Good day, and thank you for standing by. Welcome to AeroVironment's Fiscal Year 2024 Second 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, sir.

Thanks, and good afternoon, ladies and gentlemen. Welcome to AeroVironment's fiscal year 2024 second 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 statements portions of such filings. Copies are available from the SEC, on the AeroVironment website at www.avinc.com, or from our Investor Relations team. 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, December 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 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 second quarter earnings conference call. I'll start by summarizing our performance and recent achievements, after which Kevin will review our financial results in detail. I will then provide information about our outlook including our increased revenue projections for the remainder of fiscal year 2024. Kevin, Jonah and I will then take your questions. I'm pleased to report that our second quarter results once again exceeded expectations and we remain on track for our best year ever. Our key messages, which are also included on Slide number 3 of our earnings presentation are as follows. First, second quarter revenue rose to $180.8 million, up 62% year-over-year, representing a record Q2 for AeroVironment. We also posted very strong bottom line results powered by record demand, strong operating execution and effective supply chain management. Second, we have a healthy backlog of $487 million, which is higher than the start of our fiscal year and provides solid visibility for the quarters ahead. Third, on our last call, we announced our intention to acquire privately held Tomahawk Robotics, which we successfully completed in September. As I will review in a moment, we are well on our way to fully integrate the two businesses, while leveraging our combined technology across our portfolio. And fourth, we are updating guidance including an increase to our revenue target, reflecting our strong performance and the impact from the Tomahawk acquisition. Overall, we're very pleased with our performance through the first half of this fiscal year, which included significant topline revenue acceleration and record EBITDA. We remain optimistic about our future exemplified by higher growth, improving operating results and enhanced value creation for our shareholders. As we said last quarter, this reflects not only near-term demand dynamics related to global complex…

Thank you, Wahid. Today, I'll be reviewing the highlights of our second quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on our website. Overall, we had another outstanding financial quarter as the second quarter finished strong in terms of revenue, adjusted gross margins and adjusted EBITDA, and backlog. As Wahid mentioned in his remarks, revenue for the second quarter of fiscal 2024 was $180.8 million, an increase of 62% as compared to the $111.6 million for the second quarter of fiscal 2023. Slide 5 of the earnings presentation provides a breakdown of revenue by segment for the quarter. Our largest segment during the quarter was Unmanned Systems, UMS, which is a combination of our small UAS, Medium UAS, UGV and recently added Tomahawk businesses. UMS had revenue of $132.8 million in the quarter, which is up 115% from last year's $61.6 million driven primarily by strong international demand for our Puma systems. As Wahid mentioned, we began -- we also began shipments of the JUMP 20 product to Ukraine during the quarter, which contributed to the revenue growth. Loitering Munitions Systems or LMS recorded revenue of $30.2 million, a 3% decrease as compared to the $31.1 million last year during Q2. The Switchblade 600 product was a primary driver of revenue during the quarter. And at the same time, we are beginning to ramp up the production of the Switchblade 300 Block 20 product, which was introduced earlier this year. Revenue from our MacCready Works segment came in at $17.8 million, a decrease of 6% as compared to the $18.8 million from the second quarter of last fiscal year. We continue to see strong demand for machine learning and autonomy capabilities with various agencies of the U.S. DoD and U.S. government…

Thanks, Kevin. Given our strong quarter performance and the addition of Tomahawk Robotics, we have revised our guidance and increased revenue outlook for fiscal year 2024 as follows. We anticipate revenues of $685 million to $705 million. Net income guidance of $45 million to $51 million or $1.66 to $1.90 per diluted share. This decrease reflects Tomahawk acquisition-related expenses. Non-GAAP adjusted EBITDA of $119 million to $127 million and non-GAAP earnings of $2.46 to $2.70 per diluted share. We expect unevenly distributed second-half revenue split between each of the remaining two quarters of this fiscal year. Based on our record first-half performance and a strong backlog, we now have almost full visibility to the midpoint of our revised revenue guidance. And as expected, gross margin for the second half of this fiscal year is anticipated to be lower than first half primarily due to product mix. Lastly, while the situation in Washington has led to slower decision-making, we know our solutions are crucial to our customers in the U.S. and around the world. While operating under a continuing resolution slows down new program starts, we remain optimistic that budget priorities will be resolved and that our programs will eventually get funded. We hope that our supporters on both sides of the aisle can achieve consensus in the very near future. We are very pleased with our position midway through the fiscal year as we continue to meet the needs of our growing customers. The trends we see now represent an inflection point in our growth, which should drive greater demand beyond our current fiscal year. As I've stated in the past, our nation and allies are realizing the immense value proposition of our distributed autonomous Unmanned Solutions enabled by AI. We expect strong growth even when the act of conflicts…

Certainly. [Operator Instructions] And our first question comes from the line of Greg Konrad from Jefferies. Your question, please.

