Ladies and gentlemen, thank you for standing by, and welcome to the AeroVironment Fiscal Year 2023 First Quarter Conference Call. At this time all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference call is being recorded for replay purposes. I would now like to hand the conference over to Jonah Teeter-Balin. Thank you. Please go ahead, sir.

Thanks, and good afternoon, ladies and gentlemen. Welcome to AeroVironment's fiscal year 2023 first quarter earnings call. This is Jonah Teeter-Balin, Senior Director of Corporate Development and Investor Relations for AeroVironment. Before we begin, please note that certain information presented on this call 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, which 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 other filings with the SEC, along with the associated earnings release and safe harbor statement contained therein. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation on 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, September 07, 2022. 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 are Chairman, 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, Jonah. Welcome to our first quarter fiscal year 2023 earnings conference call. I'll start by summarizing our quarterly performance and discuss recent achievements. Then Kevin will provide a more detailed review of our financial results after which I will provide a summary of our expectations for the remainder of fiscal year 2023bBefore Kevin, Jonah and I take your questions. Let me emphasize a few key messages, which are included on Slide number 3 of our earnings presentation. First, our first quarter results were generally in line or above our expectations and we're on track to achieve our fiscal year 2023 objectives leading to another year of double-digit top-line organic growth. Second, we're seeing strong order momentum demonstrated by a record funded backlog of more than $300 million as of August 27th. And third, AeroVironment continues to successfully manage through ongoing supply chain challenges and is very well positioned for continued value creation even beyond this fiscal year, primarily due to strong demand across nearly all our product lines. Let me first summarize our financial results for the quarter. We delivered first quarter revenue of $108.5 million compared to $101 million in fiscal year 2022, an organic increase of 7% year-over-year. This growth was primarily due to higher demand for our Tactical Missile Systems and our Small Unmanned Aircraft Systems product lines. Gross profit for the first quarter was $33.7 million compared to $28.7 million in the prior year period. Our gross margin increased to 31% from 28% in fiscal year 2022. This increase primarily reflects higher sales volumes as well as favorable product and geographical mix. We reported a non-GAAP adjusted net loss of $2.5 million or $0.10 per diluted share as compared to a loss of $4.2 million, or $0.17 per diluted share, for the first quarter…

Thank you, Wahid. Today, I’ll be reviewing the highlights of our first quarter fiscal 2023 performance through which I will occasionally refer to both our press release and earnings presentation available on our website. In summary, this was a good quarter, both in terms of organic revenue growth and improvement to our adjusted EBITDA versus last year’s first quarter. We’ve done all this despite continued supply chain challenges that’s Wahid highlighted in his remarks. Now, I’d like to turn – like to provide more detail to the revenue for the quarter. Revenue for the first quarter was $108.5 million, an increase of 7% over the first quarter of fiscal 2022 revenue of $101 million. Slide 5 of the earnings presentation provides a breakdown of revenue by segment for the quarter. Our largest segment during the quarter was Small UAS with $43.3 million of revenue, up from last year’s $40 million, approximately 70% of Small UAS revenue in the quarter was from international customers and we expect this trend to continue throughout the year. Our Tactical Missile Systems or TMS segment contributed $23 million of revenue during the quarter, compared to $19.2 million in fiscal 2022. Despite the strong first quarter growth, we are still hampered by supply chain challenges in the TMS segment. Our Medium UAS segment finished the quarter with revenue of $19.3 million, a $3.1 million decrease compared to the first quarter of fiscal 2022 of $22.4 million. The decline is largely result of lower MEUAS program revenues. However, as Wahid mentioned, our Medium UAS division was recently awarded with the Army’s FTUAS Increment 1 program. This is an important milestone in building increased Medium UAS product revenue over the coming quarters. Our HAPS segment contributed $10.2 million in Q1 in line with the $10.4 million in the…

