Good day ladies and gentlemen and welcome to the AeroVironment Incorporated Second Quarter Fiscal 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after management’s remarks. As a reminder, this conference 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 conference over to Mr. Gitlin. Please go ahead, sir.

Thank you Andrew and welcome to our second quarter fiscal 2017 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; risks related to our international business including compliance with export control laws, potential need for changes in our long-term strategy in response to future developments; the extensive regulatory requirements governing our contracts with the 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 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, December 06, 2016. The Company undertakes no obligation to make any revision to the statements contained in our remarks 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?

Thanks Steve and good afternoon. Our three main messages today are as follows; first we are on track for our stated fiscal 2017 plans and objectives. Second, strong order flow during the second quarter supports our plans for the reminder of fiscal 2017; and third, we are making significant progress on our key strategic milestones designed to drive long term value creation. On today’s call, I will review our second quarter financial performance and then provide an update on our fiscal 2017 milestones and objectives. Raymond Cook will then provide a detailed financial review before I discuss our reaffirmed outlook for the year. Following our prepared remarks, Raymond, Steve, and I will take your questions. Now a quick summary of second quarter financial performance. As we expected, we made great progress on our bookings plan during the quarter increasing funded backlog by 60% sequentially to $119.6 million. Second quarter revenue of $50.1 million produced total first half revenue of $86.3 million, which represents 32% of the midpoint of our guidance range. Last quarter, we noted that we expected the first half to represent slightly less than one third of full year revenue, and that is precisely the result we achieved. Profitability was lower than the prior year. As anticipated and outlined last quarter, the decline was due primarily to two factors. First, the second quarter of fiscal 2016 included a $3.5 million reserve reversal for the settlement of prior year government incurred cost audits. Second, this fiscal year’s increased sustaining engineering costs, which consist of activities associated with supporting our existing products are included in our cost of sales. These increased costs, combined with the lower sales volume reduced year-over-year gross margin in this second quarter. The net result of lower year-over-year revenue and lower gross margin was a loss…

Thank you, Wahid and good afternoon everyone. AeroVironment’s fiscal 2017 second quarter results are as follows. Revenue for Q2 was $50.1 million, a decrease of $14.6 million or 23% for the second quarter of fiscal 2016 revenue of $64.7 million. The decrease in revenue resulted from a decrease in product sales of $20.1 million, partially offset by an increase in contract service revenue of $5.5 million. Looking at revenue by segment, UAS revenue was $40.8 million, a decrease of $15.8 million from the second quarter of fiscal 2016 revenue of $56.6 million. The decrease was primarily due to a decrease in product deliveries of $21.5 million, partially offset by an increase in customer funded R&D work of $4.3 million and an increase in service revenue of $1.4 million. EES revenue was $9.3 million, an increase of $1.1 million from the second quarter of fiscal 2016 revenue of $8.1 million. This increase was primarily due to an increase in product deliveries of our passenger fleet, electric vehicle charging systems. Gross margin for the second quarter was $17.4 million or 35%, as compared to $31.5 million or 49% for the second quarter of fiscal 2016. The decrease in gross margin was primarily due to a decrease in product sales margin of $14.5 million, partially offset by an increase in service margins of $0.4 million, both of which were impacted by the reserve reversal of $3.5 million for the settlement of prior year government incurred costs audits recorded in the second quarter of fiscal 2016. A decrease in product sales volumes which resulted in increase in the per unit fixed manufacturing engineering overhead support costs and an increase in sustaining engineering activities in support of our existing products of $1.3 million. By segment, UAS gross margin decreased to $14.9 million for the second…

Thanks Raymond. Before addressing our reaffirmed outlook for the full year, I would like to frame the opportunity set within our core domestic defense market. The U.S. Army, Marine Corps, Special Forces and Air Force, have largely procured their initial [indiscernible] record requirements for Raven, Puma AE and Wasp AE first generation small UAS solutions. And require ongoing support with spare parts and upgrades. The Navy, other marine operators and the Department of Homeland Security, represent large new domestic procurement and support opportunities for those first generation small UAS. The DoDs frequency location represents a significant upgrade opportunity across all DoD customers, who currently own and operate AeroVironment small UAS. The U.S. Army’s Soldier Borne Sensors program represents a potential large, new procurement opportunity for a second generation small UAS that is almost pocketable in size and function. We are positioned extremely well to benefit from all of these opportunities by selling more first generation small UAS along with upgrades spares and services and by developing the second generation capabilities that will further expand the benefits of small UAS to our customers. Now I would like to provide our view on the balance of the year. Our visibility for fiscal 2017 is consistent with our fiscal 2017 plans and expectations. Based on our current outlook we continue to expect full year revenue of $260 million to $280 million with EPS of between $0.20 and $0.35. As we have been communicating since our fourth quarter fiscal 2016 call, seasonality is having a greater impact on the distribution of revenue this year than in previous years. Due to this year’s pronounced seasonality, we believe it’s important to provide you a preview of anticipated third quarter financial performance, which we expected to be roughly in line with the quarter just completed. We anticipate third quarter revenue between $50 million and $52 million with loss per share between $0.34 and $0.38. This also implies very high fourth quarter revenue and profit, which we have expected all along. Our team is focused on effectively executing our plan in order to produce the results we expect. We have been planning for the seasonality back-end loaded year since the beginning of this year and including increasing inventory levels in order to support our customers’ lead times and sense of urgency. We believe we’re prepared to deliver. To summarize today’s three main points, first, we’re on track for our stated fiscal 2017 plans and objectives. Second, strong order flow during the second quarter supports our plan for the remainder of fiscal 2017. And third, we’re making significant progress on our key strategic milestones designed to drive long-term value creation. Thank you for your continued support of AeroVironment and thanks to our amazing employees whose commitment to our customers every single day helps them proceed with certainty. Now we will take your questions.

