AeroVironment Inc (AVAV) 2021 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to AeroVironment's First Quarter Fiscal Year 2021 Earnings Call.

This is Steve Gitlin, Chief Marketing Officer and Vice President of Investor Relations for AeroVironment.

(Operator Instruction].

As a reminder, this conference is being recorded for replay purposes.

Before we begin, please note that on this call, certain information presented contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements and may contain words such as believe, anticipate, expect, estimate, intend, project, plan or words or phrases with similar meaning.

Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control that may cause our business, strategy or actual results to differ materially from the forward-looking statements.

For further information on these risks, we encourage you to review the risk factors discussed in AeroVironment's periodic reports on Form 10-K and Form 10-Q filed with the SEC and the Form 8-K filed today with the SEC, along with the associated earnings release and the safe harbor statement contained therein.

This afternoon, we also filed a slide presentation with our earnings release and posted the presentation on our website at avinc.com in the Events and Presentations section.

The content of this conference call contains time-sensitive information that is accurate only as of today, September 9, 2020.

The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after this conference call.

Joining me today from AeroVironment are President and Chief Executive Officer, Mr. Wahid Nawabi; and Senior Vice President and Chief Financial Officer, Mr. Kevin McDonnell.

We will now begin with remarks from Wahid Nawabi.

Wahid?

Thank you, Steve.

Welcome to our first quarter fiscal year 2021 earnings conference call.

On today's call, I will emphasize 3 key messages also included on Slide #3 of our earnings presentation.

First, despite the unprecedented COVID-19 pandemic and resulting global economic challenges, we are on track to achieve our fiscal year 2021 objectives.

Second, we continue to make progress on our key growth initiatives within our tactical UAS, Tactical Missile Systems and HAPS product lines.

And third, we are successfully executing our long-term growth strategy while delivering significant value to our shareholders.

I will start by summarizing our first quarter fiscal year 2021 performance, and then we'll discuss our achievements during the first quarter.

Next, Kevin will provide a more detailed summary of financial performance in the quarter, and then I will discuss our outlook for fiscal year 2021 before Kevin, Steve and I take your questions.

Now let's review our financial performance in the quarter, which we have summarized on Slide #4 of our earnings presentation.

We delivered first quarter revenue of $87.5 million, consistent with the expectations we shared with you during our fourth quarter fiscal year 2020 earnings conference call.

Full year diluted earnings per share from continuing operations was $0.42 compared to $0.71 for the prior year, a difference resulting primarily from a shift in revenue mix, which we expected.

Non-GAAP earnings per diluted share from continuing operations for fiscal year 2021 was $0.44 compared to $0.74 for the prior year.

We are executing our plan effectively while meeting continued robust global demand for AeroVironment's highly differentiated solutions.

Now I will review our business achievements in the first quarter.

Our small unmanned-aircraft systems product line represented 64% of total revenue in the first quarter.

Importantly, we remain the leader in the global market for small UAS.

Demand for our battle proven Raven, Puma and Wasp solutions remains strong.

Additionally, we continue to engage with growing number of customers and have received orders for our Puma LE system, which now can fly continuously for 6.5 hours.

This extended flight time provides customers with even more Group 2 capabilities in the Puma LE's Group 1 footprint at a substantially lower cost than other Group 2 solutions.

We continue to demonstrate Quantix Recon to customers who are interested in its advanced capabilities, such as fully-automated launch, flight planning, operation, data collection, landing and radio-frequency silent operation.

We believe these advanced features are compelling to customers who are focused on enhancing capabilities and reducing the cognitive load on system operators.

Quantix Recon is one of the first unmanned systems to deliver a level of intelligence and autonomy that does not require a human operator's attention during its mission.

We expect these capabilities to continue to expand and increasingly to define our solutions in the future of unmanned systems.

Our teams are hard at work creating these features for our next-generation of tactical UAS to provide to our customers.

Next, our Tactical Missile Systems product line represented about 11% of first quarter revenue.

We are executing against the record LMAMS contract award for Switchblade that we received on April 30.

