Good afternoon, ladies and gentlemen, and welcome to AeroVironment's Fourth Quarter and Full Fiscal Year 2020 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. Before we begin, 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. 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. This afternoon we also filed a slide presentation with our earnings release and posted the presentation to our website at avinc.com in the Events & Presentations section. The content of this conference call contains time-sensitive information that is accurate only as of today, June 23rd, 2020. 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. Joining me today from AeroVironment in a socially distant manner are President and Chief Executive Officer, Mr. Wahid Nawabi; and Senior Vice President and Chief Financial Officer, Mr. Kevin McDonnell. We will now begin with remarks from Wahid Nawabi. Wahid?

Thank you, Steve. Welcome to our fourth quarter and full fiscal year 2020 earnings conference call. Before we discuss our strong fourth quarter and fiscal year 2020 performance, I would like to comment on recent events. We at AeroVironment have spent time reflecting on the tragic events of George Floyd, Breonna Taylor, Ahmaud Arbery, and too many others and on the protests that have followed. Let us be clear, there is no place for discrimination or racism at AeroVironment or in our society at large. We strongly believe that diversity enriches our business and contributes to the best results for our customers, business partners, and other stakeholders. We seek the most talented people to join our team regardless of race, gender, religious belief, ethnicity, country of origin, sexual orientation, or political view. However, as a country and a company, there is more we can all do to extend justice to all citizens. To that end, we have created an internal committee on inclusion and diversity to evaluate ideas from our people and others to determine the steps we can take that can contribute to positive change. As a global leader in robotic sensor, software analytics, and connectivity technologies, we believe that we are in a unique position to share our passion for science, technology, engineering, and mathematics, or STEM, with you, especially those in underserved communities and help influence the next generation of innovators, engineers, and scientists. As part of our initial efforts, we plan to increase our outreach to have African American and other underrepresented groups to further diversify our team. We welcome the input of all our employees to help us achieve an even more diverse and inclusive work environment. Now shifting to our fiscal fourth quarter and full year results. On today's call, I will emphasize three…

Thank you, Wahid. Revenue for the fourth quarter of fiscal 2020 was $135.2 million, an increase of $47.3 million or 54% from the fourth quarter of fiscal 2019 revenue of $87.9 million. The increase was due to an increase in product revenue of $37.4 million and an increase in contract services revenue of $9.9 million. Fourth quarter fiscal 2020 revenue by major product line is as follows. Small UAS was $63 million or 47% of the total revenue, TMS was $42.4 million or 31%, HAPS was $23.4 million or 17%, which includes the one-time revenue from the construction of a flight test facility as Wahid mentioned in his remarks, and other was $6.5 million or 5%. Let me take a moment to outline the current status of the HAPS program. The inception to-date revenue under contract for the HAPS program is $138.4 million. The total value of all contracts for the HAPS program in $166.1 million or a $17.5 million increase from last quarter. Turning back to the financial performance for the quarter. Gross margin for the fourth quarter of fiscal 2020 was $53.2 million compared to $37 million for the fourth quarter of fiscal 2019. Gross margin as a percentage of revenue decreased from 42% to 39%, primarily due to an unfavorable product mix. In addition, we had an increase in intangible asset amortization expense associated with our acquisition of Pulse Aerospace in fiscal 2020. Looking at the rest of the income statement. SG&A expense for the fourth quarter of fiscal 2020 was $16.3 million or 12% of revenue compared to SG&A expense of $20.3 million or 23% of revenue for the fourth quarter of fiscal 2019. The decrease in SG&A was primarily due to a $4.4 million fixed asset impairment charge booked in the fourth quarter of fiscal…