Good evening, and great quarter.

Thank you, Greg.

Maybe just to start. I might have missed it, but did you give any color around the contribution from Tomahawk and the revised guidance or how do we think about the higher guidance from core versus the Tomahawk contribution?

So, Greg, Tomahawk Robotics is now part of, as a product line within our Unmanned Systems segment. And as you know, we don't break down the details of each of our product lines, because we have several of them. However, what I can say is that in terms of our guidance to increase revenue topline guidance is attributed to both organic demand and growth in our business, as well as the -- a portion of it is related to the acquisition of Tomahawk. We believe that both of these two are fairly equally represented in terms of the demand for the second half of the year. We see strong growth and across our product lines and our [indiscernible] businesses as well as the addition of Tomahawk. So we're very excited about both.

And then maybe just for the second one, I think on Tomahawk, you mentioned integration. Can you maybe provide roadmap and kind of timing and major milestones, when you think about that integration and maybe potential revenue synergies, and how you're thinking about timing and magnitude of some of those events?

Of course, for sure, so the feedback so far from our customers, which is the most important thing for me in particular has been extremely positive about the acquisition and the synergies that we're going to be able to deliver in terms of improving our customers' experiences in a common operating picture for the war-fighter. In terms of integration, we have a very detailed multiphase integration plan. We're on track or ahead of our schedule. They are now already integrated with our business in terms of being part of our Unmanned Systems segment. We have actually expanded the role and responsibility of the two co-founders of Tomahawk Robotics, they're now general managers of our larger businesses within AeroVironment. They're very excited about the prospects of the future. In terms of the roadmaps, we're already working some of those. We're very excited. And in fact, we're more bullish now than we were even before that there is tremendous synergies between our capabilities and our products and technologies, namely in the foreseeable future, we're going to be able to integrate pretty much all of our products, our Unmanned Ground Vehicles, our Unmanned UAVs, air vehicles, all with Tomahawk Robotics Common Controller, as well as would allow us to actually integrate other third party platforms into this effort. Now, that effort is a multiyear effort because there are lots and lots of demand for integration from external customers even in partners but also an upside there is significant opportunities for integrate. The last thing I want to mention is that their location in Southern -- in Florida, Eastern Florida actually is very positive for us too. They've got a tremendous team. We're very excited and encouraged by their talent both engineering and business. And we're going to actually start to scale our resources in terms of headcount even at their facilities. So it actually gives us a better footprint in the East Coast where most of our customers are as well as allow us to hire and grow our talent as our growth desires or requires it.

Thank you.

Welcome, Greg.

Thank you. One moment for our next question. And our next question comes from the line of Peter Arment from Baird. Your question, please.

Yeah. Good afternoon Wahid, Kevin and Jonah. Nice results.

Hi, Peter.

Good afternoon, Peter.

Hey. Wahid, could you give us the latest kind of status update of the Switchblade 600? I know there's been some recent articles out there about some of the Eastern European countries looking to, start to take delivery of that product. Where are we in terms of the potential production for the Switchblade 600?