We recognized about $32 million of revenue from this award in fiscal year 2020, another $2 million as of the end of our first quarter of fiscal year 2021 and we anticipate recognizing a total of about $42 million during our fiscal year 2021.

Our strong momentum last fiscal year developing our larger Switchblade variant continued into this year with a number of successful demonstrations, tests and continued customer support and funding.

As part of this variance maturation, we plan to deliver a number of systems to our customers for operational deployment this fiscal year.

We are also establishing low-rate initial production capability, consistent with the expectations of our customers.

We continue to believe this larger Switchblade variant represents a game-changing solution to disrupt the larger segment of the missile market currently dominated by legacy systems, such as Hellfire, Javelin and TOW missiles.

These legacy missiles accounted for more than $1 billion in enacted DoD procurement funding in government fiscal year 2020.

Moving now to HAPS, which represented 19% of first quarter revenue.

We successfully completed the fourth test flight of the newly named sun glider solar HAPS in the first quarter.

This was a longer flight that also flew higher than previous tests following the envelope expansion process we are executing during this demonstration phase.

We expect this program to transition to a full testing and certification phase towards the end of our current fiscal year 2021.

As a result, this should produce revenue similar to our fiscal year 2020 annual HAPS run rate of about $60 million.

From a broader perspective, momentum for HAPS continues to build with the HAPS alliance expanding awareness of this emerging capability and global leaders in telecommunications, aerospace and technology joining forces with us to realize its potential.

As a pioneer and leader in the space, AeroVironment is very well positioned to establish the platform and related capabilities and build relationships that will bring HAPS to market.

Our strong relationship with SoftBank Corporation, our HAPSMobile, Inc.

joint venture, and our collaboration with Alphabet's loon on the Sunglider's communication payload provide a solid foundation for continued progress and the realization of HAPS as a means to deliver global connectivity and create shareholder value.

Now I would like to address the impact of COVID-19 on our business.

We are experiencing some delays in customer contracting decisions as our domestic and international customers continue to adjust to their own remote work situations.

We are also experiencing some delays in limited areas of our supply chain resulting from the impact of the pandemic.

When we developed our fiscal year 2021 annual plan, we included assumptions about the pandemic, which is why it is slightly back-end loaded, with about 60% of revenue in the second half of the fiscal year.

While this is a very fluid and unprecedented situation, we are prepared for the likelihood that the COVID-19 pandemic will persist into next calendar year and are well positioned to mitigate its impact on our business.

The vast majority of our people continue to operate remotely while maintaining and delivering on our commitments to customers, fellow team members and our shareholders.

Despite the uncertainties regarding the pandemic, we remain on track to achieve our fiscal year 2021 objectives and are well positioned for growth in the year ahead and over the long term.

Thanks to the unwavering focus of our employees, we are confident we will emerge from this pandemic as an even stronger company.

As a measure of how our people feel about working at AeroVironment, we were recently certified by the Great Place to Work organization as a great place to work for a second year in a row.

The great-place-to-work methodology involves sending a very detailed anonymous survey to all of our team members to assess their views on questions relating to justice, fairness, credibility, respect and a number of other important dimensions of a company's workplace environment and culture.

87% of our people completed the survey this year, and our overall score of 90% grew significantly from last year.

When we look at how different demographic groups within the company feel about AeroVironment through the great-place-to-work assessment, 100% of African-Americans, 90% of Hispanic or Latin X, 87% of Asian and 89% of our LGBT team members who responded to the survey agree that AeroVironment is a great place to work.

While these are very high and best-in-class scores, we realized that there is more work to do.

As we discussed on our last earnings call, we remain committed to promoting diversity and increasing representation of African-American and other underrepresented groups within AeroVironment.

Our new internal diversity and inclusion committee includes 16 team members from across our company, representing a broad spectrum of backgrounds and identities.

This committee has been meeting on a regular basis and has developed a calendar of events designed to raise awareness further with AeroVironment about issues relating to diversity.

Our recruiting efforts include outreach to minority serving institutions, both through partners and directly.

We're also continuing to plan and carry out STEM education and mentoring programs in our local communities.