Thanks, Kevin. We remain confident in our ability to deliver on our expectations for fiscal year 2023 and beyond. While federal budget priorities are still being determined by for government fiscal year 2023 are advanced unmanned robotic solutions continue to be in strong demand. As such, we are reiterating our previously provided guidance for fiscal year 2023, which is again, shown on Slide number 7. We anticipate revenue of between $490 million and $520 million for fiscal year 2023, representing double-digit organic growth and net income of $11 million to $18 million or $0.42 to $0.72 per diluted share. We forecast non-GAAP adjusted EBITDA of between $82 million and $92 million and non-GAAP earnings per diluted share excluding acquisition-related costs, amortization of intangible assets and other onetime expenses of between $1.35 and $1.65. We continue to expect 60% of revenue will be in the second half of this fiscal year, reflecting the timing of current and anticipated awards. Our adjusted gross margin should end up at or slightly above last fiscal year. This is mainly driven by favorable product mix and higher volumes, somewhat offset by the unfavorable impact of ongoing supply chain expenses. We also expect to deliver adjusted EBITDA of between 16% and 18% of revenue for the full year as previously discussed. Before turning the call over for questions, let me just reiterate a few key takeaway points on which our investors should focus. First, we remain on track for our fiscal year 2023 guidance, including among other things, double-digit top line organic growth, stable margins and improved bottom line results. Second, we’re seeing strong order momentum demonstrated by the record funded backlog of more than $300 million as of August 27. And third, AeroVironment continues to successfully manage through ongoing supply chain challenges and is very well positioned for continued value creation even beyond this fiscal year, primarily due to strong demand across nearly all our product lines. I would like to thank our employees for their hard work during the quarter. Their perseverance and dedication have enabled us to continue supporting our military and allies around the world. All of us at AeroVironment are committed to providing the U.S., our allies and other customers around the world with the most reliable, innovative, and invaluable unmanned aerial and ground based robotic solutions. Similarly, we remain committed to our goal of delivering strong returns for our shareholders. And with that Kevin, Jonah, and I will now take your questions.

Yes. Hey, good afternoon everybody.

Good afternoon, Ken.

Hi, Ken.

Hey, Wahid. I just wanted to start out. Can you just maybe provide an update specifically on Switchblade 300 and 600? How much of the – maybe the 300 in funded backlog you’ve called out or implied in the fiscal 2023 revenues are sales associated with Switchblade into Ukraine, either directly into Ukraine or as part of a replenishment of inventories here in the United States.

So Ken, the mix of backlog so far is somewhat evenly divided between the product lines. And as I mentioned on my remarks, we expect significantly more new orders for Switchblade over the next four to six months for the two specific reasons you mentioned. One, to provide more Switchblades to Ukraine through the U.S. government and two, to also backfill depleted inventories of the U.S. DoD that they’ve already drawn from to help Ukraine with so far. So I would say, as of now, the mix of our backlog is evenly distributed. It’s not heavily tilted towards Switchblade yet, but we do have line of visibility to several additional contracts and orders that are in the works through the U.S. DoD and some of our allies that should make it into orders in the next few months.

Okay. That’s helpful. And just as a follow up, is it possible maybe to quantify the impact of the supply chain on the fiscal first quarter? And what’s your visibility on if that’s getting better? Is it steady? Is it stable? I mean, how do we think about that impact as it flows through the rest of the fiscal year? Thank you.

Sure. You’re welcome, Ken. So definitely supply chain remains to be a headwind for everyone around the world that I know of and we talk to in our industry as well, and that’s no different for us. We are managing it very successfully by proactively working with suppliers, with the U.S. DoD, with the office of the Second Defence, with the distributors of our suppliers and many, many other activities that we’ve got going. For Q1, the results really were threefold. One, it was within or slightly above our expectations. So we’re very pleased with the results for Q1 as we expected them to be. If you recall, government continuing resolution for fiscal year 2022 did not end up until sort of March, April timeframe. So a lot of the acquisition dollars and funding that the U.S. DoD was expecting to put in contract in government fiscal 2022 is actually being executed now, which is basically going through this month and next month as the last two months of it. And that’s why there’s some delays in contracting in that regard. And lastly, supply chain still while – still remains a headwind, we have managed to secure as much of our supply as we can for this fiscal year, while there still remains to be some risk, but overall, we feel good about the remainder of this year. We believe that given our position today and all the actions we’ve taken, including building a little bit in advance, where it’s prudent positions as well to be able to achieve our operational plan for this year.

Thank you.

You’re welcome, Ken.

Thank you. Our next question will be coming from Peter Arment of Baird. Your line is open.

Good afternoon, Wahid, Kevin, Jonah.

Hi, Peter. How are you?

Hey, I guess, I wanted to come back to I guess talk about Switchblade as well. Over the summer, you’ve had a lot of interest that I think internationally, maybe you could just update us on the timeline there, because it sounds like what you’re referring to is the supply chain is particular impacting your TMS kind of product line. So your ability to kind of fulfill some of the demand, that’s obviously increasing.

