Good afternoon, ladies and gentlemen, and welcome to the AeroVironment's Third Quarter Fiscal Year 2019 Earnings Call. This is Steven Gitlin, Vice President of Investor Relations for AeroVironment. 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. Joining me today from AeroVironment are President and Chief Executive Officer, Mr. Wahid Nawabi; and Senior Vice President and Chief Financial Officer, Ms. Teresa Covington. Please note that on this call, certain information presented contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and they contain words such as believe, anticipate, expect, estimate, intend, project, plan or words or phrases with similar meaning. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward-looking statements. For further information on these risks, we encourage you to review the risk factors discussed in AeroVironment's periodic reports on Form 10-K and Form 10-Q filed with the SEC and the Form 8-K filed today with the SEC, along with the associated earnings release and the Safe Harbor statement contained therein. The content of this conference call contains time-sensitive information that is accurate only as of today, March 5, 2019. The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after this conference call. We will now begin with remarks from Wahid Nawabi. Wahid?

Thank you, Steve, and welcome to our third quarter fiscal year 2019 earnings conference call. On today's call, we will focus on three key messages. First, we are delivering outstanding results; second, we are positioned very well to achieve our increased fiscal year 2019 financial goals; and third, we continue to make progress on our key growth initiatives that drive long-term value. I will begin by reviewing our third quarter fiscal year 2019 financial and operating performance and then provide an overview of some notable developments during the quarter. Next, Teresa Covington will provide a detailed review of third quarter and year-to-date financials. Then I will discuss our increased guidance for fiscal year 2019, which reflects our continued strong momentum. Teresa, Steve and I will then take your questions. We are successfully executing our fiscal year 2019 plan and continue to deliver strong results as evidenced by the following year-over-year comparisons. Third quarter revenue of more than $75 million increased by 38%. Gross margin of 40% increased by 7 percentage points from 33%. Earnings per diluted share from continuing operations of $0.35 increased significantly from a loss of $0.02 and funded backlog of $133 million increased by 17%. We continued to maintain high funded backlog contributing to evenly distributed quarterly revenue this year. Year-to-date, our performance reflects strong improvement over last year. Revenue of $226 million for the first three quarters increased by 46%. Gross margin of 40% increased by 3 percentage points from 37%. And earnings per diluted share from continuing operations of $1.49 including $0.26 one-time gain on a litigation settlement increased by $1.37. Given our strong results in the quarter and year-to-date along with the continued progress we're making to strengthen our financial and operating performance, we have raised our full year guidance, which I will discuss…

Thank you, Wahid, and good afternoon, everyone. AeroVironment's fiscal 2019 third quarter results are as follows; revenue from continuing operations for the third quarter fiscal 2019 was $75.3 million, an increase of $20.7 million or 38% from the third quarter of fiscal 2018 revenue, up $54.6 million. The increase was due to an increase in product deliveries of $10.6 million as well as an increase in service revenue of $10.1 million. Third quarter fiscal 2019 revenue by major product line/program is as follows; small UAS was $47.7 million, tactical missile systems was $11.3 million, HAPS was $13.6 million and other was $2.8 million. Gross margin from continuing operations for the third quarter fiscal 2019 was $30.4 million or 40% of revenue compared to $18.3 million or 33% of revenue for the third quarter of fiscal 2018. The increase in gross margin was primarily due to an increase in product sales margin of $8.7 million and an increase in service margin of $3.5 million. Gross margin as a percentage of revenue increased from 33% to 40% primarily due to the increased sales volume, which resulted in a decrease in the per unit fixed manufacturing and engineering overhead support costs as well as favorable product mix. Looking at the rest of the income statement. SG&A expense from continuing operations for the third quarter of fiscal 2019 was $14.5 million or 19% of revenue compared to SG&A expense of $11.5 million or 21% of revenue for the third quarter of fiscal 2018. R&D expense from continuing operations for the third quarter of fiscal 2019 was $8.1 million or 11% of revenue compared to R&D expense of $6.6 million or 12% of revenue for the third quarter of fiscal 2018. Income from continuing operations for the third quarter of fiscal 2019 was $7.8 million…

Thanks, Teresa. AeroVironment is a system solution provider at the intersection of robotics, sensors, software analytics and connectivity. We have achieved leading market positions in U.S. government's small UAS and tactical missile systems. We see continued strong demand for our small UAS across the globe. We're making solid progress on our customer funded program to design and develop the next generation of solar power, high altitude pseudo satellites for global connectivity. We were gaining additional insight on customer demand as we expand awareness of our innovative commercial information solutions to the agriculture market. We're also transforming our company through initiatives focused on enhancing our operations, attracting top talent and developing our people to accelerate our progress. We remain focused on effective execution in the fourth quarter to deliver on our commitments. With continued strong performance this year, we now have 100% visibility to the midpoint of our revenue guidance range of $300 million to $310 million. However, the recent extended federal government shutdown did introduce some risk on schedule. As a result, we're maintaining our revenue guidance of between $300 million and $310 million. Year-to-date, we have generated earnings per share from continuing operations of $1.49. Due to our strong performance, we're now raising our expectations for diluted earnings per share from continuing operations to between $1.60 and $1.80. We expect higher research and development investments in the fourth quarter with annual R&D investment to approach 11% of full year revenue. Additionally, as a result of strong domestic and international demand for our solutions, we are investing more in SG&A to pursue and capture those opportunities. In summary, to reiterate our main points for today's call. First, we're delivering outstanding results. Second, we are positioned very well to achieve our increased fiscal year 2019 financial goals. And third, we continue to make progress on our key growth initiatives that drive long term value. Thank you to AeroVironment's team members for your relentless drive to serve our customers and stockholders. Thank you to our customers who place their trust in AeroVironment to support their critical missions. And thank you to our stockholders for recognizing the value-creation potential of our people and our company. Teresa, Steve and I will now take your questions.