We remain committed to the objective of diversifying our team further, and more generally, we continue to advance our efforts to seek the most talented people to join our team regardless of race, gender, religious belief, ethnicity, country of origin or sexual orientation.

Now I will turn the call over to Kevin McDonnell for a summary of first quarter financials.

Kevin?

Thank you, Wahid.

Today, I'll be reviewing the highlights of our first quarter financial performance.

I will be referring to both our press release and earnings presentation available on our website.

I will deviate finally from past practice by only addressing the key financial metrics in my remarks and leaving some of the details to the press release and earnings presentation.

Revenue for the first quarter of fiscal 2021 was $87.5 million, an increase of 1% from the first quarter of fiscal 2020 revenue of $86.9 million.

The breakdown of revenue by product area is contained on Slide 6 of the quarterly earnings presentation.

During the quarter, we saw strength in domestic small UAS, which was up 24% from the same period last year and HAPSMobile development revenues, which were up 33%.

This was largely offset by lower international small UAS revenue.

In general, our international visibility has been most impacted by COVID.

Turning to gross margin.

Slide 5 of the quarterly earnings presentation shows our product service mix and overall gross margin trends over the past 5 quarters.

Gross margin for the first quarter was $35.4 million or 40% of revenue compared to $41.3 million or 47% of revenue for the first quarter of last fiscal year.

The 47% gross margin last year was an outlier with exceptionally strong gross product margins of 54% and favorable product service mix.

The 40% overall gross margin in the first quarter this year was in line with our expectations.

Next, I'll turn to operating expenses.

SG&A expense for the first quarter was $12 million or 14% of revenue compared to SG&A expense of $13.7 million or 16% of revenue for the first quarter of FY '20.

The lower spend in the current quarter is, in large part, related to a reduction in travel and trade show expenses as a result of COVID-related restrictions.

R&D expense for the first quarter was $11.1 million or 13% of revenue compared to R&D expense of $8.7 million or 10% of revenue for the first quarter of FY '20.

We continue to make significant R&D investments.

These investments include enhancements to current products, new variants within product lines and product additions.

We believe these investments will enable continued leadership in the small UAS space and drive growth in both our small UAS and TMS product lines in the near future and longer term.

Looking at the bottom line.

Net income attributable to AeroVironment for the first quarter of fiscal 2021 was $10.1 million or $0.42 per diluted share compared to $17.1 million or $0.71 per diluted share for the first quarter of fiscal 2020.

The $7 million reduction in net income was largely a result of reduced gross margin dollars of $5.9 million and increased R&D investments of $2.4 million, which were mentioned previously, and reduced interest income of $1.1 million related to lower investment yields and more conservative investment policy.

Net income was positively impacted by lower SG&A expense of $1.7 million and reduced tax rate of 9.6% versus the prior year of 10.4%.

The decrease in tax rate was primarily due to an increase in excess tax benefits from equity awards.

Looking at the full year.

We expect the year-end tax rate to be between 11% and 12%.

In terms of adjusted EPS, Slide 11 shows a reconciliation of GAAP and adjusted non-GAAP EPS.

Non-GAAP diluted earnings per share for the first quarter of fiscal 2021 was $0.44 per diluted share and excludes $0.02 per diluted share of intangible amortization related expense associated with our acquisition of Pulse Aerospace.

Non-GAAP diluted earnings per share for the first quarter of fiscal 2020 and was $0.74 per diluted share and excludes $0.03 per diluted share, which includes deal, cost, integration expenses and intangible amortization expense associated with our acquisition of Pulse Aerospace.

Turning to the balance sheet.

Once again, we ended the quarter in a strong cash position.

Cash, cash equivalents, investments at the end of the first quarter of fiscal 2021 totaled $338.5 million, an increase of $20.8 million from the end of fiscal 2020.

Total cash flow from operating activities during the quarter was $26.8 million, of which $10.5 million was the result of working capital improvements and the remainder from other operating activities.

The working capital improvement came primarily from lower accounts receivable, partially offset by lower accounts payable and reduced accrued liabilities as a result of year-end bonus payouts.

In terms of capital expenditures, we spent $4.1 million during the quarter.