Peter, that’s accurate. Overall, our – most of our products are somewhat affected by the supply chain constraints, the global supply chain constraints, but Switchblade in particular because some of the – as you know, some of the electronics that are within Switchblade are very specific to Switchblade specifically the warhead and the fuse for the arming of the munition, et cetera, et cetera. Overall, I could tell you that the activity level in terms of demand signals is very, very strong for Switchblade and our small UAS overall it’s both domestic as well as international. We are actively engaged on with several countries, the list continues to grow, and most of those engagements are progressing quite well through the acquisition and contracting process. That’s why I mentioned on earlier my remarks that we expect to secure more contracts and the momentum should continue into our second and third quarter of this fiscal year. Now, how much of that demand we can convert to actual sales and revenue for this year is still undetermined because of the timing of those contracts and the supply chain constraints. But we’re looking them actively and what I can say is that we feel good about being able to achieve our current plans given the situation we’re in and the visibility that we have within our pipeline. And then lastly, of course, Switchblade has absolutely been an incredible game changer for the Ukraine military through this conflict. Many of the U.S. allies in Europe are awoken by this, and they’re really interested in acquiring the capability. We’re actively engaged with them on both DCS and FMS cases. And I expect that to continue over the next several months and quarters.

I’d add to that that we are also seeing – it shouldn’t get lost that we’re seeing increased adoption with the U.S. DoD across a broader class of customers there. So while the international demand is great and the Ukraine war, we’re also seeing in the U.S. side, so it’s kind of a double whammy.

Yes. And then just a follow up related to this conversation on Switchblade is just, Wahid, the profitability for this area and TMS, I assume as the international mix grows, particularly if you get more direct we should expect that to improve. Is that a correct assumption?

Yes. So our first quarter profitability was pretty much in line and slightly above our expectations. Usually we have a lower and unprofitable first quarter and that over time improves. This year, especially, we do have the backlog, but supply constraints that’s what is really driving some of the revenue and top line for the first half. And that’s why we expect about 60% of our revenue to be in the second half. And of course, for the full year, we expect it to be a fairly profitable year for us, and way better results than last fiscal year and we expect that momentum to continue into our – our fiscal year 2024. I believe that the demand drivers and the macroeconomic levels, despite the economy and higher interest rates and inflationary pressures, I believe that we’re positioned very well for this fiscal year, as well as next fiscal year and beyond.

Appreciate all the call, and thanks, Wahid.

You’re welcome, Peter.

Thank you. Our next question will be coming from Austin Moeller of Canaccord Genuity.

Hi, good afternoon, Wahid and Kevin.

Hey Austin.

Hello there.

Hi. So just my first question here. This has sort of been touched on by a few analysts before me, but within that $307 million backlog as of August 27, how many of those customers are specifically NATO, Europe customers that were part of the 20 countries approved by the DoD in the state for [ph] department a few months ago.

So Austin, we have a fairly growing list of international customers, both for Switchblade, as well as for our other small UAS products. We’re also engaged with multiple countries in our medium UAS JUMP 20 systems internationally. I’m not able to comment specifically on the number of customers and countries primarily because of the sensitivity of those countries and customers of disclosure. But what I can tell you is that the portfolio of those customers are is growing. The demand is healthy, and I expect that to even grow further in the coming months. Majority of those engagements are through the U.S. government and FMS cases, but there is also multiple activities and even unfunded contracts on a DCS basis, which is reflected on our unfunded backlog, which is separate from the $307 million that I mentioned earlier. Although know, we are more bullish on FMS cases for Switchblade than DCS, because our U.S. government, I believe generally prefers for this type of loitering munitions to be procured and provided to our allies through FMS cases. Although we have a letter authorizing this for both DCS and FMS, but we feel more optimistic on the FMS sales in general.

Okay. That’s helpful. And then of the customers that are looking at the JUMP 20 and medium UAS, how many are looking at buying that kit and bundling it with some Switchblade 300 just given that you can fire those off the wings.

So, we have actually demonstrated that capability, several customers are interested in them. We are actively engaged in those discussions. The number again is sensitive to our customers, but I expect long term in the next two years to three years that multiple of our existing Switchblade customers would be highly interested in both our VAPOR Helicopter, as well as our medium JUMP 20 UAS to be equipped with Switchblade multiple Switchblades, which we have demonstrated both in live demonstrations in real life. So, I think that not only Switchblade will be successful and grow as its own product line. And similarly, our medium UAS, evidence of one of the major evidences, the Army FTUAS program, but other platforms and enabling our medium UAS and other platforms with Switchblade will become more and more common in the industry over the years to come.

