Good day and thank you for standing by. Welcome to the AeroVironment Fiscal 2025 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 2025 first quarter earnings call. This is Jonah Teeter-Balin, Vice President 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 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, September 4, 2024. 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 first quarter fiscal year 2025 earnings conference call. I will start by summarizing our performance and recent achievements, after which Kevin will review our financial results in greater detail. I will then provide our expectations for the remainder of fiscal year 2025, and finally, Kevin, Jonah and I will take your questions. I'm pleased to report another quarter of excellent results in line with our expectations. Our key messages, which are included in slide number three of our earnings presentation, are as follows. First, first revenue rose to $189.5 million, a 24% increase from the same quarter last fiscal year, and set a new first quarter revenue record for the company. Second, we're now starting to book key Switchblade opportunities, such as our recent U.S. Army $1 billion IDIQ contract, and anticipate funded backlog to increase in coming quarters. Third, our Loitering Munition Systems segment continues its upward momentum for its record first-quarter revenues of nearly $52 million, a 68% year-over-year increase. And fourth, given our strong execution, key program awards, and robust pipeline, we are reaffirming our previously stated guidance for fiscal year 2025. These first quarter results position us for another record fiscal year as demand for our autonomous systems continues to rise. We remain focused on our core strengths in agile innovation, manufacturing, and customer relationships, which is allowing us to extend our leading position in this dynamic and growing market. We were able to achieve strong revenue growth in the quarter while retaining high levels of product quality, performance, and profitability. As our pipeline expands, we continued increasing our production capacity to ensure we meet our customers' urgent needs through fiscal year 2025, and beyond. We believe AV is the strongest company in the defense tech sector. We have…

Thank you, Wahid. Today, I'll 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 our website. Overall, we had another outstanding financial quarter with record first quarter revenue and the second highest quarterly revenue in the company's history. Adjusted gross margin and adjusted EBITDA were also strong. As Wahid mentioned in his remarks, revenue for the first quarter of fiscal 2025 was $189.5 million, an increase of 24% as compared to the $152.3 million for the first quarter of fiscal 2024. Slide five of the earnings presentation provides a breakdown of revenue by segment for the quarter. Our largest segment during the quarter was Uncrewed Systems or UxS, which is a combination of our small UAS, medium UAS, and UGV businesses. UxS had revenue of $120 million in the quarter, which is up 22% from last year's total of $98.2 million. Puma demand remained strong, accounted for 78% of UxS revenue, but we also saw meaningful contributions from our ground vehicle, RAVEN and JUMP 20 products during the quarter. Our Loitering Munition Systems segment or LMS recorded revenue of $52 million, a 68% increase as compared to the $30.9 million last year during the first quarter. Most of the LMS product revenue recognized during the quarter is for orders in which the contract has not been definitized, meaning the customer has placed the firm order for the equipment or services without a final price. The price will be determined when the contract is finalized, which we expect to occur in the next couple of quarters. LMS margins were negatively impacted by the undefinitized orders during the quarter. However, we still expect full-year improvements in LMS adjusted gross margin and adjusted EBITDA margin over last…