Thanks, Kevin. July 17, 2021 will be AeroVironment's 50th anniversary. While we celebrate our past and accomplishments to-date, we're just getting started and are excited for the future of AeroVironment. AeroVironment remains the leader in our chosen markets, we are delivering outstanding financial results, our financial position is strong and our growth portfolio is advancing toward even larger market opportunities. As we look ahead, we envision a future where intelligent robotic systems in the air, on the ground and in the water work together to achieve mission success quicker, safer and more cost-effectively than what can be accomplished today. This future state requires advances in autonomy and its enabling technologies, which our team is already achieving as we add valuable new capabilities to our solutions. Our strong balance sheet provides financial flexibility to execute on our strategy and build long-term shareholder value. Currently, we have strong visibility into fiscal year 2021 with record funded backlog and total visibility of 60% described on slide number 7 of our earnings presentation which is higher than the 55% at this time last year. This gives us confidence in our ability to achieve our annual revenue and earnings objectives. Additionally, proposed U.S. Government fiscal year 2021 defense procurement funding of approximately $90 million for AeroVironment solutions adds to our confidence in achieving this year's objectives. However, it is important to note that we are operating in an unprecedented macro environment. The duration and magnitude of the COVID-19 pandemics impact on the global economy and what longer-term effects it may have on customer funding and procurement decisions is unknown. We are beginning to see some delays in our supply chain, but its impact has not yet been significant to our business. Our customers are also grappling with remote work scenarios, just like the rest of…

Thank you, Wahid and Kevin. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Peter Arment of Baird. Peter?

You've actually got Eric Ruden on the line for Peter this afternoon. So my question, just a quick one. On the guidance, can you just give a bit more color on the moving pieces there? It looks like it's going to be more of a back-half weighted year. Is any of that due to ramp-up in the Switchblade contract? And is there any color you can provide kind of just on the quarterly cadence there, just what you expect on the ramp-up? Thanks.

Sure. Eric, this is Wahid. Good to talk to you, and I hope everything is okay on your end of the world. The guidance that we provided, I basically said that for the revenue range that we've guided which is between $390 million and $410 million, we expect the first half to represent about 40% of that approximately. And obviously, the second half will be roughly 60% of that. We have a very diverse portfolio of products and customers and contracts type that vary, and the timing of those always fluctuate. And based on that, we provided the EPS, GAAP and non-GAAP adjusted EPS guidance that I just mentioned earlier as well. So again, it's not heavily back-end loaded, it's just slightly. And it's pretty - I would argue that's a pretty well level loaded balance sheet relative to the many previous years, in general.

We'll now take a question from Pete Skibitski at Alembic Global. Pete?

I guess I'll start with -- could you give us some more color on what the biggest driver to growth will be in fiscal '21? Is it small UAS or is it TMS, is it international, a particular factor there and I just have one follow-up after that?

Sure, Pete. This is Wahid. Good to talk to you. In terms of the revenue for the year and by product, we have a number of different - we're very blessed to have a quite diversified portfolio of products now as well as customers, geographies, contract types. So, it allows us to have flexibility and a diversified portfolio. In general, the growth - the majority of the growth for fiscal year '21 is going to come from small UAS and our tactical missile systems business. We expect the HAPS business to be roughly flat because of the nature of the business being a customer-funded R&D program still for fiscal '21.

Okay. So no tip-off as to whether UAS or TMS will grow faster?

As I said, it really depends on the quarter and on the timing of all these contracts. Again as I said, we have lots of customers. We're very - we've been working on this intentionally over the years, as you know, to grow the diverse - and diversify our portfolio, and there is lots of different opportunities that we're pursuing internationally as well as domestically as I highlighted in the call and that allowed us to deliver outstanding results for fiscal '20. And we again expect to grow in fiscal '21, as I provided the guidance, which again speaks to the strength of our business and the diversity of our portfolio of solutions and the demand for products.

Okay, fair enough. And then my follow-up, if we do have a continuing resolution for DoD that I think is widely expected at least for a quarter, it could impact - could continue through most of your third quarter fiscal '21, I think. Should we think that that's going to impact you guys in any way or have you kind of taken account of that in your guidance?