Sure. So, I'm glad to report that we've had many -- several of the U.S. government and U.S. DoD's leadership, as well as Congressional leaders, visit us in the last couple of weeks related to our Switchblade production. We have a significant amount of production capacity, which we've invested in. We were very fortunate. And that's a major plus because we can deliver Switchblade by the thousands now and we can deliver them at U.S. DoD program of record quality and caliber and maturity. Secondly, there are several, about 20 different countries, that we're engaged in, in terms of their interest in acquiring Switchblade or wanting to receive Switchblade. About a third of those cases are already in active Department of State and Department of Defense export approval process. So I expect in the next six months or so that this process will go faster than before because the demand is very high and the U.S. defense organizations, as well as department of State is very favorable towards helping us equip these countries with Switchblade. We've delivered, quite a good chunk of those Switchblade 600s and 300s so far to the U.S. DoD, all of these cases so far for Switchblade remain to be NF -- FMS cases. So A, we delivered a lot, there's five countries that have already spoken for them and they've gone public about it and meant -- made its statements. There is a total of 20 countries that we're actively involved with. And about a third of those are actively in the export approval process, which is really, really encouraging and positive. In addition to that, Peter, I also want to mention that we're actively negotiating with the U.S. DoD on a very large multiyear IDIQ sole source Switchblade contract that allows the U.S. DoD to purchase large quantities of Switchblade for multiple years from AeroVironment and then actually fulfill the needs for Ukraine, for the U.S. DoD stockpiles and programs as well as for our allies and FMS cases. That actively is in process, but it will take some time, but it's very encouraging.

That's all great color. I appreciate that Wahid. And Kevin, maybe just a quick one for you on, you made some comments about that, you kind of expected the gross margin -- adjusted gross margin for the year to end up in the low 40s to high-30s. Maybe you could just -- that implies, I guess in the second half of the year, if you're going to be in the high-30s that you'd see that gross margin come down. I guess maybe the mid-'30s or so, is that primarily tied to the LMS revenue ramp or can you maybe highlight, maybe some of the puts and takes there? Thanks.

Right. So you kind of have a combination of a little bit lower small UAS revenue and that's kind of replaced by the lower margin LMS coming in the second half.

Okay. Great. Thanks again. Nice results.

Thank you, Peter.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Ken Herbert from RBC Capital Markets. Your question, please.

Yeah. Hi. Good afternoon, everybody.

Hey. Good afternoon, Ken.

Hey, Wahid. Maybe if I could just to sort of put a finer point on the mix impact in the second half of the fiscal year, what's your outlook for growth, specifically within LMS of -- within the LMS segment for the second half of the year? I mean, second quarter growth there, I mean, consistent with your expectations, but flattish down slightly. How much of the second half growth is going to come from that segment relative to UMS or MacCready Works?

So Ken, I'm glad you asked that question. First of all, this fiscal year Loitering Munitions as a whole, we expect it to be the strongest driver of our growth overall, it's going to be very, very robust growth for the whole year. That's our expectation. As we expected and as I said in my comments, the first half of the year is very much in line to our expectations and how we thought it's going to play out, primarily because the contracts for Switchblade are very large lumpy contracts. We had a very strong fourth quarter. If you remember last fiscal year which we had a record shipments and record bookings that has allowed us to ship on the first quarter and second quarter, according to our plans. Second half is going to be very dominant in terms of growth and revenue driver for our Switchblade 300 and 600. We have a robust pipeline for Switchblade that is not only going to fuel our second-half performance in terms of revenue and bookings, but it's also going to fuel our fiscal '25 and beyond. I mean the pipeline for Switchblade 300 and 600 looks extremely promising. It just takes a little while, primarily because of the nature of the product, the government contracting process and the FMS approval process that we have to go through for all these exports. But overall, I think second half is going to be dominant by our Loitering Munitions business both in terms of bookings as well as in terms of revenue performance for the year.

Okay. That's helpful. Thank you. And maybe, Wahid or Kevin, what's your outlook for full year free cash flow? I mean you sort of used 36 or so through the first half of the year, your significant investments in working capital. Do we expect much relief in positive free cash in the second half of the year or how do we think about the full year from a cash basis?

I mean, I'm not banking too much on a lot of relief. I think the working capital levels will stay around this mark here in the third and fourth quarter, maybe even up a little in the third quarter and then come down a little bit in the fourth quarter. And then I think you'll start to see some improvement at least as a percentage of overall sales in FY '25.

Okay. Great. Thank you very much.

You're welcome, Ken.

Thank you. One moment for our next question. And our next question comes from the line of Pete Skibitski from Alembic Global. Your question, please.

Yeah. Good afternoon, guys.

Hi, Pete.

I guess one for me, how do you guys -- what's the right way to think about the kind of the timeframe or the path to improve LMS gross margins and what are the major factors that impact that through the mid-term?