Okay, great. Thanks for filling me in on all that.

You’re welcome, Austin. Thank you.

Thank you. [Operator Instructions] The next question we have is coming from Louie DiPalma of William Blair. Please go ahead.

Wahid, Kevin and Jonah. Good afternoon.

Good afternoon, Louie.

Hi Louie.

Good afternoon. Louie.

Has the contract that has been discussed widely in the media for AeroVironment to manufacture and ship 10 Switchblade 600 to Ukraine. Has that contract closed yet? And was that responsible for a portion of the increase in backlog during the month of August?

Louie, I’m not in a position to be able to, again, comment on specific contracts due to the customer sensitivity. What I can tell you is that four Switchblade 600 specifically [indiscernible] we have several engagements and contract activities that are near signage or award with the U.S. DoD. They’re both for Ukraine as well as some other allies besides Ukraine. And also portion of that unfunded backlog that we have is also specifically related to Switchblade 600s when a DCS sales for a one of our allies. And so, again, but I’m more optimistic on FMS sales of Switchblade in general than DCS, although we remain engaged on both fronts with our customers and the pipeline for both Switchblade 300 and Switchblade 600 looks quite healthy and growing.

Thanks, Wahid. And you were successful with the FTUAS Increment 1. And can you remind us, how does that win position AeroVironment for that ultimate $1 billion program of record and how does Increment 2 fit into the mix with the program of record?

Sure. So Louie the way that the U.S. Army has so far described and plans to award the Future Tactical UAS program is as follows: Increment 1 is really critical and was critical for us and for anybody who wins it because it is the first set of air vehicles and systems where the U.S. Army is going to buy them and provide them to an operating Combat Brigade. So one Combat Brigade within the U.S. Army is going to receive a system and they are going to take that system and basically operate them. The intent there is to inform the U.S. Army program office of any additional enhancements, improvements or changes to the platform if they see any or to make sure that what they have so far selected is what the operators and users really want and need for their missions. Additionally and Increment 2, the U.S. Army plans to add additional improvements or enhancements to the performance requirements of the competition, which we are very well aware of. And our goal is to meet those additional expectations ahead of the customer’s acquisition process. And so the reason why Increment 1 is so critical is that whoever gets Increment 1 award, a, they get to field systems with the users and b, are in a much better position than all the other competitors to benefit. And b, ahead of competition in terms of competing for Increment 2, although Increment 2 will be an open competition, but that’ll give us an advantage because so far according to the U.S. Army, we are the only awardee for Increment 1 and they are proceeding with us only at this time. And based on our engagements with them, they’re very happy and satisfied with our systems performance. And they look forward to fielding these systems and working with us to improve and deliver more capability to the military. And so once Increment 2 gets awarded, that becomes to official program record, which is expected to be about $1 billion in the budget process and as part of the acquisition planning process within the U.S. Pentagon and U.S. Army.

Great. And do you expect that $1 billion to be allocated just to one vendor or is it expected to be like multi-company?

That's a great question, Louie. It is not common for the U.S. Army for such set of capabilities, whether it's a Group 2, 3, UAV or a weapon system or another asset that the soldiers or the combat brigades carry for them to actually have multiple options or multiple choices, because then in your for structure you have to deploy these systems and train the for structure based on more than one set of capabilities. So although the U.S. Army hasn't said definitively that they plan on awarding to one that is their plan today, okay. Could that change? Possibly. Is it likely? In my view the likelihood is low and primarily the reason I think the likelihood is low is because the way that the U.S. military and army operates and trains and does its training doctrine and supply, maintenance and support structure for having two separate systems for this for – and a given combat brigade will make it extremely difficult if not impossible to practically implement.

Right. One final question if I may.

Sure.

Are you able to, I know it's – this is very, it might be premature, but are you able to discuss your partnership with Northrop Grumman for the Jackal, Switchblade variant that they showcased at the special operations forces conference?

