total days outstanding was approximately 87 days for fiscal year 2016, compared to 66 days for fiscal year 2015. Net inventory was $37.5 million at the end of fiscal year 2016, compared to $39.4 million at the end of fiscal year 2015. Days in inventory were approximately 92 days from fiscal year 2016, compared to 106 days from fiscal year 2015. During fiscal year 2016, we invested approximately $8 million or 3% of revenue in property improvements and capital equipments. We recognized approximately $6.1 million of depreciation and amortization expense in the year. Now I would like to turn things back to Wahid to discuss AV's expectations for fiscal year 2017.

Thanks, Raymond. Fiscal 2016 positioned us well for fiscal 2017 with strong customer engagement and important progress in our core business and growth portfolio. As we look ahead across fiscal 2017, some important milestones to look for include, one, continuing the expansion of our domestic small UAS business through sustainment and upgrade, potential U.S. Army procurement programs and promising U.S. Navy adoption. Two, expanding or growing international install base for small UAS with existing and new customers. Three, progressing towards the U.S. DoD’s frequency relocation program for small UAS. Four, continuing successful delivery of Switchblade Tactical Missile Systems to our defense customers who see great value in this unique capability. Five, deploying Blackwing systems to the U.S. Navy submarine suite. Six, continuing progress in our Switchblade variance including ongoing production of some variance and the progress towards the production of others. Seven, launching our commercial UAS business for precision agriculture and other verticals including announcing key customer relationships and projects. Eight, further customer engagement in atmospheric satellite systems. Nine, accelerating progress in our global TurboCord EV charging strategy. And ten, successful execution on our continuous improvement initiatives. With our plan in place, we expect effective execution across our portfolio of opportunities to produce fiscal 2017 revenue of between $260 million and $280 million. We are moderating our incremental internal R&D investments this year based on our progress last year and our expectations for market adoption timing this year. For fiscal 2017, we are targeting an internally funded R&D rate of 12% of revenue. As a reminder, we are generating a growing amount of customer R&D funding resulting in total that we fund ourselves. As a result of lower internally funded R&D, we expect to produce operating profit this year that will deliver earnings per share of between $0.20 and $0.35. We expect seasonality similar to what we have experienced in recent years, but a bit more pronounced with the second half of the year representing about two-third of full year revenue. Within the first half of the year, a similar distribution to fiscal 2016 with about 40% of first half revenue in the first quarter. Before we turn the call over to Q&A, I would like to reiterate our points for continued areas of focus for value creation. One, our core business remains profitable with leading market positions and strong customer pull. Two, we are progressing on our strategy to deliver high long-term growth with continued progress in key growth initiatives targeting very large market opportunities. It’s important to note that these opportunities may take time to develop into material financial contributors to our results. And third, our prospects for fiscal 2017 and beyond are promising. We have much work to do and I cannot think of a more capable team than the one I have been given the privilege to lead. I look forward to spending more time with our stockholders, analysts, our leadership team and our board in order to deliver on your high expectations of us. Thank you to our employees, our customers, and our stockholders for your trust and ongoing engagements. I’m eager to have all our stakeholders precede with certainty. Raymond, Steve and I will now take your questions.

Thank you. [Operator Instructions] The first question comes from Troy Jensen of Piper. Your line is open.

Gentlemen, congrats on the nice profitability.

Thank you.

So, Wahid, so you – maybe Raymond can help on this too, but just to go over your full year guidance again, so you said $260 million to $280 million, it’s about 65%, about two-third second half and one-third in the first half?

Correct.

And then what was the comment about 40% of it, you expect it could be 40% of the first half number expected to be in the July quarter, is that correct?

Yeah, so what we did is we gave some color and we said about one-third, two-thirds between first half and second half and then for the first half, we expected it to be about 40%/60% split.

Between Q1 and Q2?

Between Q1 and Q2.

Yeah, understood. So if I run the math of the midpoint that equates to about $36 million in sales for the July quarter? Am I doing that correctly, Ray?

I think if you are doing the math at the mid-point that’s about correct.

Okay, I guess just your comment on more pronounced volatility and revenues here, can you just kind of comment why the [sequential drop] [ph], why the year-over-year drop, what are you seeing on the pipeline, guide too such a low number?

So, Troy, this is Wahid. Historically if you look at our past years for many, many years going back to fiscal 2011, 2012 and all those years, our business in general has been quite seasonal. And we try to figure out exactly what drives that and we can all have different thoughts on this, but generally we have smaller first halves than second halves and the ratios that you have seen this year in fiscal 2016 is fairly similar to the prior years and in fiscal 2017 it’s slightly more pronounced. As Raymond pointed out that in first half, it’s roughly one-third of the revenue and then two-thirds in the second half and we have a very high portion of our business that is what I refer to book and build because of their urgent need nature of our customers’ requirements and needs, we have to have the ability to turn around quickly and convert contracts into shipments so they can utilize the capabilities that our products and services offer to them. So for that reason, we have a fairly short what I call gestation period between when we receive a contract and when we actually ship products and they are lumpy because they are fairly different sizes in nature.