Sure. So, we have taken that and many other factors into account. And if you see, we have very strong backlog, $208.1 million worth of funded backlog and our visibility is higher than even last year - this time last year, 60%. So pretty darn remarkable achievements on - for the team so far. Given those and given all the aspects of these other risks, we believe that based on what we know today and all the risks, we're confident about our ability to achieve the guidance that we provided this time. Obviously, we live in unprecedented times. There’s all kinds of risks related to the pandemic, the CR situation, change of guards within the administration, the impact of COVID-19 on the economy, etc., etc. So all of those - given all of that, if anything changes, we'll keep you updated. But we feel confident at the moment based on all the factors that we see that we can achieve the expectations that we've set. Additionally, I would mention that we have now a third consecutive year of double-digit top line profitable growth, and we have achieved or exceeded our expectations in several years now within what the expectations we provided at the beginning of the year. So, I feel good about our odds, but there's all these risks that we don't know about that's going on around us and we'll keep you updated.

Thank you, Pete. And our next question is coming from Ken Herbert at Canaccord Genuity. Ken?

Wahid, I just wanted to - sorry, one more question on the guidance. I mean, you've guided to call it 10% top line growth in '21 with basically flat earnings growth. And I know you called out some COVID-19 related timing and other disruptions and then of course just mix. Can you provide sort of any more granularity on maybe the relative impact of those two items? And I would guess from your mix comments, it would imply maybe a little bit growth on TMS in '21 considering the margin contribution from TMS relative to small UAS. But any more discussion around that would be helpful.

Sure. So, Ken you're right. Based on the comments that I made that we do expect fiscal year '21 revenue mix to be slightly unfavorable in terms of gross margins, as I mentioned. And the reason for that really is a multitude of factors, primarily related to mix. And what I say - what I mean by that is that we have a very diverse portfolio of products now, customers, geographies, contract types, and all of that really changes the profitability or gross margin profile of any of our contracts. And so, it varies, fluctuates based on what time of the year or quarter or month you look at our - out of that lens. However at the end of the day, we still believe that we're going to be able to grow our business this year and deliver another year of profitable growth and the mix overall is a little bit unfavorable in terms of the margins. We still believe that the underlying demand drivers for our solutions are strong. We accounted for the potential impact of COVID-19 to the degree that we can, but it's an unknown and no one really knows the impact fully. And as things change, we'll keep you updated as we go forward.

And I'd just add to add, this is Kevin, we do see good operating income growth, but we are having some negative impacts on the interest income because of interest rates and our tax rate. So there is some noise happening below the operating income line that's impacting our EPS guidance.

Right.

And if I could, Wahid or Kevin, obviously TMS do you factor any international sales into the fiscal '21 outlook? I know there has clearly been some move by the current administration to try and promote more international sales across the unmanned spectrum. Can you just give an update on where you are with efforts in TMS and if fiscal year '21 might be the year we start to see some of those efforts succeed?

So, Kevin, as I mentioned, yes, we are very fortunate that over the years we've grown our portfolio to a very large number of customers internationally. As I mentioned on the call earlier in my remark that we now have 50, 5-0, international allies as our customers for our small UAS products. We believe that similar opportunity exists for us for TMS. And as I mentioned, we are actively engaged with both U.S. government as well as multiple allies and their interest on Switchblade and the acquisition of it and exportability of it. We believe it's a matter of when versus if. But the timing of that is really, really difficult to nail down specifically. We expect to - obviously this year we have a number of opportunities at any given time for our small UAS internationally. And the timing of that has been affected to some extent, but again no one really knows very fully the impact of the COVID-19 in general. We still have a very diversified portfolio and really pleased with the results so far. And I believe that we can deliver another year of growth and profitability, despite all the challenges and headwinds that everyone else is dealing with in this difficult times.

Thank you, Ken. Our next question is from Joe De Nardi at Stifel. Joe?

Wahid, you mentioned something to the effect of - the guidance kind of considering COVID and maybe the growth rate being moderated as a result of that. Like, what would the guidance have been a couple of months ago without COVID? How much - what's the magnitude of the impact?

