Good day, ladies and gentlemen, and welcome to the AeroVironment, Inc. First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after the 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, Ms. Teresa Covington; and the Vice President of Investor Relations, Mr. Steve Gitlin. And now at this time, I would like to turn the conference over to Mr. Gitlin. Please go ahead, sir.

Thank you, Michelle, and welcome to AeroVironment’s first quarter 2019 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 United States government; availability of U.S. government funding for defense procurement and research and development 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; the impact of potential security and cyber threats; 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; uncertainties in the customer adoption rate of commercial unmanned aircraft systems; failure to remain a market innovator and create new market opportunities; changes in significant operating expenses, including components or 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, September 05, 2018. 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.

Thank you, Steve, and welcome to our first quarter fiscal year 2019 earnings call. On today’s call, we will focus on two key messages. First, our team is successfully executing our plan and we’re on track to achieve our fiscal year 2019 objectives. And second, demand drivers for our solutions remain strong and we’re capitalizing on these opportunities to make progress towards our long-term goals. Today, I will summarize our solid first 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 financial review of the first quarter and I will discuss our goals for fiscal year 2019 before Teresa, Steve and I take your questions. Our momentum continued into the first quarter as we delivered strong results, including revenue of $78 million, up 127% year-over-year, driven by solid funded backlog at the end of fiscal year 2018. This positions us for a more normalized quarterly run rate than in previous years with our first quarter revenue representing approximately one quarter of the midpoint of our full year guidance range. Our favorable mix of products versus services plus a strong mix of higher margin products in contracts produced gross margin of 42%, up from 25% in first quarter of fiscal year 2018. Diluted earnings per share from continuing operations was $0.85, up more than $1 from the same period last year. Please note that first quarter EPS includes a one-time gain of $0.26 per diluted share from a litigation settlement. Continued demand for our solutions is reflected in our strong funded backlog of $157 million as of the end of the first quarter, an increase of 120% year-over-year. In the first quarter, we adopted ASC 606, the new accounting standard for revenue recognition,…

Thank you, Wahid, and good afternoon, everyone. AeroVironment's fiscal 2019 first quarter results are as follows. Revenue for continuing operations for the first quarter of fiscal 2019 was $78 million, an increase of $43.6 million or 127% from the first quarter of fiscal 2018 revenue of $34.4 million. The increase was due to an increase in product deliveries of $36.5 million and an increase in service revenue of $7.1 million. Gross margin from continuing operations for the first quarter of fiscal 2019 was $32.6 million or 42% of revenue compared to $8.7 million or 25% of revenue for the first quarter of fiscal 2018. The increase in gross margin was primarily due to an increase in product sales margin of $22.7 million and an increase in service margin of $1.2 million. Gross margin as a percentage of revenue increased from 25% to 42% primarily due to higher revenue and a higher percentage of product sales in the first quarter. Looking at the rest of the income statement, SG&A expense from continuing operations for the first quarter of fiscal 2019 was $12 million or 15% of revenue compared to SG&A expense of $11.3 million or 33% of revenue for the first quarter of fiscal 2018. R&D expense from continuing operations for the first quarter of fiscal 2019 was $6.4 million or 8% of revenue compared to R&D expense of $5.5 million or 16% of revenue for the first quarter of fiscal 2018. Income from continuing operations for the first quarter of fiscal 2019 was $14.2 million or 18% of revenue compared to a loss of $8.1 million or minus 24% of revenue for the first quarter of fiscal 2018. The increase in income from operations was primarily due to higher gross margins of $23.9 million, partially offset by an increase in…

Thank you, Teresa. We’re off to a solid start in our fiscal year 2019. With strong backlog, revenue visibility of 74% for the midpoint of our guidance range and a focused and committed team we continue to expect fiscal year 2019 revenue from continuing operations of between $290 million and $310 million with diluted earnings per share of between $1.10 and $1.40. We continue to expect R&D investments totaling 10% to 11% of annual revenues. With respect to the distribution of revenue in earnings in fiscal year 2019, we continue to expect first half revenue about equal to half of the midpoint of our full year revenue guidance range. In contrast to first quarter revenue mix, we expect lower margin revenue mix for the balance of the year. We also expect increased operating expenditures, including R&D and SG&A investments along with a higher effective tax rate through our fourth quarter. While revenue in our second, third and fourth quarters will be close to that of our first quarter, the effects of lower margin revenue mix, higher operating expenditures and a higher effective tax rate imply lower quarterly earnings producing the annual earnings guidance I just mentioned a moment ago. In summary, we are confident in our ability to achieve our fiscal year 2019 objectives and deliver another strong year of profitability and growth. To reiterate our main points for today’s call; first, our team is successfully executing our plan and we’re on track to achieve our fiscal year 2019 objectives. And second, demand drivers for our solutions remains strong and we’re capitalizing on these opportunities to make progress towards our long-term goals. Thank you to our team members who work tirelessly to create value for our customers and stockholders. Thank you to our customers who place their trust in AeroVironment to support their most 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.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. The first question in the queue sir comes from Joseph DeNardi with Stifel. Your line is open.