Thanks, Kevin. Given our strong execution, key contract awards, and robust pipeline, we are reaffirming our previously stated guidance for fiscal year 2025. Our healthy backlog and recent order raise visibility to 80% of the midpoint of our fiscal year 2025 revenue guidance. We continue to expect first half revenue to represent about 45% of the full fiscal year. We're confident in achieving our full year guidance and are focused on converting these awards and other opportunities in our pipeline into orders and revenue. In summary, as global demand increases for our autonomous AI-enabled uncooked solutions, we anticipate strong revenue growth to continue across our business segments. Our strong start this quarter supports our belief that fiscal year 2025 will be a great year for our investors, employees, and customers. We're well-positioned to benefit from U.S. DoD budget priorities and are encouraged by an increase in international demand, especially for Switchblade and our JUMP 20 solutions. Our strong anticipated growth lends itself to shareholder value, creation that extends well beyond fiscal year 2025. Before turning the call over for questions, let me summarize the key takeaways from today's call. First, first quarter fiscal year 2025 revenue groups $189.5 million, setting a new first quarter record. Second, we're now starting to book key Switchblade opportunities, such as our recent U.S. Army $1 billion IDIQ contract, and anticipate funded backlog to increase in coming quarters. Third, our Loitering Munition Systems segment continues to be the key growth driver for the company throughout fiscal year 2025. And fourth, the fundamentals of our business have never been stronger, and we anticipate that fiscal year 2025 will be another record-setting year for the company. I would like to thank the incredible AeroVironment team that provides our customers with the solutions they need to achieve their vital missions. Thank you also to our shareholders and customers for your continued support. We're excited for what's ahead, and grateful to serve our country and allies at this critical time. And with that, Kevin, Jonah, and I will now take your questions.

Thank you. [Operator Instructions] Our first question will come from the line of Ken Herbert with RBC Capital Markets. Please proceed with your question.

Yes, hey, good afternoon, Wahid, Kevin, and Jonah. Nice quarter.

Thank you.

Hey, Wahid, maybe just first, I wanted to ask, you obviously maintain the full-year guide with the IDIQ contracts you were able to sign last week or announced last week. How should we think about the task order timing and amounts under that in fiscal '25, and I'm guessing it's fair to assume that of, out of the IDIQ initial visibility or funding was basically already factored into the '25 outlook?

Ken, that's correct. So, overall, we're very pleased with the $1 billion at sole-source IDIQ contract. Just this past week, we were able to book the first past quarter for approximately $128 million against that. And that there's several really key benefits to this new contract. One is the ceiling of it is fairly high, a record for the company ever before. Second, there's also better payment terms in terms of mile progress payments in terms of the cash flow equation. And lastly, yes, some of this was baked into our guidance. And then, there is a lot of still -- then it's only our first quarter, so we got three more quarters ahead of ourselves, number one. And number two, there is bit of an election coming up. And there's also a possibility of potentially a CR, a continuing resolution, with the U.S. DoD's budget. We do expect additional contracts and task orders under this IDIQ, although the timing of that, again, is questionable based on the customer's ability to be able to convert these things to contract, and the level of workload, that is the former customer. Overall, I think we had a fantastic quarter, and we're looking forward to keeping you updated for the rest of the year as well.

Okay, thanks, Wahid. And if I could, you made a few comments regarding some uncertainty on pricing for some of the Switchblade contracts that are yet to be finalized. Is it possible to maybe range or bracket some of the discussions you're having around pricing, and how should we think about maybe pricing on the 300 and the 600, moving forward, considering some of the uncertainty around some of these more recent contracts?

Well, hopefully -- and Ken, it's Kevin, that certainly will be cleared out here in the next quarter or two. And as I said, when we look -- with the possibility, as we think overall for the year, both our adjusted gross margins and adjusted EBITDA margins for that business will show improvement. So, we're optimistic that that will all turn out the right way for us. But we can't really speak to specific dollar amounts and things like that.

Okay, thank you.

You're welcome, Ken.

Thank you. One moment for our next question and that will come from the line of Peter Arment with Baird. Your line is open.

Yes, good afternoon, Wahid, Kevin, Jonah. Hey, Wahid, you mentioned in your release that regarding like the Replicator LASSO in Organic Precision Fires that only initial funding was released. So, do you expect other releases or tranches during this fiscal year out of those programs?

We do. We still have, if you recall last quarter, I specifically mentioned that there's close to $300 million worth of potential orders for Switchblade alone that we're expecting. We just booked, [for example] (ph), the first one, which was the $128 million task order against the $990 million IDIQ. There's more coming. We definitely expect a lot more throughout this fiscal year, and we believe that this fiscal year, again, will be another record year for our Switchblade segment and our Loitering Munition. The timing of those is, again, it's a very difficult thing to predict the exact timing. Although I believe that, within this fiscal year, we expect multiple additional Switchblade orders that is in the process with our customers to be converted into a task order under the existing contract umbrella, ceiling or additional new contracts; they're both possibilities that we expect this fiscal year.