Okay. Just the 30/16 [ph] is well below any number we’ve seen in prior years, so just kind of curious why is it so pronounced this year versus other years?

We have different theories behind it. I mean, I couldn’t give you a specific reason as to why, but it’s really driven by our markets and our customers.

Okay. That’s fine.

Yeah.

Go ahead, Ray.

Yeah, I was just going to say and our ordering patterns what we are projecting for the year.

Okay. Right, understood.

Sorry, another thing to keep in mind Troy is that we now have, you know the government fiscal year is different than our fiscal year. And so we believe that that has an impact on it. We also have a very large growing number of international customers and those customers have different fiscal years depending on the country. So, and of course based on their demands and requirements the timing of their demand and requirements change and it’s not really in our control and so we try our best to address their needs, as soon as they have a need and they execute a contract with us.

Thank you. And the next question is from Josephine Millward of the Benchmark Company. Your line is open.

Hi guys.

Hi Josephine.

Hi, Wahid can you tell us what international UAS was in 2016. I think it was around 20 million in fiscal year 2015?

Fiscal year 2015?

No, just last year, 2016. You said they grew significantly, I’m trying to size how big it was?

I could tell you that we had a record year. Historically, we have not guided and given details to the product line level, what we have said and you heard in my opening remarks that our international business is a growing business and we have in many new countries that have adopted our solutions than as you heard in my remarks. And we have a fairly decent list of additional countries that have requested information about our products and engaged with us in terms of demand. So, we have a fairly optimistic view on our commercial sales in general, but we have not guided to the product level.

Okay. In terms of the new small UAS opportunities with the U.S. Army, do you expect decisions on these programs this coming year? Can you give us a sense of timing and the size of the market opportunity? I think you talked about the short range micro UAS and soldier borne sensor?

Yes. So, the government’s plans have specific requirements for these product capabilities already included in their plans and we are working with our customers based on their own planning and timing adoption as to when they will initiate that. At this time, we do not have enough information to be able to give you a more precise answer on that. All I could tell you is that based on the engagements we’ve had with the customers there is a real intent by the army to enable our U.S. Army with its capabilities and both of those two requirements are in there.

Thank you. The next question is from Michael Ciarmoli of KeyBanc Capital Markets. Your line is open.

Hi, good evening guys. Thanks for taking the question. Just, maybe a look on into the 2017 outlook focusing maybe on backlog, backlog entering the year at one of the lowest levels, can you sort of bridge the gap for us in terms of how we get to the mid-point of guidance, what ships out of backlog, I think you've done that walk a couple of time on prior calls, what you are expecting from new order flow, level of EES, et cetera?

Yes, Michael, so our 2016 funded backlog was roughly $65.8 million. I believe we have disclosed that on our earnings release. And that is fairly similar or typical to our historical levels. In 2015, entering into 2016 was somewhat of a similar ratio. And in general our funded backlog going into the year typically has been less than roughly third of our business in general that we have been in the past. So, I would argue that this is fairly typical of the last few years that I’ve been here and that I’ve seen our track record in that respect. As I said earlier, our business is lumpy and the timing of these opportunities and contracts are not something that’s in our control and we try our best to give as much visibility as we can, but the most important thing is to take care of our customers and address their needs.

So, can you provide a bridge in terms of what gets us to that midpoint? I mean, how much ships out of that backlog? What orders are? What the expectation is for EES revenues as you guys have done in the past region that kind of path towards midpoint of guidance?

I do not have that information handy right now, but we could work on that and get back to you on that separately later on, Michael.

Yeah. Michael, with respect to the EES component of that, what we’ve typically done is we’ve typically looked at last year’s or prior’s year’s EES revenue contribution and made an assumption that if that were to be stable and that would be a portion of that visibility walk down. Obviously, as we progress through the year by the time we come down to the Q1 earnings call we’ll have better visibility into the balance of the year and we’ll be able to address it at that time.

Thank you. [Operator Instructions] The next question is from Howard Rubel of Jefferies. Your line is open.

Thank you. Talk a little bit more about Blackwing for a moment, I mean, you’ve sort of had it in your pocket, now it’s showing up. What were the things that caused the Navy to find this so appealing and how do you think about it going forward as part of a larger product line?

Sure, Howard. Good afternoon it’s Wahid, here.

Thank you.