Now I'd like to highlight some of our backlog metrics.

Our funded backlog at the end of Q1 was $154.4 million, a decrease of $10.1 million from the first quarter of fiscal 2020 and a decrease of $53.6 million in the fourth quarter of fiscal 2020 backlog of $208.1 million.

In terms of fiscal 2021 visibility, which is highlighted on Slide 7 of the earnings presentation.

As of today, we have year-to-date revenues of $87 million, first quarter ending backlog that we anticipate to execute in fiscal 2021 of $147 million.

Quarter-to-date bookings that we anticipate to execute in fiscal 2021 of $20 million.

Unfunded backlog from incrementally funded contracts we anticipate to recognize revenue during the balance of the year of $30 million.

This adds up to $284 million or 71% of our fiscal 2021 midpoint revenue guidance range.

Now I'd like to turn it back to Wahid.

Thanks, Kevin.

AeroVironment's growth strategy is based on innovation.

Our solutions are the result of our strategic research and development investments.

These R&D investments typically exceed 10% of revenue each year and last year totaled 13%.

We are the pioneer and leader in every one of our target markets, and our successful track record of profitable growth and value creation demonstrates the strength of our business model.

We continue to invest in innovation and growth with new capabilities and solutions advancing through our MacCready Works and engineering labs.

Some of these development efforts seek to enhance existing solutions, some introduced new solutions to existing end markets and some target new capabilities for new markets.

We are expanding our portfolio to address a broader and more valuable range of customer missions.

For example, Puma LE and the larger Switchblade variant are new solutions addressing new missions and potentially valuable new market segments.

And we are aggressively developing and demonstrating innovative new unmanned CIS solutions that are smarter and more autonomous to support our customers' missions against much more capable adversaries in permissive and contested environments.

We're executing our strategy to offer a multi-domain portfolio of unmanned solutions and capabilities, integrating robotics, sensors, software analytics and connectivity technologies to equip our customers with the tools to win.

By doing so, we believe we will continue to grow our business and deliver even greater value to our shareholders and our customers.

Customers within the U.S. DoD -- the U.S. DoD continue to rely on our solutions to protect and enable U.S. forces.

For example, there is $90 million in procurement funding proposed in the U.S. government's fiscal year 2021 defense budget for AeroVironment's solutions.

It is difficult to know the future of the U.S. defense budget given the upcoming presidential election and the budgetary impact of the massive economic assistance provided by the federal government during the pandemic.

By contrast, we're confident that the solutions we supply now, and are developing for the future, fit into categories that remain high priority generate bipartisan support and offer attractive economics as compared to legacy solutions.

We believe that the unmanned systems segment of the DoD's budget is among the most attractive and likely to receive continued robust investments.

Yet we are in a time of great uncertainty.

In times like these, our strong balance sheet signals confidence to our customers who seek long-term partners and suppliers.

Additionally, our strong cash position and no debt serve as a valuable resource to inorganic opportunities that support our growth strategy.

Supported by 71% visibility to the midpoint of our guidance range, we reaffirm our full fiscal year 2021 guidance of revenue of between $390 million and $410 million, as summarized on Slide #9 of our earnings presentation.

We expect an operating margin of between 12% and 12.5% and earnings per diluted share of $1.65 to $1.85.

This financial guidance assumes approximately 7% ownership of the HAPSMobile joint venture.

We expect non-GAAP earnings per diluted share, which excludes amortization of acquired intangible assets, to be between $1.74 and $1.94.

We still expect first half revenue to account for approximately 40% to the midpoint of our revenue guidance range.

We also expect first half earnings per diluted share to represent about 35% of the midpoint of our diluted EPS guidance range.

As Kevin mentioned earlier, revenue mix will result in a lower gross margin percentage in fiscal year 2021 as compared to the prior year.

We expect research and development investments to range between 11% and 12% of revenue this fiscal year.

In summary, to reiterate our main points for today's call.

First, despite the unprecedented COVID-19 pandemic and the resulting global economic challenges, we are on track to achieve our fiscal year 2021 objectives.