Well, Pete, we actually have seen fairly strong improvement on the gross margin of our Switchblade product line as a whole relative to the last several years and we continue to make even more progress. Having said that, our small UAS especially international contracts and orders are by far the most profitable products because we've invested for many, many years in that product line and we're able to sell those as a commercial item to a lot of our international customers. So while -- our small UAS has set up very, very high bar in the industry, if not only just for AeroVironment. Switchblade gross margins and profitability is fairly strong and it's improving. How well that it's going to be -- usually our hardware’s are in the upper 40 -- mid '40s or low '40s, and Switchblade are on a mid to high '30s. So it's not that much off of our small UAS and it's improving. We have several activities and strategies on improving that one of which of course of course is volume and lowering the cost inputs and allowing us to actually get more efficient in production, which we are making significant improvements and our team has managed that really well. The second thing is also in terms of improving the cost in terms of the Block 20 product. Switchblade Block 20 and the next-generation systems are actually easier to manufacturer, has less labor content and much more automation in terms of its manufacturing capability. So we've got several activities, which many of them have already paid some dividend. And they'll continue to pay dividend going forward as well.

Okay. That's a great color. I appreciate it. Just one more from me. I just want to understand, guys, in terms of this big Switchblade, IDIQ, that's coming down the pike, how will that product sort of and how that meets Army requirements? How would that differ from the LASSO contract for the Army, assuming you win, LASSO at some point, I don't know what the timeframe is on that. But it seems like similar products, so I don't know if LASSO is deemed as a mid-to long-term replacement for the, Switchblade IDIQ or what's the right way to think about that?

Sure, Pete. So let me add some comments or color to this thing. Historically, U.S. Army has been the main contracting office for procuring Switchblades for U.S. DoD as well as for our allies and that remains still the case right now for the most part. And if you used to have a large contract that we bought under for multiple years, and since the demand has gone up so much higher, that contract has reached its ceiling. So now, the U.S. government basically buy these on individual UCAS or undefinitized contract action items -- actions, which is laborious for both the government as well as for us. What they have started to do is to actually initiate another very large multi-year sole-source IDIQ contract for all Switchblade both for U.S. DoD as well as our allies. So the LASSO contract and some of the other ones, until the large multi-year contract is in place will still be executed and awarded to us based on these UCAS but long term what we want is a larger contract vehicle that allows the U.S. government to buy for many customers, many opportunities and funding sources and fulfill those much easier. So we're very pleased that the U.S. Army and U.S. DoD has taken that initiative. We're actively working that it's going to take some while because of the CR situation as well as with the bandwidth of U.S. DoD in terms of contracting resources, but we feel very good. We've already turned in our proposals. We're negotiating the rate structures. And I think it's going to be more of a matter of when versus if. And when that goes into effect, then it actually allows a lot more volume to go through and a lot more procurement to happen much faster and from the timing. And so we're looking forward to that, it will be very, very positive for us and for our customers.

Okay. Thanks so much, guys.

Thank you.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Louie DiPalma from William Blair. Your question, please.

Wahid, Kevin and Jonah, good afternoon.

Good afternoon, Louie.

Good afternoon, Louie.

Good afternoon.

I'm following up on several of the recent questions. You mentioned the Army announcing that they awarded AeroVironment 100 LASSO systems. Is -- are those 100 systems already in backlog? And what's the general expected timeline for the LASSO program in terms of Phase 1 and subsequent phases?

Sure. So Louie that particular contract award has two very positive aspects to it and that's why I highlighted it. Number one, it is the first initial tranche of the LASSO program record potentially, which puts us in a very, very good position. So eventually as you know these programs will be completed, but to be already selected on the first phase and have product go into the U.S. Army for testing and fielding is very, very positive. Secondly that order is not in our backlog. So while our Switchblade and Loitering Munitions business backlog is pretty healthy, we -- many of these opportunities that I mentioned on the -- on my comments is not reflected on our current backlog. All of these opportunities are additional orders and contracts that we expect to book in the next six to 12 months. And in fact that demand continues to increase rather than decrease in terms of its space as well as the topline. So our pipeline and our portfolio looks very robust for Switchblade both 300 and 600. And domestically, we've got several programs, internationally we've got lots of countries. And we're also working on many other platforms to integrate Switchblade onto such as Humvees, the Abrams, and [indiscernible] et cetera, et cetera. So, all in all, we've got a lot more upside on our Switchblade product lines over the next six months -- six to 12 months in terms of orders.