Okay. And then, you mentioned also in your prepared remarks that there's a pretty healthy pipeline or other opportunities, maybe is that on the international front? Maybe could you talk to the demand signals you're getting from an FMS perspective, I guess, maybe tied to LMS in particular?

Yes, so we believe that, as the year progresses, not only that demand for Switchblade and orders for Switchblade will continue to come in from our domestic customers. We also have a growing pipeline of potential opportunities that we're actively working and engaged with on international front. I mentioned specifically on the call earlier, Mike Morris, Taiwan's announcement by the State Department that U.S. approved for Taiwan. There are several additional countries beyond and besides just Taiwan that we're engaged in. Again, it is incredibly challenging to predict the exact timing of when those opportunities are going to convert to an order, but it's more a matter of when versus if. We believe that these customers have a very, very strong desire. They're actively engaged with us in the State Department and with our military side as well, U.S. Military. And they've got budgets lined up to be able to eventually procure this. It's just a matter of going through the process. The process is long and it takes time, but we do expect those to come in throughout the year and even beyond the fiscal year as well.

Great. I'll leave it there. Nice results.

Thank you, Peter.

And one moment for our next question. And that will come from the line of Louie DiPalma with William Blair. Your line is open.

Wahid, Kevin, and Jonah, good afternoon.

Hi, Louie. Good afternoon.

What programs are associated with the $990 million Switchblade IDIQ, should we think of it as the successor to the LMAMS program, or is LMAMS going to be a separate contract that you could be awarded next year? And is LASSO and Replicator also outside of the $990 million IDIQ vehicle?

Great question, Louie, let me try to elaborate a little bit and clarify some of these. So, the $990 million contract IDIQ sole source essentially is similar to the previous IDIQ contracts that we've received under the terminology called LMAMS. So, the U.S. Army calls it now LUS or Lethal Unmanned Systems. And so, this category of lethal or loitering unmanned systems is really the category that replaces the LMAMS acronyms that we used to use before. The umbrella contract is intended to be such that multiple different opportunities and needs of our customers can be contracted and procured under this contract. So, examples of those are the U.S. Army's own need for Loitering Munitions, both Switchblade 300 and 600, need for the U.S. Aid packages to Ukraine could be also fulfilled through this, as USAI is called Ukraine Security Assistance Initiatives. So, those potential option is that also if Ukraine request them and the U.S. wants to give them can be procured under this. The Replicator initiative is another one. For the U.S. Army specifically, the Replicator initiatives needs could also be procured under this contract through the U.S. Army. However, if U.S. Marine Corps and U.S. Air Force and other services have needs they can also place orders with us under additional separate contracts outside of this IDIQ. So, what the IDIQ gives us is a vehicle for the U.S. Army and DoD to buy a lot of stuff, but it doesn't limit us just to that. We have multiple other opportunities besides that in avenues that we can secure orders going forward for the Loitering Munitions. And our portfolio has grown or the demand has grown and the request and opportunities or engagement for our Loitering Munition actually keeps expanding. It's a very, very robust pipeline that continues to expand besides the fact that we continue to book actually really sizable orders so far in the first couple of quarters so far.

Great. Wahid, that is helpful. And Kevin, just to clarify, did you say that the margins for the new Switchblade contract are higher than the traditional margins, so you were able to successfully negotiate better pricing terms?

