Good day, and thank you for standing by. Welcome to the AeroVironment Fiscal Year 2024 First Quarter Conference Call. At this time, all participants 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 is being recorded. I would now like to hand the conference over to your speaker today, Jonah Teeter-Balin. Please go ahead.

Thanks, and good afternoon, ladies and gentlemen. Welcome to AeroVironment’s fiscal year 2024 first quarter earnings call. This is Jonah Teeter-Balin, Senior Director of Corporate Development and Investor Relations. 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. These statements involve many risks and uncertainties that could cause actual results to differ materially from our expectations. Further information on these risks and uncertainties is contained in the Company's 10-K and other filings with the SEC, in particular, in the Risk Factors and forward-looking statement portions of such filings. Copies are available from the SEC on the AeroVironment website at www.avinc.com or from our Investor Relations section. This afternoon, we also filed a slide presentation with our earnings release, and posted the presentation to the Investors section of our website under Events and Presentations. The content of this conference call contains time-sensitive information that is accurate only as of today, September 5, 2023. 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 everyone to our fiscal year 2024 first quarter earnings conference call. I'll start by summarizing our performance and recent achievements, after which, Kevin will review our financial results in the greater detail. I will then provide information related to the outlook for fiscal year 2024, after which, Kevin, Jonah and I will take your questions. I'm pleased to report that we are off to a very strong first quarter, and we believe we're on-track for our best year ever. Our key messages, which are also included on Slide #3 of our earnings presentation, are as follows: First, first quarter revenue rose to $152 million, a 40% increase year-over-year and our best Q1 in AV's history. This reflects a robust demand for our market leading intelligent unmanned systems domestically and abroad. Second, our funded backlog rose to a new record of $540 million up from $424 million at start of fiscal year 2024. This backlog reflects $268 million of new bookings due in the first quarter. Third, we recently announced that AV will purchase privately-held Tomahawk Robotics enabling multi-domain control of a wide variety of unmanned solutions from one user interface. And fourth, we're raising our previously issued guidance for fiscal year 2024 which I will cover later in more detail. Gross margin for the first quarter was $65.7 million, an increase of 95% versus last fiscal year's $33.7 million, and our gross margin as a percentage of sales rose to 43% from 31% in fiscal year 2023. We continue to expect gross margins to remain strong in fiscal year 2024, as our revenue mix shifts to more favorable product sales. Overall fiscal year 2024 is off to a great start, and we're squarely on-track to meet our increased outlook for the full-year. Global trends continue to…

Thank you, Wahid. Today, I will be reviewing the highlights of our first quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on the website. Also, there is an 8-K available on our website, which recaps our historical results into the new segments. Overall, we started the first quarter extremely strong in terms of backlog, revenue, adjusted gross margins and adjusted EBITDA. As Wahid mentioned in his remarks, revenue for the first quarter of fiscal 2024 was $152.3 million, an increase of 40% as compared to the $108.5 million from the first quarter of fiscal 2023. Slide five of the earnings presentation provides a breakdown of revenue by segment for the quarter. Our largest segment during the quarter was Unmanned Systems, or UMS, which is a combination of our small UAS, medium UAS and UGV businesses with revenue of $98.2 million, an increase of 45% from last year's $67.8 million driven primarily by our small UAS business unit, which shipped systems to eight international countries during the quarter. Loitering Munitions Systems or LMS recorded revenue of $30.9 million, a 34% increase compared to the $23 million last year during Q1. LMS demand continues to be driven by strong U.S. and international orders. Revenue from our MacCready Works segment came in at $23.2 million an increase of 31% compared to the $17.7 million from the first quarter of last fiscal year. We continue to see strong demands in MacCready Works services within the various agencies of the U.S. DoD and U. S. government, in particular, increasing demand for incorporation of our computer vision, autonomy and AI capabilities. In slide five of the earnings presentation, there's a breakdown between product and service revenue. Specifically, during the first quarter, product revenues accounted for 78% of…