[Operator Instructions] Please standby for questions. And we’ll be taking our first question from the line of Josephine Millward from the Benchmark Company. Your line is open.

Good afternoon.

Good afternoon, Josephine.

Thanks for taking my question. Great bookings in Q2. Can you give us more color on your bookings since you only announced two orders during the quarter were they mostly international?

Hi, Josephine, this is Wahid.

Hi, Wahid.

Hi there. Our orders on any given quarter as you know in any given year varies significantly from customer geographies and products, and this year, we have so far seen as we stated from the beginning of the year, and I have explained that at the beginning of the fiscal year strong demand for our small UAS products domestically – I’m sorry internationally as well as our Tactical Missile Systems business for the family of systems and the variants of the products that we’ve developed. So we see strong positions in the U.S. market, and we have now grown our international customers for small UAS to 35 plus countries, and that list we expect it to grow even further as the years go by, so in general the bookings what we have is composed of a variety of different customers, both domestic and international, both small UAS as well as TMS product lines.

Okay, the urgent request for the Switchblade, the $47 million, do you expect to receive and ship that order in your fiscal year 2017, is that reflected in your guidance?

I’m sorry Josephine, you said that, what was the question was it $47 million.

The urgent request for the Switchblade.

Yes.

Do you expect to receive that order and ship it in your fiscal year 2017 and it’s now reflected in your guidance.

Okay. So Josephine, first just a little point of clarification, the roughly $47 million that you mentioned and I mentioned in my remarks is not an urgent need designated request, it’s actually in the OCO budget of the government, in an amendment.

Right, right, yes.

So it may turn out to be executed by the government as an urgent need or may not, we don’t know that at this point, and we can’t comment on that specifically. However, as we can tell from our inventory positions and our backlog, we have been planning for these particular opportunities all year along and even before the year. And I’m not in a position to be able to precisely predict the timing of these orders, but we remain prepared and we’re heavily and strongly engaged with customers in all these procurement activities.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Austin Bohlig from Piper Jaffray. Your line is open.

Thanks for taking my questions, gentlemen. And just a couple of questions here. First I just kind of want to dig more into your guidance commercial opportunity. And now with your commercial platform launch, just wondering if you could give a little bit more color on sizing this opportunity for you maybe as a percentage of revenues of how big you guys think you could get down the line.

Hello, Austin. Sure no problem this is Wahid. So we are extremely excited about the commercial information solution and the opportunity in front of us. We have tried to stay away from sizing the market ourselves because it seems like there are so many other experts in the industry domestically as well as internationally and globally that size this market in many, many different ways. It’s suffice to say that the overall size of the market is definitely in the billion of dollars over a long period of time, whichever way and whatever specific research report or analysis that you look at, they all project similar type of very large numbers, number one. Number two, we believe that what’s really important now is to get the right solution that addresses the key problems and needs of our customers in the commercial industrial space effectively better than anyone else in a very differentiated and cost effective manner. And we believe that our comprehensive solution that we just unveiled inclusive of our Quantix drone, the integrated payload and sensors within it, the software analytics that we offer as part of our DSS system and the services to operate and conduct these activity for our customers is one of the most comprehensive and highly differentiated solutions in the industry. And we believe that we will uniquely position to take advantage of the opportunity in front of us. Right now we’re primarily focused on getting this product to market in terms of a shipping date that we expect and first customer ship, and as well as to receive pre-orders for them. And so until and unless we get the product to the market and receive some indicators from the customers, I won’t be in a position to comment on the revenues and size of the market in the future, but at the time, we’ll be able to provide you some more clarity.