Sure. So as you saw from our results, we delivered outstanding results. A third year of double-digit top line profitable growth and we looked at - and we do this on a very regular systematic and methodical way. We looked at our pipeline of opportunities and the customer timing individually as we build our outlook and we build our forecast. And we realized that there is some delays, they're not significant, but there is some delays that we've been able to manage both in terms of supplier delays and parts that we can procure as well as timing of international contracts. As you know, international travelers come completely to a screeching halt and doing business with 50 countries, there is a lot of unknowns there in terms of when those paths will open up and when we could actually continue to progress that. We still believe that we can deliver another year of profitable growth and that's why we provided the guidance based on our very strong backlog, historically record level of backlog and visibility again. So we've taken all that into consideration, but we have accounted, to some degree, for the unknown impacts of COVID-19 and these delays into our guidance, which we provided. And this will mark another year of growth for us and very strong profitability. And as Kevin mentioned also on the operating income line, very healthy strong operating income because there is lots of other things that are going on below the operating income level that we wanted to bring your attention.

Would you be able to grow at 20% and further 10%? I'm just trying to understand like what the magnitude is a little bit, if you have a sense for that.

Look, I am so proud of the achievements of our team in the fourth quarter and the fiscal year, Joe. Despite these incredible events our team has able to deliver a record quarter, a record backlog, incredible visibility for the next year and a phenomenal financial performance for the year and set us up beautifully for next year. We are in a better position now in terms of our visibility relative to fiscal '21 than we were last year at this time. And could we grow higher? Of course, our team is genetically programmed, if you ask me, to grow as fast and as best we can and deliver the maximum amount of value for our customers and our shareholders. We never rest for anything less than that. But given all the variables, we feel confident about the outlook that I provided and our ability to execute on our plan and deliver again at this time.

Thank you, Joe. Next question is from Louie DiPalma at William Blair. Louie?

I know you guys said that HAPSMobile revenue for the fiscal year should be flattish, but it definitely seems that you're making progress. What are the next milestones that investors should be looking forward to with HAPSMobile? And secondly, what are the biggest challenges that you expect to face over the next couple of years with HAPSMobile development?

Sure. So as I mentioned on the remarks, we've had an outstanding year in terms of our performance and execution on HAPSMobile in fiscal '20. We were able to achieve our initial low altitude flights. We established a flight test facility and Spaceport New Mexico where our people are there today and actively working the flight-testing schedule that we have as part of the program. And we also - I said that we expect this revenue, if all goes according to our plan, to continue to be similar in fiscal '21. Again the HAPS program right now is on the first phase of its business plan which is design, development and demonstration of the two airplanes and the capability, which we're coming toward the end of that milestone, roughly. And we'll smoothly transition over to the extensive, what I call, testing and certification phase. The challenges of course in that basis this is a never been done before endeavor from the beginning. The opportunities are massive long term, but the challenges are equally as big. And we have demonstrated over the years that we're the best company in the world with the best talent and know-how and qualifications to be able to tackle this challenge and overcome it and so far we've got a tremendous track record. And testing and certification of this kind of an aircraft, which is our intention with the FAA and other authorities is obviously a significant risk. But both our partner and we are very positive about the outlooks. We believe that this has a tremendous opportunity long term and we keep executing against that plan and we keep making progress. So we look forward to another successful and positive progress here.

Sounds good. And do you have any sense of how long the second phase, being the testing and certification phase, should last?

Sure. So again because this has never been done before in the stratosphere with this type of an airplane, it's all speculative and we are very familiar with the process because of our work with the FAA and other agencies in this area. However, if you look at comparable things or something similar to this in the commercial airline space, it's a several-year effort. And again, I emphasize heavily that this has never been done before and it is first time ever. But we're familiar with it, we have a plan, we understand what needs to be done and we're working that plan. And as you could see from our track record so far, we've been able to achieve the expectations that we have set for ourselves and our partner and execute it well against our plans and delivered on those so far.

Before we jump to the next question, Kevin, it might be helpful based on the previous question if we can provide any kind of color as to the expectation of quarterly revenue percentage for the first half of the year.

Yes. Wahid mentioned 40% in the first half and 60% in the second half and we would just say roughly 50%, 50% between first quarter, second quarter for that first half revenue.