I would agree. Well, I speak, you could kind of say that, but basically I'm speaking to looking at last year's margin based upon the volumes we had and this year's margins, either adjusted gross margins or EBITDA margins. And because of additional volume, new contracts, et cetera, we expect improvement in both the adjusted gross margins and the EBITDA margins. And Louie, as our volume grows and as this business continue to grow at a very high pace, we do think that the overall profitability profile of our Loitering Munitions should improve and will improve over time. But on a quarterly basis, you'll see fluctuations primarily because of the lumpiness of the business and the size of these contracts that are coming in. In addition to that, I also mentioned on the call on my remarks that the payment terms is much more favorable because our customers prefer for us to deliver quickly and they have very urgent needs and the contracting process takes time. We thought we have to a lot of times plan things in advance. And to do so, we wanted to make sure that the government recognizes that and actually pays us based on progress payments rather than just revenue and payments at the end of the whole process when they receive the product. We saw more at stake with the revenue recognition. That's right. So, as we recognize revenue, we're going to be able to actually invoice our customers based on progress payments and that's a very favorable term for us and this $990 million contract. I believe that our customers recognize the value that we deliver to them for the speedy delivery that we are doing and the ability for us to turn around and shifting to them quickly and that obviously they recognize that and allowed us to get progress payments on it.

Great. So, those progress payments, those should be positive for the working capital dynamic. Is that what you're saying?

Exactly. Very much so, I mean, it's not all going to happen overnight. But over the next several quarters, we should start seeing the reduction even with increased volumes in the unbilled receivables.

Awesome. Thanks, Kevin, Wahid, and Jonah.

Thank you, Louie.

Thanks, Louie.

Thank you. One moment for our next question. And that will come from the line of Peter Skibitski with Alembic Global. Your line is open.

Hey, good afternoon, guys. Couple of program questions, just to ask further on the whole LUS versus LASSO area, is it correct to understand, will the LUS contract basically be largely your legacy Switchblade 300 and 600 variants as opposed to LASSO maybe the Army has kind of updated requirements coming out of Ukraine and so you'll have newer Switchblade variants delivered under LASSO. Is that the right way to think about it? Or would you color that a little bit different?

So, slight tweak to that, Pete. What I would say is that LUS is what the terminology that U.S. Army uses to fulfill their immediate urgent needs. Today, if they have needs to have some Loitering Munitions and have them affordable force structure, LUS is the terminology they're using. Long-term, they have actually publicly announced a promo record type specific requirement called LASSO, which stands for Lethal Aerial Stalking and Strike Ordinance. I believe that's what it stands for, LASSO and so LASSO is their long-term intention of acquiring Loitering Munitions both Switchblade 300 and 600 type or maybe even additional variance of it that goes beyond just the next year or two. It goes up to a 10-plus year cycle. And so, they have already decided to procure AeroVironment Switchblades for the initial purchases under the terminology of LUS. Long-term, it will be called LASSO according to the U.S. Army today and that's a multiyear program of record for multiple variants of Switchblade that goes on for a decade plus over time. So, the good news is that we're in a great position. A, U.S. Army recognizes the need and the requirement. B, they have already selected us for the initial purchases and C, they have put a blanket purchase order in place for us at an IDIQ ceiling with close to $1 billion so it allows them to procure a lot more Switchblades over the next several years, and so, all of that really is very positive indicator to the strength of our relation with the U.S. Army, their satisfaction with us, and our product's performance in the battlefields.

Okay. I appreciate it. Second question for me is, coming out of Ukraine, you hear this term, FPV, First Person View I think, for some of the small UAS. And just it seems like a newer thing. I'm just trying to find out, do your current small UAS have that capability? And I saw DIU has this blue UAS refresh challenge and they talk about First Person View, but they also talk about bigger UAVs, one, two, three. So, I just wonder if you could maybe give us some color there in terms of what you guys possess with FPV. Is that kind of a new requirement? Or, and if you guys expect to play there in addition to some of the other DIU opportunities.