Okay. Well and then on top of that, a good transition I was just wondering about your distribution strategy or your go-to-market strategy with your commercial platform. Do you guys plan on going straight direct or is it possible that you guys could team up with leading industrial players such as like John Deere or any of these bigger industrial players similar to what your competitors have done.

Sure, so Austin, as you know I’ve spend a great deal of my career in the commercial space and I’m quite familiar and many others in our company that we have sort of built the team who has extensive experience in multiple channel distribution strategies and different experiences in those markets. We realized that there’s not a one-size-fits-all channel strategy for this business for all the verticals that are out there. We also recognize that selling hand to hand to every single farmer across the globe is not the most optimal solution and strategy for the agricultural market, for example. However, so we’re looking and we’re developing a multi-channel strategy and for different industries it most likely will include different types of channel strategies. Many of the large enterprise customers, and the utilities, and oil and gas and transportation they are smaller in number but very large in size in terms of the opportunity and their assets. So that could bode well for a direct channel strategy, because they also expect to do the business direct with the suppliers and vendors and that’s very similar to our defense business. So a lot of what we’ve done in the defense space bodes very well with those enterprise class customers that we’re engaged with actively and we have been working for many years now. On other applications and global opportunity we will most likely deploy a multi-channel strategy which we will most likely face and we’ll give you more update as we get prepared and ready to do so. But right now, we’re really focused on execution and we’re excited about the opportunity.

Okay. Well, thank you, gentlemen. Good luck in the second half.

Thank you very much Austin.

Thank you. [Operator Instructions] We have a question from the line of Howard Rubel from Jefferies. Your line is open.

Thank you. Two, first when you had indicated the year was going to be back half loaded had you expected it to be really jammed into the fourth quarter.

Hi, Howard this is Wahid, the short answer is yes, we – as you know I’ve been here for five years and folks who have been here for lot longer than five years, there’s one thing very true about our business which is its very difficult to predict it on a quarterly basis and I believe for that same reason was one of the reasons why we’ve haven’t guided quarterly in many previous years before us. And whenever we could provide some color we have been able to provide it confidently we’ve done so. So when we set our plans beginning of this fiscal year and even prior to the beginning of the fiscal year, we had a fairly good understanding of what our revenue was going to look like. And we had actually specifically planned for that and so far for the first half of the year as you saw from our results we’re very much in line with our expectation. If you recall on the first quarter, I mentioned that we see first half revenue to be about one-third and second half be about roughly two-thirds. And 32% versus 33.3% is exactly where we landed. We also knew at that time that fourth quarter is going to be a bigger quarter for us primarily because of the urgent needs of our customers’ requirements. And so since then even then since the beginning of the year, or even prior to that, we have ordered raw material, we have built sub assemblies at subcontractors and we’ve been develop in building product and anticipation for these customers urgent needs because they are talking to us specifically about these requirements and their needs and the timing of them. So in a nutshell, we expected it, we’re on track with that expectation and we believe that we’re ready to execute against that in the second half of the year.

No I mean you did a filing subsequent, I think to the second quarter to reinforce the fact that or rather the first quarter rather that the second quarter was going to be a challenging gross margin. So I understand that. I just – how should I say, surprised at – I mean this would be a record and then some fourth quarter if one does the math, I mean more than, I don’t know what else to say other than close to half your year is going to be in Q4.

Howard, yes you’re absolutely right about that. We have been aware of that. And we’ve been prepared for this specific situation because of our customers’ urgent needs, and expectations and timing. So although as you know every year our fourth quarter has been the largest quarter. And from my past five years we’ve also set records in last three years although this year seems to be even bigger than that. But I think the one thing that we’re doing some what differently now and even more is to prepare for these types of customer requirements and needs. And we believe that all along we’ve been prepared and we’re ready to execute against that.

And then a follow-up question, it sounds as if the international business has clearly grown in share. Could you provide us with a percentage of how the mix has shifted from domestic to international?

So Howard, we typically don’t provide on a quarterly basis, details on international and specific customers in general. What I could say that in general, our international business as we’ve said at two or three quarters ago is very promising. We’ve been executing very well, our customers seem to really, really cling on to our value proposition and benefit and see value in our solutions. And also international customers tend to be about, we believe about a decade behind in adoption the U.S. DoD. So this year – as you remember last year, we had a very, very successful year internationally. And we also mentioned that we expect successful and a strong year this year for international sales and orders and so far that’s been reflective. Just to point out in our in our annual filing Howard, in our 10-K we typically breakout international revenue at company level and in the last 10-K we issued, it was in the high 20 percentage range which was a record for the company straight [ph].