Thanks, Kevin. With a record backlog of orders and after a very strong first quarter, we're increasing our guidance for fiscal year 2024 as follows. We anticipate revenue of between $645 million and $675 million. We anticipate non-GAAP adjusted EBITDA of between $117 million and $127 million representing about 18% of revenue. Net income guidance remains unchanged at $51 million to $59 million or $1.91 to $2.21 per diluted share. This is primarily due to increased R&D investments in support of our strong growth. Non-GAAP earnings guidance also remains unchanged between $2.30 and $2.60 per diluted share. We expect R&D investments to be closer to 12% of revenue this fiscal year. As a reminder, we expect a more balanced revenue distribution with roughly 50% of new revenues expected to occur in each half of this fiscal year. We now have nearly 100 visibility to the midpoint of our revised revenue guidance. While we are confident in our ability to achieve our guidance, there are also numerous factors at play. This includes working with suppliers to scale their business to match our needs as well as securing long lead items. We remain well positioned to deliver nearly 20% growth in revenue, higher margins and overall improved bottom line results. The investments we're making this year should also position the company for continued growth in years to come. While the overall geopolitical environment as well as battlefield trends towards significant greater use of unmanned platforms support our confidence in the future, were mindful that the U.S. government is nearing the end of its fiscal year. We, as with most defense contractors, now regularly assume that a continuing resolution is more likely than not, which could impact contract timing. However, I would say unequivocally that AV remains optimistic about our fiscal year 2024…

[Operator Instruction]. Our first question comes from the line of Gregory Konrad from Jefferies. Your line is open.

Good evening and great quarter.

Thank you, Greg.

Maybe just to start on the outlook, I mean, the revenue outlook. It's a pretty big raise one quarter in. Can you maybe just talk about what's changed since last quarter, has there been some risk retirements? Is it orders and just kind of what's driving that better revenue outlook for the year?

Sure. So, we're very pleased with how great our team performed on the first quarter, Greg. There are several factors why we raised out our guidance for full fiscal year 2024. One is, we've had a tremendous first quarter, and our first quarter, this is historic first quarter for the company. Second, our backlog, as you saw, is at a historic levels also, we have another record on top of a record that we achieved this Q1. And then our visibility to the midpoint of our revised guidance is nearly at 100%. So, you can look at that and say based on our inventory position and ability for us to be able to secure long lead items, we feel fairly strong that at this time, we can achieve the revised guidance range that we provided. The demand for solutions remain very healthy, both domestically and abroad And I think the whole aerospace and defense industry is in a point of inflection when it comes to small unmanned systems. As a distributed architecture of warfare as well as Loitering Munitions, both categories, which we have essentially invented in the marketplace over the last two decades. So, we're positioned extremely well. The demand seems to be very strong even beyond fiscal 2024 and, we felt that at this time, we should raise our guidance to be able to achieve the higher levels of revenue outlook on the top line that we provided.

And then maybe just a follow-up. If you can talk about Tomahawk a little bit, you had Progeny and just kind of how you view the shift from maybe hardware to more software and integration? And how you think about that kind of expanding the addressable market as you get more into kind of control and software side versus the hardware?

Sure. I'm glad you asked that question, Greg, because it's a really important point to make here. There are several reasons why we decided to acquire Tomahawk. which we have known by the way for many, many years. We work with them in the past, as I mentioned on my remarks, and we know the technology, the products and their talents very, very well. It's very similar to the Progeny Systems. There's a few key reasons I want to highlight. One, the overall customer trends are when the war fighters are overwhelmed with so many robotic systems, small, medium, large, extra-large, etcetera, etcetera, Loitering Munitions, ground robots, etcetera. It becomes very difficult for an war fighter to be able to carry multiple ground control stations and tablets and devices to control multiple UAVs. So, what Tomahawk does, it allows not only AeroVironment robotic systems, but also any other brand of robotic systems, to be able to simply integrate together in the battlefield to simplify the life of our customers, meaning a war fighter. In addition to that, it also enables a whole bunch of AI enabled features and technology, which we have been investing and they're investing in as well. So, one thing that really not well known about our offering is that we've been investing in this category of autonomy, GPS denied operations, contested battlefield environments, like the ones that we see and witness every day in Ukraine, AeroVironment has been investing in this area for several years. And we expect that to continue and we're positioned extremely well on that. So, what Tomahawk does, it helps us accelerate that deployment and adoption and to meet the customer's need, well better than anybody. So, there are several reasons it's a growth acquisition. It allows us to grow further and faster and allows us to deliver more value to our customers in order to simplify their what I call ecosystem and environment when they're operating multiple UAVs. Obviously, we just signed and we're going to close this quarter. We expect to close it this quarter and we'll provide more color on the financials at that time.