Second, we continue to make progress on our key growth initiatives within our tactical UAS, Tactical Missile Systems and HAPS product lines.

And third, we are successfully executing our long-term growth strategy while delivering significant value to our shareholders.

Thank you to our customers, our team members and our shareholders for your ongoing engagement and for challenging us always to deliver excellence.

We continue to focus on delivering on our promise to help you proceed with certainty.

Kevin, Steve and I will now take your questions.

Thank you, Wahid.

We will now begin the question-and-answer session.

(Operator Instruction].

Our first question this afternoon comes from Ken Herbert of Canaccord Genuity.

Ken?

Wahid, I just wanted to first start off.

I think you mentioned in your remarks that your execution on the LMAMS contract accounted for $2 million of revenues in the first quarter, which would imply $40 million for the remainder of the year.

I just wondered if you could provide any more detail on the cadence of that or how we should think about that progressing through fiscal '21.

Sure.

So Ken, what I said in my remarks was that on our fourth quarter of fiscal year '20, on the contract, the record contract that we received last quarter, we recognized approximately $32 million worth of revenue in our fourth quarter of last fiscal year.

In addition to that, we recognized roughly about $6 million worth of revenue in our first quarter this quarter.

And then for the full year, we expect roughly about $42 million worth of revenue for -- from the LMAMS contract.

So roughly, if you add up the fourth quarter fiscal year '20 number of $32 million to the $42 million, we're going to be -- we expect to recognize approximately $74 million worth of revenue against that contract value.

Okay.

My question was of the $42 million this year, with $6 million in the first quarter, can you provide any more detail on how that paces through the second, third and fourth quarter for us?

So first of all, a quick correction.

I think for the first quarter, we recognized $2 million worth of the revenue, not $6 million, as I mentioned earlier.

In terms of the distribution, it really varies based on the ASC 606 revenue-recognition rules, we have not specified the details of that.

But you could see, as we build products and we progress towards the contract and customer acceptances happen, we will recognize the revenue.

Okay.

Great.

And if I could, just one follow-up.

The -- I think you mentioned you've booked $20 million so far this quarter towards the full year number, obviously, as part of your 70% that you provide on the revenue line.

How does that compare to prior quarters?

Can you give any -- or I guess, the second quarter in prior years?

Are you ahead of where you were?

Or is the COVID impact maybe dragging that down a bit, especially with international customers?

Sure.

So as I mentioned in my remarks, Ken, when we developed our plans at the end of last fiscal year, for this fiscal year, we made sure that we put in some buffer and cushion in terms of the overall plan accounting for the COVID-19 epidemic and delays that we were expecting.

So our original plan that we developed at the beginning of the fiscal year or before the beginning of the fiscal year, comprehended some of those expectations of those types of delays that I mentioned.

So since then, those expectations have become reality so far.

And we're on track, according to our results so far.

We -- our first quarter results are right within the expectations that we communicated to you last quarter.

And we're very pleased with those results so far.

We expected the first quarter bookings to be lighter than the normal flow of business that we've had in the past.

But again, this is something quite common in our business.

We've had ups and downs in our quarterly revenue distribution and bookings for a very long time.

That's very natural in our business.

Yes, 60-40 is pretty much in line with what we've done.

We did a little bit better the last couple of years.

But prior to that, that's about where we're at.

And from a visibility perspective, the current visibility is in line with visibility at this point in time in previous years.

Right.

We've been in the last few years, we've been in the 70 -- low 70%, and that's about where we're at right now.

Yes.

So according to our expectations, Ken, we're very much in line with our expectations and our plans.

And we have noticed some delays both on the customer contracting side as well as on some specific suppliers, all of which we've accounted for in our plans and progressing quite nicely so far throughout the first quarter.

Obviously, it's early.

It's our first quarter of the year, and we'll keep you updated as we progress throughout the year.

Thank you, Ken.

Our next question comes from Joe DeNardi at Stifel.

Joe?

Wahid, thank you for the additional color on LMAMS and the variant and some of the more granular guidance you provided.

That's helpful.

You described LMAMS and I think the variant as a game-changing capability.

I'm wondering if you would characterize the revenue benefit to AeroVironment from that capability being adopted as also a game changer.