Yeah. You’re welcome. So, the U.S. Navy has expressed interest in this for a while. We’ve been working with them and trying to understand the requirements more clearly and we have so far delivered some products for what I refer to as a pilot space prototype testing and evaluation. And then, recently we have actually shipped some products for them to be able to use those in the field in an operational, what I call con-ops or concept of operation and template. And so, we feel fairly optimistic about this opportunity and it is also in the DoD’s future year defense program or FYFYDP plan and the U.S. Navy intends to essentially equip our submarines with this capability and our track record so far has been fairly positive and we believe that this represents a fairly large opportunity long-term.

And just to add to that Howard, in terms of your question about how to think about it from a broader perspective, if you turn back the clock to when we first started talking about Switchblade, that’s really – that’s always been a solution focused on dismounted inventory tested application and as we were out demonstrating that to customers, other customers came out to those demonstration and like what they saw and asked us if we could modify them to address their emerging concepts of operation, unique operating requirements for that and so we began to do that and over time we ended up to at a point where we are now where we’ve grown beyond just Switchblade into truly an emerging family of tactical missile systems or loitering missile systems if you will that encompass both direct fire lethal types of effects, as well as ISR types of effects. So, Switchblade remains a good example of the lethal type of loitering missile system we’ve been talking about. Blackwing is an example of a similar architecture adapted for ISR types of application. Switchblade as we’ve been talking about has been addressing dismounted inventory, Blackwing is now addressing submerge submarines. And so, we’re really expanding the addressable market and expanding the number of customers and the number of con-ops that we can address through this emerging family of systems as Wahid also mentioned, we have a growing number of variance that have continued to evolve and progress towards the point where at least one of them as we’ve said has moved into more of a production type of a situation and others might be moving in that direction shortly. So that entire family of the tactical missile system/loitering missile systems has been growing, continues to grow, continues to expand its footprint and address a larger and growing market opportunity.

I appreciate it. I mean, we can count ships or we can count subs or we can - it goes well beyond just a few applications. Thank you very much.

You’re welcome. That’s accurate Howard. Thank you.

Thank you. The next question is from Michael Ciarmoli of KeyBanc Capital Markets. Your line is open.

Hey, guys. Thanks for taking the follow-up. Maybe just going back to this visibility question, can you guys tell me what portion of remaining government funding you guys have entering into this fiscal year? I’m just trying to understand - can you tell me what portion of government funding you guys have left that you expect to execute on, in this fiscal year? I’m just trying to get a sense, is your visibility better entering into this year or is it you know, lower than it’s been in previous years?

Michael, I would say that in terms of better or worse or equal, I would call it equivalent to last year. And so, I would characterize our current visibility and unfunded backlog fairly similar to what we did in fiscal 2015. If you want specific numbers, these are some of the numbers that we’ve actually shared already. In fiscal 2015, starting of that time, our funded backlog was $64.7 million and we had an additional $19 million worth of unfunded backlog, which totaled to about $83 million and change. In fiscal 2016, funded backlog is about $66 million, $65.8 million to be more exact and then an additional $16.7 million worth of unfunded backlog, which totals to about $83 million as well.

Okay. That’s fair. And then, just on the - you guys have been talking a lot of about growth initiatives. Can you give us a sense, I mean, the guidance for revenues is the same as it was for fiscal 2016, can you give us a sense of what programs or what product lines are seeing revenue headwinds in the overall portfolio that’s offsetting some of the growth in international and tactical missile? Just to try and get a better understanding of what’s going on with mix in the portfolio?

Sure, Michael. So, as we’ve said before and as we continue this journey, our family of system solutions both in the small UAS, as well as in the tactical missile systems or loitering missile systems family is fairly large now. The portfolio is fairly large and our customer base is pretty large, and different variants of these products, whether it’s Raven, Puma, WASP or Switchblade or variants of Switchblade they are on different phases of their adoption curve with different customers. And so, I would characterize for example, our Raven and Puma business to be fairly established in a domestic market. However, we have significant opportunity for growth in international markets. We have opportunity for growth in the defense market for sustainment and upgrades like we launched the i45 gimbal sensor suite, which is unmatched capability in the industry. So, any one of our products you could look at it any time, the family of the system has various – or they are in various stages of their adoption and acquisition. So, primarily in fiscal 2017, we see strong demand in growth in international markets. We see strong demand in customer needs for our tactical missile systems as I described earlier. And obliviously, we intend to enter in the commercial U.S. market with the right solution first and we’re focused on perfecting that solution and the adoption of that really will take time and it also depends on the market itself. It’s a very large market with lots of different verticals and lots of different applications.

Thank you. And at this time, there are no further questions in the queue. I’ll turn the call back over for closing remarks.

Thank you very much and thanks for your attention on today’s call and your ongoing interest AeroVironment. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website avinc.com and we look forward to speaking with you again following next quarter's results. Have a good day.

Thank you. Ladies and gentlemen, this concludes today’s conference, you may now disconnect. Good day.