Sure, Pete. So, FPV, or First Person View drone that is either armed or unarmed is essentially a category that has existed for a while. It is a very different set of capability and different sets of missions than a Loitering Munition. What Switchblade can do is very, very different than what an FPV drone can do. And Switchblade is considered a much more sophisticated, much more capable system in terms of its loitering capability, et cetera, et cetera. An FPV drone, whether it's armed or not, most of the time it's armed in Ukraine nowadays, essentially is a manual process of taking a quadcopter or a multirotor, attaching some kind of a munition or war-headed explosives to it, and then essentially flying it manually to a target. And there are lots and lots of challenges with that, although it is a capability that will most likely remain for the long run, but it's not the type of mission that Switchblade is designed for or it's used. Switchblade addresses a whole bunch of other more sophisticated and complicated missions that an FPV drone or armed drone can't really address at all. And so, and there's lots of things that I can go into detail in terms of its range, endurance, loitering capability and precision. And, but the most important thing is mission success. The effectiveness of Loitering Munitions such as Switchblade is much, much higher than what you see on FPV drones. And so, (a), that is a category, we intentionally decided not to blame that initially, although we're keeping an eye on it, but the munitions that Switchblade address is much larger and the market for that is incredibly robust long-term.

Okay, okay. Yes, sounds like FPV or COTS-type, modified COTS-type almost. I see what you're saying. Okay, thanks very much, guys.

That's right.

Yes, taking an unarmed drone and essentially strapping a bomb or an explosive to it, returns them into an FPV drone that is really a low level of complexity and mission capability.

Got it. Thanks, guys.

Thank you, Pete.

One moment for our next question. And that will come from the line of Andre Madrid with BTIG. Your line is open.

Hey, guys. Thanks for taking my question. Kind of wanted to go back and talk about the FMS pipeline in particular for Switchblade. I think on the last earnings call, we heard you mention that roughly half a dozen countries right now are in various stages of acquisition. Has this figure grown or is it roughly still around the same? And how could we expect it to trend moving forward? Again, I know the timing is uncertain, but any color there would be appreciated.

Andre, so it is very true that we are engaged with a half a dozen plus different countries. The list of countries that we've been approved to engage with is close to 50 countries, actually over 50 countries internationally. So, that's a very, very strong positive start to begin with, because as the U.S. government allows us and gives us approval to engage with them, it gives those countries and those allies a huge confidence that if they were to engage and invest energy in this process, they will get a positive outcome, which is they can acquire Switchblade eventually, number one. Number two, the list of active engaged customers that actually have a program or requirement and are in the process of getting authorization and approval is about a half a dozen plus. And the number keeps growing. It is not shrinking, it's actually growing. And the pipeline keeps progressing forward in a very positive manner, meaning that there's a very long process by which we engage these customers to get them from when they ask, they want to Switchblade, until they actually receive Switchblade. And that's a two plus year, three year process in many cases. And we're engaged in different levels of that with each customer and each ally. And all of those are actually in general moving positively in the right direction. What's really difficult to do is to predict the exact timing of when these contracts actually become an award. The most recent one was the Taiwan approval from the U.S. government that was announced. We've had other countries such as Australia who publicly announced, France has publicly announced, and a few others like Lithuania has publicly announced as well. The process, for example, for Lithuania was roughly about 18 months, just to give you an idea. So, in general, (a), we've got a growing number of countries, (b), they're moving in the right direction, (c), we're very optimistic that over the next year or two, many of those, if not all of those, will convert to actual contracts and awards. And that's why I say that this momentum that we have in our Loitering Munitions category will continue well beyond fiscal year 2025. We believe that we have a franchise here that is going to be very large over the next several years because we've just basically created a whole new category in the entire operations or doctrine of military warfare. And force structures are going to be all potentially equipped with Loitering Munitions, if you look forward to the next decade or so. That's a very, very large and robust shift, seismic shift in the marketplace for us, very capable.

Definitely, definitely. No, I appreciate the color there. Thank you. And I guess following up on that even further, I know that this IDIQ was something that you had highlighted previously multiple times over, and it said that not only would this help facilitate international sales to Ukraine, but also possibly to other foreign countries. Could this IDIQ vehicle that was provided by the U.S. Army, could this help be -- could this be used for that? And is the expectation to still do so?