Thanks, Wahid. [Operator Instructions] Our first question comes from Peter Arment at Baird. Hello Peter.

Hey, good afternoon, Steve, Wahid, Teresa. Thanks for your time. Just a first question, I guess on HAPSMobile. It seems like, obviously, we'll get some additional details with the Q. But you've been – it looks like, you're on pace to generate, probably cost over $40 million in revenue in fiscal 2019. I guess thinking – I'm really thinking more about just how that trends going forward. Any color you could give us on what progress you're making on the prototype vehicles, et cetera?

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

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

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

Our next question comes from Ken Herbert at Canaccord. Hi, Ken.

Hi, Steve. Hi, Wahid and Teresa. How are you?

Hi, Ken, pretty good. How are you?

Very good. I just wanted to first ask about the sequentially the TMS revenues have been, I mean, sort of trending down each quarter. Can you talk about maybe visibility on if any particular programs you can highlight within this – within the TMS portfolio and maybe any color on sort of what you're implying in the fourth quarter for this business and any sort of visibility into fiscal 2020. I know, you're not giving guidance there yet, but sort of what's happened in the TMS product line and how should we think about this moving forward?

Sure, Ken. So first and foremost, as you know, we have built a very strong business with our tactical missile systems category with our Switchblade. We continue to be the solution of choice for customer, U.S. militaries needs for this capability. And we have delivered and growing this business very significantly over the years. Any given day or quarter or year we'll have – we will – naturally, we'll have fluctuations between our different portfolio of products and contracts in terms of the amounts of revenue, which we recognize and share. One other things that's changed on the tactical missile systems business in Switchblade specifically is that due to the new accounting 606 rules, we now recognize the revenue for TMS over time instead of a point in time. So that is an uptick that this changed this year. However, in general, as you see from the government fiscal year 2018 budget dollars, which we're in the process of executing that, there is significant – there was significant funding there. And additionally, there was a close to a $100 million worth of additional funding on government fiscal year 2019 budget, most of which is not yet in our backlog. So we have a significant, what I consider demand signals and demand potential for a Switchblade and we continue to execute on that as we progress throughout the year and the remainder of this calendar year.

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

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

Great. Thank you very much.

You're welcome, Ken.

Our next question comes from Joe De Nardi at Stifel. Hi, Joe.

Yes. Hey, Steve. I like the new format. Good afternoon to you guys. Wahid, I know you'll provide guidance for FY20 next quarter, but could you maybe talk directionally about what you're expecting on the top line? I mean, you mentioned the army budget pretty supportive of LMAMS, what sounds like a tailwind for Switchblade from an accounting standpoint. Can you just talk about your expectations? Any significant items we should be considering positively or negatively for next year, just on the top line?

Sure. So first of all, I'm very pleased with our team's ability to execute this quarter and year-to-date so far. We have built a very strong foundation for achieving our goals for this year. We still have some time left our fourth quarter to execute and complete that successfully. That's why we provided the guidance for this year. In terms of the following year, as I mentioned on my remark, we feel very strong about the general overall demand drivers for solutions across the Board. We see strong demand and domestically for small UAS. We see strong demand for a small UAS internationally. We continue to win more and more countries as well as larger order sizes that you've seen in our recent announcements that we have done in the last several quarters. We also see potential strong demand for the HAPS opportunity that we have globally if you've seen, there's lots of news out there in terms of the potential prospects of that. And given on top of all that there is strong budget dollars already allocated into the government in fiscal year 2019, majority of which is not yet reflected in our backlog currently. So while we don't provide specific guidelines for fiscal 2020 until our next quarterly earnings call, we – I believe that we've built a very strong foundation to not only even out our revenue for this year, but also position ourselves for a strong fiscal 2020.

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

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

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

Sure. So Joe, on government fiscal year 2019, those budgets have been already published publicly. In fact, I believe on the last the conference call, I detailed out the specific funding dollars that are allocated for our product specifically, there are funding dollars for LMAMS close to about a $100 million. There is close to $13 plus million for our Puma systems for the Air Force. And there's also a considerable amount of funding over $40 million for Raven for the U.S. Army. And there are also additional future long-term opportunities for new potential programs soldier-borne sensor being one of those particular opportunities, but there are more than just the SBS program. So overall in government fiscal year 2019 budgets that was just announced and published, there is historically speaking very strong and robust funding for our products and solutions. We have not seen the details of our – of the proposed government fiscal year 2020 budgets, but that's due to come out sometimes in the near future. And as it does, we will absolutely keep you informed.

[Operator Instructions] We'll now take a question from Louie DiPalma with William Blair. Welcome, Louie.

Thank you for having me Steve, and good afternoon, Wahid and Teresa.

Good afternoon.

Good afternoon.

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

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

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

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

Let's take a follow-up question from a Joe De Nardi at Stifel. Go ahead, Joe.

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

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

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

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

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

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

We have no more questions at this time. So this will conclude today's call. Thank you for your engagement and your interest in AeroVironment. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website, www.avinc.com. We look forward to speaking with you again following next quarter's results. On behalf of every member of the AeroVironment team, we wish you a good evening. Thank you.