Thank you.

You're welcome, Greg.

And one moment for next question. Our next question comes from the line of Peter Arment from Baird. Your line is open.

Yeah, thanks so much. Good afternoon, Wahid and Kevin, terrific results.

Thank you, Peter.

Wahid, just a question on the -- I don't think we've ever seen you have a report, 78% of the mix just kind of in the quarter for products. And I'm just wondering, just given how well your backlog is hitting new record levels, is this just kind of what we should expect going forward throughout this year, just thinking about service versus product?

Peter, as I said in my remarks, yes, we expect the product mix as a percentage of revenue to be more favorable towards products as it was in our Q1. And as you know, that product sales generally because we invest our R&D in our products and we sell them as majority of them, not all of them, as a commercial item, we enjoy a higher gross margin, in that regard, because we invest in it and it's justified to our customers. So, for the remainder of this year, we expect the gross margin percentage and the mix of revenue to be more favorable towards product sales than services for fiscal year 2024.

That's helpful. And then just on the backlog, the record backlog, can you maybe talk a little bit about how the FMS activity that you're seeing and just the opportunities there. I know you've been able to expand the, the, the countries that Switchblade is available for. And, of course, you've had a huge installed base in the small UAS category internationally, but how is FMS activity we think about going forward?

Sure. So, overall, our backlog, as you know, as I mentioned is at a record level again. We had a record backlog entering first quarter of fiscal 2024, last quarter in our earnings call. And we actually built beat that or increased that by almost another $100 million this quarter. It is phenomenal how well we've been performing in terms of, securing orders and working on growing our backlog. Many additional FMS cases remain, not to be in contract yet, from our many allies for Loitering Munitions. We believe that over the next several quarters and maybe even beyond fiscal 2024. We will see more countries placing orders and contracting these, the demands that they have and the needs they have for Loitering Munitions. The Ukraine conflict has essentially put an exclamation mark on how effective and important small Unmanned systems and Loitering Munitions are for a near peer kind of a conflict. The one that they are facing with Russia. So our systems have been incredibly vital and I believe that this is an inflection point as we go into multiple years beyond now. This is something that we work for very hard as a company. We've been saying this for a long time. We believe in this value proposition of our solution. And I think our customers are starting to realize that and that's accelerating their needs and requirements for acquiring those sorts of things. So in short, backlog is very strong for this year. We expect that to remain strong throughout the whole year. And I believe that many additional FMS cases for Switchblade 300 and 600, remains to be not contracted yet. It's going to be contracted in the future. Those cycles take a little longer, but there's a very healthy pipeline that's being built, as we progress throughout this fiscal year, which will help us in future years.

Appreciate it. Thanks.

You're welcome, Peter.

Thank you. One moment for our next question. And our next question comes from the line of Ken Herbert from RBC. Your line is open.

Yeah. Good afternoon. Hey, Wahid. I wanted to see if I could start out and ask a question on the backlog again. Is it possible to parse out how much of the growth in backlog is maybe direct with U.S. aid to Ukraine versus maybe international customers or other U.S. domestic opportunities?