Absolutely, yes, Andre, I'm glad you brought that up because one of the reasons why the U.S. Army placed this contract, not the only reason, but one of many reasons, was to also allow and accommodate for any international SMS sales of Switchblade to be able to be placed under this contract as an acquisition purchase. Whether it's a foreign military funded program or a foreign military sales program, FMS or FMS, they all could be procured under this umbrella contract. And historically, we've performed really well. And in general, if you look at the history of AeroVironment with the U.S. Army and these types of sole source IDIQ contracts, we've always achieved the limit, the ceiling limit, or even the customers increased the limit. Once you have a contract like this, it allows the customer in a much easier way to either increase the time frame or increase the ceiling as we go forward. So, it's very exciting and the short answer is yes. It definitely can accommodate international customers and it could actually help improve the speed of that process as well.

Wahid, as always, thank you so much for the detail.

You're welcome, Andre.

Thank you. [Operator Instructions] And we do have a follow-up question from Peter Arment with Baird. Your line is open.

Yes, thanks. Wahid given that all these different partners can basically kind of use or leverage the IDIQ contract. It sounds like you're going to be bumping up against potentially your capacity sooner than kind of expect, or at least you're going to be close. So, when do you expect to make a move, and how much of an additional capacity do you need to put in place to support that? That's my first question.

So, great question, Peter, I'm glad you asked me, because I made a specific comment on my remarks about the fact that currently in fiscal 2025, we have the capacity and the ability to deliver close to a half a billion dollars' worth of Switchblades on product revenue this fiscal year itself. But we're not sitting still for that alone. We've been planning on this for a while and we've been always in general ahead of the demand curve or cycle. And as I mentioned on the call, we're already actively engaged in multiple different other states in selecting the next site to build our next large factory for Switchblade. And I want to also add that we're still in the current factories that we have, one of the fundamental features of our production facilities are that they're very flexible, meaning we can easily modify and accommodate scaling up or tweaking some of the production capacity of our non-legal UAS factories to Loitering Munitions. So, in general, we've got a lot of flexibility as part of our planning process when we design these things and we design our factories. In fact, it's one of our biggest, biggest, what I call, competitive advantages in the market, because we're the only ones we are aware of who can deliver half a billion dollars' Loitering Munitions at a U.S. DoD's reliability and performance levels with a battle-proven product line. And (b), we're not sitting still. We're already looking at additional capacity in multiple ways. And C, I would say that overall, the capital requirements for those expansions are not going to be monumental. They're going to be very affordable. We do this in very much within our existing CapEx, a sort of percentage spend per year as a percentage of revenue, which is roughly around 5% or so on an annual basis.

Okay. And then, just for clarification -- yes, go ahead, Kevin. Sorry.

I just said improved payment terms of capital before.

Right, right. And just for clarification, the Taiwan FMS order that was cleared, is that not in your funded backlog yet, or just trying to get some clarification there?

That is correct, Peter. So, as I mentioned, the only thing that we booked that's down or that's added to our funded backlog at the end of the Q1 was the $128 million pass forward award from the U.S. Army for their LUS requirement. That's for the U.S. Army's own needs. The order for Taiwan and many other additional Switchblade orders both for example OPF or Replicator or Ukraine additional demands for Ukraine that has been publicly announced by the U.S. DoD is not reflected on our backlog. All of those potential orders we're working them and eventually they're going to make its way into an order of backlog, which we expect to book most of those, if not all of those throughout this fiscal year. So, our pipeline as I said for Switchblade remains quite robust and we're just at the beginning of booking these additional demands that we've talked about, but we have not -- it's not reflected in our backlog yet.

Understood. Thanks again, Wahid.

You're welcome, Peter.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the conference back to Jonah for closing remarks.

Thank you, and 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 hope you have a good evening and look forward to speaking with you again following next quarter's results.

This concludes today's conference call. You may now disconnect.