Yes. I can comment on that. And we are certainly partnered with Northrop Grumman for a very specific U.S. Army opportunity. That's referred to as LRPM, Long Range Precision Munition, and it's essentially the U.S. Army's version of a Switchblade capability that can be deployed and equipped the U.S. Army military with. That is a very large program, which both Northrop and AeroVironment feel that we have a very compelling solution that we should compete and go forward with. So what you saw at that conference at the SOCOM was where Northrop actually displayed the first prototype of the Jackal Loitering Munition System in public. We are engaged with them. We're very pleased with that partnership. We're making very good progress and we intend to compete there, and the reason why this is important because this is another example of how we believe the adoption of loitering munition is going to keep getting more and more momentum, not in the U.S. DoD but also with majority if not all of our allies in the next decade. And we're very, very fortunate and pleased to be in a position that we are as the leading provider with a demonstrated, validated, field proven capability that is already fielded by the thousands and that gives us a significant advantage in the marketplace to be able to capitalize those opportunities going forward.

Awesome. Thanks Wahid.

You're welcome, Louie.

Thank you. Our next question will be coming from Brian Ruttenbur of Imperial Capital.

Yes. Thank you very much. Couple of quick questions. First of all back to supply chain, what we're hearing is the supply chain from a number of companies is at least visibly starting to get better that six to nine months things should be dramatically improved from where they are now. I know you made a comment about supply chain still having, yes, that you're still having issues there. Can you comment about what you're seeing in the next couple of quarters in terms of visibility on the supply chain?

Brian, the supply chain situation really is extremely dynamic and changes literally on a daily basis. Since we are a prime system contractor and provider of a system solution to our customer, we deal with a variety of different products, not just one set of specific electronics or that we buy composite material, motors, semiconductors, microprocessors, lenses, gimbal cameras, et cetera. So the battery packs, battery systems, et cetera. So our need is pretty broad and our portfolio is pretty wide and large as well. So the profile of supply chain constraint changes on every one of those categories on a very, very fast paced basis number one. Number two, as I mentioned on my remarks, we have received authorization from the Pentagon U.S. Department of Commerce and Department of Defense, a authorization that allows us to go with our suppliers and place at risk orders ahead of actual U.S. government contract signed for the demand that the U.S. DoD is forecasting for Ukraine and for the U.S. DoD at a DO priority rating level. That is a very difficult authorization, which is to my knowledge almost unprecedented, but the U.S. DoD has given us that authorization. And we're engaged already the last two months with our suppliers on all of our at risk orders and a non at risk orders to be able to secure that. So and while I cannot give you a very clear picture, we see improvement in some areas, but we also see some areas that are stagnant. And I would say that the two areas that are still of the highest need for us is some semiconductors and processors that go into the Switchblade systems, as well as a critical set of components that go into the Switchblade warhead. And we're working those, as I said, from many, many different angles but it is a, and Department of Defense. The Office of the Secretary of Defense for sustainment and acquisition is directly engaged with us on a weekly basis is working and actively making phone calls with us and reaching out our suppliers to try to solve this. And that has been very helpful, but it's still not sufficient to be able to give us a 100% confidence yet, but we feel pretty good about our position and ability to be able to deliver on our expectations this year.

Right. And as a bolt-on to that, just as the follow up gross margins, you said are going to be flat to slightly up, is that because of the supply chain or is that because of the rising cost and you, price a lot of your deliverables years in advance and prices arising, is it a combination of those two factors or is it one versus the other?

It's, that's accurate Brian. It is basically a combination of both. So we expect the gross margins for the full year to be at, or slightly above last fiscal year’s gross margins. And the reason why it's going to be up is because the mix of our products revenues changed favorably to more hardware sales and product sales versus services, and also a heavier dose of international sales versus domestic sales, which also gives us a better margin profile. Now that is offset to some extent, by some increases in supply chain, constrained costs and expenses, expediting of parts, some material costs because of the, macroeconomic levels, the pricing increases, et cetera. Now, having said all that, we have already taken some active steps to adjust our prices where we can, which we can't in many, many cases we can, but the effect of that is not immediate. We always work with our customers to make sure we plan with their budgets accordingly in what they have put in their budgets. So we do not want to surprise them at the last minute, and we are working with them to make sure that they can accommodate those and we can justify those increases as time moves forward. So that's the reason, why I think for this fiscal year, it'll be either at, or slightly above and hopefully even better next year.

Thank you.

You're welcome, Brian.

Thank you. Ladies and gentlemen thank you again for participating and we look forward to speaking with you again next quarter. You may all disconnect. Have a wonderful evening.