Ken, unfortunately, because of customer sensitivity, I'm not able to go further deeper into the colors of the backlog and what, but I what I could say is that in general, our backlog is really strong in all three of our business segments. Our Unmanned Systems segment, our Loitering Munitions segment and our MacCready Works segment. So, we have seen significant growth in all of them. The backlog for Loitering Munitions is made up primarily because we only sell those to the U.S. government, including for international opportunities, U.S. DoD has so far decided to sell those requests all through an FMS or U.S. AI case, FMS cases coming through the U.S. army. So really the contracting office that handles our Switchblade family of systems for both domestic and international customers has been and remains to be the U.S. military and U.S. army. The mix of customers in that area is pretty broad. I'm not able to comment on a specific contract or the amounts of them because of the sensitivity of the conflict that we have around the world and our customers. But it's healthy across the board. And I believe that it's going to stay that way for the foreseeable next this year and beyond, hopefully as well. Because, as I said, we'll continue to build on our momentum That's one of our fundamental goal, and priority last several years to continue to build our backlog to also level load our revenue based on a quarterly basis. And as you could see, we expect this year to be nearly fifty-fifty between first half and second half of the year, primarily because of our backlog.

That's great. Thanks, Wahid. And if I could, there's been a lot of press recently around some newer starts within the United States whether it'd be the Vaso program or replicator or others. I'm not sure how much you could talk about these, but can you maybe just talk about how well you believe you're positioned from some of the newer efforts, with the U.S. army and the Marine Corps and other parts of the U.S. government on some of these new competitions and how meaningful they can perhaps be in ‘24 and fiscal ‘25 for you?

So, Ken, I could not agree more with you in terms of the relevance of these large, very high priority focus areas for the U.S. DoD. You mentioned a couple, Lasso that's been recently been announced by the U.S. Army. We're tracking all of these. We're engaged with our customers very closely. One of the things that we pride ourselves is that we spend a lot of energy making sure that we're very, very close an intimate to our customers so we can solve their problems the best way possible better than anybody. And some of these requirements are squarely focused around the area that we as a business are offering as a pure play player. There's no one on this planet that I can think of that has the breadth and the depth of our portfolio when it comes to unmanned systems and robotics. So, the replicator, which was just recently announced by the U.S. DoD and Pentagon, is very much another example of the type of capabilities that are defense customers, U.S. DoD specifically, is looking to sort of acquire over the next several years that's very much focused around our system. So, I think we're positioned really well. I believe we will be able to participate in these opportunities. The details of that, of course, I'm not able to disclose right now because it's quite early and sensitive to our customer's operations and business.

Thanks, Wahid.

You're welcome, Ken.

Thank you. One moment for next question. And our next question will come from the line of Bryce Sandberg from William Blair. Your line is open.

Wahid, Kevin and Jonah. Good afternoon.

Good afternoon.

Wahid, you referenced how the $176 million Ukraine Puma IDIQ is nearly fully drawn. Do you expect to be able to renew this contract?

So, the answer is we are already engaged on additional contracts. So the short answer is yes. Is it going to be exactly the same type of contract and the same exact amount? No. But there's definitely a lot of demand for our system for Ukraine. As you all know, as I mentioned before, Ukraine has made many public statements that our Puma system is the workhorse in Ukraine and our Switchblade family systems is also one of their very critical capabilities that has helped them defend their nation and defend their independence against Ukraine so far. I believe that that's going to continue, we are engaged with the U.S. DoD on a very, very close and regular basis. There are several additional requests for our systems and the U.S. DoD is working with us to be able to fulfil those needs as they see appropriate. As you can see, some of that is also in fact, reflected our backlog today. So, the strong backlog does include additional orders for our unmanned systems in small UAS as well as Loitering Munitions. But I expect that to grow and continue to expand over the next several quarters as we move forward because I think that, as I said, there's an inflection point. Many of these countries, including Ukraine, want to have more and more of our types of systems, which are far less expensive than much more expand other platforms and they're much more effective in what they're trying to do and how they're fighting their conflict with Russia.

Great. Thanks, Wahid.

You're welcome.

Thank you. [Operator Instructions]. And our next question comes from the line of Pete Skibitski from Alembic Global. Your line is open.

Nice quarter guys.

Thanks, Pete.

I guess, Wahid, you touched in your opening comments, I think, supply chain issues. Can you update us on what you're seeing in terms of, as you're ramping volume issues with GUIs, any other components that you're having whose lead times are extended?