Yes. Thanks. Good afternoon, everybody. Wahid, I think you mentioned in your prepared comments that TMS was 29% of revenue in the first quarter, small UAS was 53%. What’s the other 18%? Is that HAPS or what’s the right math there? Thank you.

Hi, Joe. It’s Teresa here. HAPS was 15% in Q1 and then we have other at 3% which is inclusive of MacCready Works since the [indiscernible].

Okay. And Teresa do you have those similar percentages for first quarter '18 just so we can get a sense for the growth rate?

Sure, Joe. In the first quarter of fiscal '18, small UAS was 58%, TMS was 28%, HAPS was 7%, and other was 6%.

Great. That’s very helpful. Wahid, just maybe a higher level question for you. Given what the stock price has done, I’m wondering if that changes how you view your appetite for M&A and how you think about using stock to finance any of that? Thank you.

No problem, Joe. So obviously we have a very strong and healthy balance sheet in terms of our financials. That is obviously not an accident. We’ve worked really hard to achieve that. The primary reason for that is to execute our strategy, our organic strategy and delivering the long-term value creation and achieving the success and the opportunity we’re pursuing, Joe. We also recognize that there will be multiple opportunities to use our balance sheet and potentially even our stock, if we needed to, to supplement or to achieve our strategic gets, either faster, better, or cheaper in different ways. An example of that in the past year for example was the formation of a joint venture with SoftBank Corporation where we invested 5% initially and we can raise that percentage up to 19% when we expect that decision to happen sometime in this fiscal year. So with those types of activities we intend to use our balance sheet to progress our strategy. Beyond that there may be other opportunities inorganically that would require a combination of potentially cash and non-cash such as our stock. Those are all options that we as management team as well as the Board considers on a regular basis. We review those and should we make any decisions on that, we will keep you updated, but certainly that’s on the mix of our consideration for decisions in the future.

Thank you.

You’re welcome, Joe.

Thank you. [Operator Instructions]. The next question comes from Brian Ruttenbur with Drexel Hamilton. Your line is open.

Yes. Thank you very much. So, I just want to clarify a couple of points. First of all, the way you’re looking at the quarter, it’s a normalized $0.59, and that would equate to your guidance, that $0.59 goes into the $1.10 to $1.40. Is that correct?

The $1.10 to $1.40 when we gave that range was inclusive of the one-time legal settlement that we had at $0.26, so that included that. So it was the $0.85 that we’ve talked about from continuing operations was part of the guidance, the $1.10 to $1.40.

Okay. So you’ve made $0.85 in the first quarter but you only anticipate making another $0.35 to $0.60 whatever, you’ve made half – over half – I haven’t done the math or have it on top of my head, I apologize. You’ve made half here in the first quarter and you anticipate the second quarter being also very strong. Is that correct at least on the revenue side but not as much on the margin side? Is that correct?

That is correct, Brian. So this is Wahid. You bring up a really good point which is absolutely as you heard from my remarks, we expect the second, third, and fourth quarters in terms of revenue to be roughly equal up to that of our first quarter. However, the profit margin on the second quarter and the remaining of the year has a significantly different picture than the first quarter, and it’s driven primarily by the following factors. First, the mix of our revenue for the remainder of the year is quite different. We have lower margin product sales as well as a higher percentage of services contracts than product contracts that we anticipate to shift throughout the remainder of the year. Second, we also expect to increase our OpEx investments. Q1 was lower as we mentioned that to you guys last quarter. And then third, our effective tax rate would also be higher for the remainder of the year. We benefitted from that on the first quarter, and that would not be the case in the remaining three quarters. So the combination of those three factors equates to a lower EPS for the remainder of the year, and we therefore reconfirmed our guidance of $1.10 and $1.40 for the full year.

Okay. I’m sorry to have you repeat that. I heard that you made those in the prepared comments, but it seemed odd to me that it was such a big quarter and that there was no raising, and I appreciate you going back over that.

No problem.

Yes, thank you. And then can you talk a little bit about the long-term growth in the business? Where do you see it going? It’s obviously going to be a solid year this year and now that you’re kind of a pure play on the UAS side, where do you expect that to grow in 2020 and beyond?

Sure, Brian. So this is Wahid again. Obviously, we feel very good about our performance for the first quarter. We’re very pleased with the results that we accomplished so far. It is still early for the year and that’s why we’re reconfirming the guidance and we expect to achieve the outcomes that we set in front of us as part of our goal for this year. Beyond fiscal '19, we don’t comment specifically on the growth in dollars or revenue percentages and all that. We will provide that on the fourth quarter. I can tell you that inherent to our strategy as a business is to pursue these very large global end markets with highly differentiated compelling and sustainable value proposition solutions and then capitalize on those and basically achieve adoption with those and achieve great success. That has been our history in our small UAS. That has been our history so far in our Tactical Missile Systems business and we intend to achieve even greater successes with the other two businesses that we’re somewhat younger in those new businesses, such as our HAPS business as well as our Commercial Information Solutions. So in general, that’s our strategy and we feel pretty strong about our value proposition and our odds for success in the long term.