And then you mentioned preparing for LRIP, I think.

When would you expect the award associated with that?

Is that this fiscal year or sometime next year?

Sure, Joe.

So thanks.

We try to do best we can to provide as much information as we could at a high level of accuracy and confidence within our business.

In terms of the larger variant of Switchblade, we do believe that this is a game-changing capability.

The reason why we believe that is because the current market for a larger variant of this size, which we roughly compare to a Hellfire or Javelin or TOW, that amount of spending in the U.S. DoD's current budget year last year was about $1 billion.

So it significantly increases the market size and opportunity for us relative to our original Switchblade.

We've had tremendous success with this original Switchblade, as you've seen so far, with record contracts, and we've been the primary producer of that to the U.S. government, supplier for that.

And we believe that this additional variant, larger variant, opens up a much bigger market for us, number one.

Number two, so far, we're making very good progress.

We -- as I said, it's co-funded by us and our customer.

We are making really good progress in terms of developing the capability, demonstrating the capability and progressing and maturing the designs and development effort.

And we've already started initially for low initial rate production set up in our manufacturing footprint.

Obviously, this is a longer-term game and endeavor for us.

We're excited about it, but we'll keep you updated.

In terms of revenue potential, it is quite significant.

It could be a game changer for us in the long run because the market is there, the potential is there, the funding dollars are there, we just have to execute and deliver the capability.

And the rest, hopefully, will play out itself.

And then the timing on an LRIP award?

So we're co-funded currently for this program.

The investment in terms of manufacturing generally is all on our part because we are the manufacturer.

We will keep you updated on the awards as we go forward.

As I mentioned in my remarks, we are right now in the process of both already building low limited quantities for initial deployment and our customers' operations.

As I mentioned on my remarks, it is part of the program and the effort that we have with our customer.

So when we have more information that we could share, we will be glad to share that with you, of course.

Thank you, Joe.

Our next question comes from Pete Skibitski at Alembic Global.

Pete?

Just a couple of questions.

First one, the Quantix Recon, I think, is interesting.

I want to get a sense of your perspective on it in terms of do you guys expect this to kind of play into a program of record in the next year or 2?

And I guess, overall, how near-term a revenue contributor do you think it could be?

Sure.

So Pete, Quantix Recon, the reason why I believe and we believe this is such a game-changing capability is because the way that the system is designed and operates addresses some fundamentally key desires and requirements that our customers really wish and have asked for, for a while for a long time.

Essentially, this autonomous automatic flight planning and operation and navigation and then radio silent operation, where you can actually go into an area and you literally would not have to have any communication with an operator and achieve a mission or conduct a mission as a radio-silent system is really, really attractive.

In terms of a program of record, I'm not in a position to be able to comment on that specifically.

There is no specific programs that we know, but we do know customers who've been asking for this capability.

We're engaged with those customers.

We have delivered some -- to some of those customers, and we're in a process of hopefully delivering more to other customers.

We'll keep you updated as that strategy progresses over time.

And it's, again, another part of our overall strategy of a system solution offering to our customers as a family of systems.

It's also maybe worth noting that if you look across our portfolio in small UAS and in Switchblade and Tactical Missile Systems, there were no programs of record when we began those products, when we introduced those products.

We define a new capability.

We put those into the hands of customers.

They began to understand how they could be used, how they could add value to their operations.

And those ultimately led to competitions and, in some cases, programs of record.

So the nature of the unique set of capabilities that Quantix Recon offers is similar to what a Raven looked like years before it was adopted, what Switchblade looked like before it was adopted and follows the model we've been following quite successfully for a number of years.

Okay.

Fair point.

And just one follow-up for me, guys.

Just trying to get into your head more on this larger Switchblade variant because you're talking about it as kind of a Hellfire or a TOW or a Javelin replacement essentially, all powered missiles, right?

You didn't mention mortars.

Was that deliberate?

Do you really see it as more of a replacement of those higher price point missile programs as opposed to replacement for maybe a lower price point mortar system?

So Pete, the reason why we chose to just highlight those 3 is because they're very well known.