Great. And I think you and Kevin both mentioned that the second half of the year should be heavy in terms of both Switchblade 300 and Switchblade 600. And will Switchblade 600s also be shipped to those five international customers in the second half or some of those five international customers?

The answer is yes, Louie. Many of those international customers, I can't specifically name any of them because of the respect and confidentiality for customers. But vast majority, if not all of those customers desire and have requested both Switchblade 300 and 600. And same is true for the supplemental budget that is in front of Congress for Ukraine, the $100 billion plus budget item, the supplemental package that's in front of Congress that is for Israel, Ukraine and potentially Taiwan. There are line item dollars for both Switchblade 300 and 600 for those three countries. And so, we feel pretty strong that long term since Switchblade 600 is a fairly newer product in terms of its life in the market is going to be equally as large of a product and revenue generator for us as a 300. And obviously the selling price of the 600 is significantly higher, because it's a much bigger Loitering Munition.

Great. And one last one for Kevin, do you expect SoftBank -- or for both of you, do expect SoftBank to continue funding HAPS? And is AeroVironment prepared to continue funding HAPS and Sunglider on its own if SoftBank drops out?

Sure. So A, SoftBank is very committed to this program. We are working with them very closely. They continue to fund us although the funding for them has reduced slightly because of their financial situation over the last couple of years. There's a much bigger discussion and known variables in the Japan's economic situation in the pandemic et cetera that's affecting that. Number one, that's the underlying reason. So -- however, SoftBank is very committed to us. We're actively engaged with them. We're dial -- we're talking to them all the time, very regularly. And we're progressing that process. So I do not expect them to start funding our Sunglider anytime soon. They're committed to the mission. They still believe in the platform and we believe in the long-term value proposition perhaps. It's just that they have intentionally slowed down over the last two years because of the overall macroeconomic situation that they are faced with. Secondly, we are funding it with some small amount primarily because there is IP involved, and we would like to make sure that we own and we look to protect. We've always done that and we'll continue to do that. And lastly, we have received our initial contract award from the U.S. DoD and there is additional funding a significant amount of funding actually relatively speaking, and the government fiscal year '24 budget for HAPS and the U.S. DoD budget. So, when the government fiscal year '24 budget is approved, we expect that eventually to transition into a contract AeroVironment and we're actively working this program with the U.S. DoD, there's very strong support and desire for this capability in the U.S. DoD as well.

Excellent. Thanks, Wahid. Thanks, Kevin and Jonah as well.

You're welcome, Louie.

Thanks, Louie.

Thank you. One moment for our next question. And our next question is a follow-up from Ken Herbert from RBC Capital Markets. Your question, please.

Yeah. Hi, good afternoon. I just wanted to follow up on the EPS guidance. I mean, you did just under $2 in adjusted EPS in the first half. The guidance implies, $0.60 to $0.70 in the second half of the year at the upper end of the range. Aside from mix as you really ramp Switchblade sales, is there anything else in particular of the EPS that's sort of driving the significant step down first half to second half?

We definitely expect a step up in R&D in the second half of the year. So that's going to be part of the equation there for the EPS. So you're going to see a little bit lower margins, you're going to see a step-up of the R&D expense in the second half.

Okay. So mix in R&D I guess would be how we should think about that.

Yeah. That's right. Normally, our years are all reversed around. So there's a little bit of a backwards here.

Yeah. And as I've said to Ken on my remarks, as you saw, we have an exciting number of other programs and projects where there's a lot of demand for those systems including the DARPA ancillary, the SOAR program with the U.S. Army and with the OSB for large contested logistics capability, those programs are getting a lot of traction. And we do not want to slow down those efforts and make sure that even though if there is a continuing resolution we accelerate those things because the desire and demand by the U.S. DoD for those capabilities is very high. And we also believe that we're very unique in the sense that our solutions are considered the most innovative and the most capable in these categories that the U.S. duty is feeling very strongly about. So we're going to expect to actually ramp up R&D investments in the second half to support those developments in order to fuel our future growth and share -- shareholder value creation.

Okay. Great. Appreciate it. Thanks, Wahid and Kevin.

You're welcome.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jonah for any further remarks.

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, 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.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.