Thank you, sir. The next question comes from Joseph DeNardi with Stifel. Your line is open, sir.

Yes. Thanks. Wahid, I appreciate the revenue disclosures you guys have provided. It’s helpful for us to understand how the business looks and I don’t want you to regret doing that. But given the commentary around the mix of business changing a little bit in the back of the year, should we think about the margin profile of kind of the TMS business, the small UAS business and the HAPS business as being different? So as one ramps up a little bit that there’s going to be a margin drag associated with that?

Joe, certainly that is the case with our businesses on any given time. Our different product lines and businesses have different profiles even based on specific contracts. So even within our small UAS business, Joe, our fixed price contracts tend to have slightly higher risk but also a higher profitability of gross margins. Our cost plus contracts are less risky in terms of its outcome for AeroVironment. However, it’s got also a lower profile for profitability. And in terms of our different businesses, that is also true. Obviously right now in our HAPS business in a joint venture, we are executing against the contract that we have in place which we announced earlier which is a cost plus fixed fee contract. And by nature it is a lower gross margin endeavor which we believe is the right thing for the long-term value creation opportunity for AeroVironment. So throughout the year, Joe, we do expect differences in gross margin based on different product lines as well as within the product lines based on the mix of the product.

Okay. That’s helpful. And then just on Switchblade or TMS, I’m wondering if you could just talk about to the extent you can how it’s being used by the customer right now? I know you’ve been hesitant to talk about that in detail in the past. I’m wondering if that’s changed at all. Is the usage primarily in theater still or is it being used more broadly kind of the normal course of training or is it still very focused, limited type of deployment at this point?

So, Joe, we have always believed and we continue to believe that our Switchblade, the original Switchblade that we have introduced many years ago is a disrupter of a very large typical missiles business. We believe that our solutions set is very compelling and it provides a very compelling value proposition for the type of problems and challenges that our men and women in uniform face daily out in the world. We’ve been at the belief [ph] of that and as you can see from our results and our track record, we have built that business and grown it very, very steadily over the last few years very handsomely. We still believe we’re in early stages of adoption. Our customer still is the U.S. government. We’re not shipping those internationally to-date. I cannot comment specifically on the actual use of the product with what type of forces and all that due to our customer confidentiality needs. However, there’s a very strong funding line within the U.S. budget as I mentioned on my earlier remarks close to $113 million in the proposed budget which was just signed by the President. And again, this is a repeated demand signal of high demand, high validation of the solutions compelling value proposition to the market that we serve. And we’ve also mentioned that there are multiple variance of that solution and different phases of its adoption in development process, which we believe is going to address a much bigger market long term.

That’s helpful. Wahid, is the 113 million that’s in the budget, I’m assuming that’s not in your backlog yet. When would that go into your backlog and when do you expect to record that 113 million in revenues? Is that primarily an FY '20 event for you guys or would some of that start to hit this fiscal year?

So, Joe, you’re right that it is not in our backlog today because it’s actually proposed funding that has been just signed by the President. There’s still some debate and discussion that has to happen between the two houses of Congress. And then the expected plan as of right now is for that to be resolved and delivered to the President before October 1, which is the beginning of the new government fiscal year. And what that means is if that were to happen by that timeframe, then that line of approval is going to be funded through the government fiscal year 2019 which starts October 1 and ends in September – end of September of 2019 calendar year. That means that the booking of that could happen any time towards the end of this year or beginning of next fiscal year. And we will update you as we progress through that process. We’re engaged with our customer on that very closely and we’re working towards a successful outcome for both our customer and AeroVironment.

Okay. And then one last one for me, if I could, just on the international opportunity for Switchblade. Can you just talk about what the timeline there could be when you could actually start to sell that to some of our closer foreign allies and whether any of those customers have expressed interest in that type of capability? Thank you.

Sure. So, Joe, we believe that similar to the U.S. DoD customer of ours that the capability and the value proposition of Switchblade and its variance is very attractive and applicable to a multitude of our allied nations. Obviously because it is such a disruptive solution in technology, our customer, U.S. government, feels that it needs to be carefully vetted in terms of the ability for it to be able to ship internationally. We have been working on that and we continue to work on that with the U.S. government and the state department. We’ve been very successful with that in our small UAS business for the last multiple decades and we’ve grown that business as you’ve seen. Long term I believe that we’re going to be successful there. However, it’s going to take more effort and we have to go through the process. When will that happen? It’s really hard to predict the exact timing of that, Joe. But we’re working through that process and we will update you as we have any updates on that.

Thanks very much. I appreciate the time.

You’re welcome, Joe.

We have no further questions at this time. I would turn the call over to Mr. Gitlin for any closing remarks.

Thanks, Michelle, and thank you all for your attention today and for your interest in AeroVironment. An archive version of this call, all SEC filings and relevant company and industry news can be found on our Web site, avinc.com. We look forward to speaking with you again following next quarter's results. Good day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.