Great. Thank you. Now we'll get a follow-up question from Ken Herbert of Canaccord. Ken?

Wahid, just a question. I think it's been about a year since you did the Pulse acquisition. And I remember at the time you talked a little bit more about looking for maybe inorganic growth opportunities being a little higher priority and you obviously have a very strong balance sheet. Can you just talk about your current view on capital allocation when you think about acquisitions and are you seeing maybe any color around the pipeline or what you're looking at or how we should think about that moving forward and the potential there to deploy capital?

Ken thank you for asking that question. That's a very critical question, an important one for us and our Board. We assess that on a very regular basis, number one. Number two, let me make some comments on this and give you guys some color, which is we're very fortunate to have a strong balance sheet, zero debt. And the future for our systems and the prospects for unmanned systems, the intersection of robotics, software analytics, connectivity and sensors is very bright, whether you look at it from the commercial perspectives or the defense perspective, it's very bright, very promising. So we're positioned really well. And being at the place we are and the financial position that we have, I would argue that these are the better times for us to be more looking out for potential distressed assets or more better deals where it makes sense to our strategy, it makes sense to support our strategy. So we're actively looking, as I've said before, and I gave you guys an update on our Pulse acquisition and what progress we've made, which is very satisfactory to me based on what we established as our own performance criteria as part of that acquisition and we're making progress there. So we look forward to updating you. Obviously we're looking at a number of options at any time, but if there is anything meaningful to share and to let you guys know, inform you, we will keep you updated on that.

Thank you, Ken. [Operator Instructions] We will now take a question from Joe De Nardi as a follow-up. Joe?

Thanks. Kevin, what were international sales in the quarter and for the year?

Give me that one second here. So total international revenue for the year was $166.2 million and for the quarter it was $50.6 million.

And I believe that included the HAPS revenue, which is international.

Right. Right. Correct.

Right. Okay. Yeah, so Wahid I guess along those lines, if you just look at the international business excluding HAPS, just kind of, I guess what you guys get selling Puma and Raven internationally, it's more than I think what you get selling that to the U.S. Just given the conversations you're having around Switchblade internationally, do you think that there is a similar opportunity there longer term or is the market kind of more constrained just given export restrictions longer term? What are your thoughts there? Thank you.

I would say that I expect or I believe that our international sales of Switchblade is a matter of when versus if, really, number one. Number two, does it have the same potential. I believe so. I believe that we have proven domestically similar to our small UAS. If you look at the history of these two businesses or product lines, they're are very similar. We came up with a game-changing capability, introduce it to the customer, they loved it, and since then it's been grown to be a large business. And then we have introduced it to allies and it's taken a little bit of time for them to adapt, but we've grown that now internationally to 50 countries now. That's an impressive achievement and an accomplishment by our team. I believe the Switchblade has a similar value proposition, if not even stronger in some cases, for most of our allies that we're involved in these conflicts. So we still believe in that. And you can see from our progress with the U.S. DoD, U.S. Army and the multi-year contract that we will receive for our Switchblade and as I mentioned on the call, we also have progressed the larger variant of Switchblade plate very well successfully in the fourth quarter and throughout the year. And I believe that had impact that increases our size of the market opportunity for us as we prepare to introduce that to the market in future. So overall, I do believe that our tactical missile systems business has a similar profile of demand and opportunities internationally as our small UAS.

Do you see all of your foreign customers now being eligible to purchase Switchblade eventually?

I believe that there is - so today, currently I can tell you that we're involved with multiple customers, multiple allies that have an interest in this. Whether that list is equal to our small UAS, I'm not able to comment on that specifically. But what I can tell you is that our initial foray into small UAS wasn't as probably as large it is today either. So over time, it keeps growing. As adoption takes place, more and more customers will fold into that and we continue to grow. As you see from a year ago we've increased on our number of international customers for some small UAS. So we continue to grow even small UAS portfolio of customers internationally.

Thank you, Joe. That was our final question. We really appreciate 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 avinc.com. We wish you continued good health, a good day and we look forward to speaking with you again following next quarter's results. Good day.