So, Pete, we believe that the revised guidance we gave, we're in pretty -- we're confident that based on our indicators today, we're going to be able to achieve the revised increased guidance on the top line. We have secured pretty much most of our long lead items. And as Kevin mentioned in his remarks, we have intentionally raised our inventory levels to some extent, primarily because our systems are in high demand and sense of urgency, but within our U.S. DoD as well as our allies is very high. As soon as they contract with us, they would like us to deliver the systems. So, it's never a perfect situation. The supply chain is a game of, I call it a [whack a mole] (ph) game. Every day, every week, there's some sort of a new issue. But overall, we have handled this and managed this extremely well throughout the entire years of the COVID pandemic, the supply chain constraint, etcetera. So, for fiscal 2024, overall, we're in a very good position. and but there's challenges that arise every day and we try to address them. And we've actually done a really good job of managing those things. Another challenge that we are also facing, that we're tackling is not only do we have to manage the supply chain and making sure the parts are there, our revenue has grown considerably over the last two or three years. And with this growth, we need to also make sure that we bring up the production capacity of some of our smaller suppliers. And that is something that doesn't happen overnight. And it requires effort in our part, and for them to increase capacity, they've got to scale up their production and their manufacturing in their operations. And we're working with many of them that are strategic to us to make sure that we don't have any bottlenecks. And I'm very pleased with the progress that our team is making, and we've made it a concerted effort and focus for ourselves as a priority as a Company and a leadership team to focus on that for the last three to four years. And I think that is starting to pay dividend for us as we see the kind of growth that we've been able to achieve and deliver to, for our shareholders.

Okay. I appreciate it. And last one from me, on the Tomahawk deal, my question is why buy this company. It's fairly young, right? Only five years old. Why buy them instead of maybe team with them on an ongoing basis or some other business arrangement? It's -- this whole area of ground control systems, it's, I guess you would have to have a comfort level that their IP is so high that it would -- other competitors would have a hard time overcoming that. Can you share your thoughts on why you pulled the trigger on this deal?

Sure. So as you said, that's a very good question, Pete. One, we've known them for many, many years. And we've known them since their founding days, and in fact. So, I personally known that one of the founders, through the industry, of course, for a long time. The reason why we did this is because it allows us to accelerate and achieve our growth objectives faster for ourselves as well as for our customers. As an independent company, while they continue to work with us, we won't be getting the level of priority and preferential treatment as we would like because at the end of the day, it's all about the mission of more customers, the war fighters. And most of our customers have already chosen to go down the path of selecting their system, Tomahawk systems as the open architecture to connect multiple unmanned and manned devices. So think about a battlefield where there are tanks, armored vehicles, ground robots, UAVs, etcetera, USVs, and you need to make sure that you provide a common operating picture for the operator, for the warfighter. And so, what Tomahawk does it brings all those things and it connects them and integrates them and also introduces a lot of predictive AI feature set. So in order for us to deliver those capabilities to our customers faster and also integrate deeper in terms of our product roadmaps, technology investments, we felt that the acquisition was the better way to go. And lastly, I would say we're also growing in terms of our talent. Tomahawk Robotics is primarily based out of Florida and it's an area that we’d like to get access to more talent. So their site in Florida allows us to expand our workforce outside of California and areas where they're closer to our customers. So there are several reasons, their talent base, their IT, their product, their progress with customers, as well as ability to support our growth in the years to come. So, I really feel strongly that this is a very good decision for our Company or shareholders. It's also a great outcome for our customers. So far the feedback has been very positive and it positions us to basically marry the best, the most ubiquitous unmanned systems provider, which is AeroVironment, with the most advanced common controller technology enabled by AI from Tomahawk to be an integrated system solution for our customers.

Okay. Appreciate all the color. Thank you.

You're welcome.

Thank you. And with no further questions in the queue, I'd like to turn the call back over to Jonah Teeter-Balin for any closing remarks.

Great. Thank you once again for joining today's conference call and for your interest in AeroVironment. As a reminder, an archived version of this call, all SEC filings and relevant news can be found under the Investors section of our website. We wish you a good evening and look forward to speaking with you again following next quarter's results.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.