Yes, I was recalling 28% or 29% or so, it just seems. But with this growth in international you’ve been able to still manage your SG&A. How have you – and as I said I’m just sort of to follow-up on the how have you been able to manage the balance because typically international sales tend to require more selling requirements and more time and other things. So is there anything you’ve been able to do there, Wahid I mean the customers, see what the U.S. military is doing and they come to you or do you have to go search them out.

Yes, a great point, Howard. So international customers have some uniqueness to them relative to the domestic customers in some ways for example we are involved directly with some of the customers and other cases we’re also using manufacturer representatives or sales agents that require that they have local relationships they’re set up for those countries. And certain countries also require that you do business through a local entity. For example, if you know and we have a joint venture partnership in Turkey with a company that we formed that’s called Altoy, which we’ve been working with them. Similarly we announced this quarter in Australia we’re partnering with multiple partners, local partners. So international customers tend to be somewhat unique on their own and each one is somewhat different from the other. The G&A that you mentioned we typically don’t talk about and disclose G&A to specific regions or customers. I could tell you that we are well aware of the costs and we believe we’re pretty strong and bullish on our international prospects in general. In general, we always compete with large players as well as the small local players and our win rate is extremely high and remains – it remains high as based on our engagements above these customers. So we’re optimistic about it, Howard.

Thank you very much, Wahid.

You’re welcome, Howard.

Thank you. Looks we have a follow-up from Josephine Millward from The Benchmark Company. Your line is back open.

Hello, Josephine.

Yes, thank you. Wahid can you talk about your counter UAS offerings, there seems to be very strong DoD interest there. Are you developing or proposing something based on to Switchblade?

Josephine, I wish I could comment more on this topic because it is a very exciting category. We have been aware of this for a while and we are actively engaged with customers on developing what we believe very differentiated unique and compelling solutions that could help our customers with them and obviously will proceed with certainty. So unfortunately, I’m not in a position to be able to discuss the details due to our customers’ wishes.

I understand. I’m going to ask another one for you. Can you comment on FLIR’s recent acquisition of Prox Dynamics’. Do you think they’re targeting the army to social point sensor with more of what you call Black Hornet?

So very good question, Josephine. Obviously, no one, others who may not know that FLIR announced this quarter or this month at least a couple weeks ago that they have acquired Prox Dynamics which is what we consider a small competitor, international competitor in the nano category of UAVs. First, I would like to point out that FLIR is one of multiple vendors for our business for sensors and cameras of that nature. And we have had a strong relationship with FLIR, we’ve already been in communication with them before as well as after this acquisition. And we believe that we will continue our relationship yet we always have these strategic questions answered internally we address them to make sure we’re not dependent on one particular vendor or supplier. And in terms of the Nano UAV that you mentioned, we’re very strongly excited about our own offering, and our value proposition, and our solution and our engagement with the customer. You just heard from my remarks we have received an order for 30 snipe systems for early evaluation. And we are very excited about this product and we are very much willing to compete. And our team, obviously we’ve known Prox Dynamics for long time, we are continuously assessed competitive nature of our business. And all I could say that we feel fairly confident about our position and our solution offering and our competitive nature despite FLIR’s acquisition.

We might just add that the deal does suggest that there is broad and deep recognition of the value in small UAS and the growth opportunities ahead, not just by us but by other companies in the industry.

That’s helpful. Thank you very much.

Thank you, Josephine.

And it looks we have a question from Austin Bohlig from Piper Jaffray. Your line is back open.

Hey, gentlemen just a quick follow-up for a Raymond more on the modeling concept. Just wondering if you could help us out on – how would you think about taxes or the tax rate for the next couple of quarters?

Yes, so our taxes are moving as you’ve seen as we’re near the [indiscernible] we got near the breakeven number. So I think going forward, we will be at a sub statutory level from both the federal and the state perspective. But as we hover around the breakeven level you should see it in the low-digit numbers to teens.

Okay, perfect. Thank you, gentlemen.

And we have a question from the line of Jon Ladewig from Stifel. Your line is open.

Hi, gentlemen. Yes. One quick question, are we still expecting the 12% of sales for research and development?

John. Yes, as we have said the beginning of the fiscal year that we have been lowering our incremental R&D investments on strategic initiatives, growth initiatives since beginning of the year and we expect this year to be roughly about 12% of revenue for the full year.

Okay.

[Operator Instructions] I’m seeing no other question is in the queue at this time. So I would like turn the call back over to management for closing comments.

Thanks, very much, Andrew and thank you all for your attention and your ongoing interest in AeroVironment. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website avinc.com. We wish you a joyous holiday season and New Year. And we look forward to speaking with you again following next quarter’s results. Good afternoon.

Ladies and gentlemen thank you again for your participation in today’s conference. This now concludes the program and you may all disconnect this time. Everyone have a great afternoon.