This capability is broad, generally fits in that category of size of missiles and warheads and capability.

So there are a number of other ones besides the 3 that I mentioned, that we mentioned, that absolutely could qualify as a peer or become comparable in some way, shape or form.

By no means, they're exactly the same.

We obviously believe that we have something very innovative and disruptive in terms of its nature of how Switchblade works and how it's designed and the technology that's built into it.

But the idea here is really to try to give you guys a sense of what does the size of that market look like and what type of capability this is.

As we progress through this process, and we're in a position to share more details about it, we'll obviously do that with you in more detail as time goes forward and we progress.

And just one thought to add to that in response to your question, Pete.

The nature of the Switchblade emerging family of systems is scalability.

So if you start with the original Switchblade, small man portable, backpack-able, dismounted inventory type of solution designed for certain kind of soft targets, for example, the larger variant is obviously bigger, can fly longer, farther, carry a larger warhead and deliver much more significant effects on targets.

And there are opportunities for different points along that scale, addressing all kinds of different missions that our customers are facing.

So we're at a very early stage of the evolution of this family of systems that ultimately is designed to be able to deliver unique capabilities across a broad range of mission sets.

Our next question comes from Peter Arment at Baird.

Peter, please.

Wahid, you mentioned about -- you guys now have -- you've got quite a bit of visibility on the 71%, but you also kind of gave some commentary around international visibility, small UAS, that there was probably a little bit of delays in contracting because of COVID.

How has that progressed, I guess, since as we've seen kind of the summer?

And are you expecting some of that to improve as we get into the fall?

Sure.

So Peter, as I mentioned in the remarks, we do have a 71% visibility that Kevin outlined of the specifics of -- at this time of the year.

This is pretty much in line with our historical levels.

We have seen some delays on our customers contracting activities with us primarily because of the COVID-19 situation.

Now there -- everybody is getting used to the new normal and they're essentially adjusting and figuring out how to do that.

We're in very close contacts with our customers, all of our customers, domestic and international, across all of our family systems and products.

And we feel very confident about our plans today.

That's why we reaffirmed our guidance that we provided earlier.

At the same time, we know what it takes to get these contracts over the line, over the -- cross them over the path, so to speak, and get into the final stage of awards.

And based on all the data that we have, we feel quite good that we can achieve the outcomes, the goals that we've set for ourselves and expectations that we have for ourselves for this year.

And at the same time, I would say, that we're also very sort of fortunate that we have a strong balance sheet.

We're in a great position.

There's going to be another year of profitable growth as a company and as a business.

And the demand drivers overall long term for our business seems very positive.

There's close to, as I mentioned on the call, $90 million worth of funding on government fiscal year '21 proposed budgets, which has not been approved yet, but there's a healthy dose of demand for these types of systems because this category we're in is quite attractive in the overall category of defense in general, both domestically and internationally.

Okay.

That's helpful.

And just as a follow-up on the HAPS, you mentioned that it was going to be entering kind of a new phase.

So I assume that you've -- in the slides, you mentioned that there's -- you've had 11, I believe, contract modifications.

So we would anticipate more of that as we get into this new phase?

Or does it -- maybe just a little bit more insight on how that's going to play out.

Yes, Peter.

So in terms of the HAPS, what I wanted to specifically communicate is that we're making some great progress over the last 2 years or so on this program and in this initiative.

We're positioned really well.

We've had 4 consecutive flights -- successful flights and demonstration so far.

We have developed and delivered 2 airplanes, and we're sort of coming towards the end of the Phase 1 of this business plan.

And where the transition from Phase 1 to the next phase, which is an extensive testing and certification phase is essentially a very smooth transition.

And we expect that transition to happen sometime by the end of this fiscal year.

And so we -- what I tried to articulate is that we expect our revenue for HAPS business this year to roughly be equivalent to our run rate of last fiscal year, which is around $60 million or so.

And that gives you an idea as to what we expect this year.

Obviously, in order to achieve that, there either have to be modifications on the existing contract that we have or we have to get a new contract.

The good part is that we're very close with our partner, SoftBank, in this case.

We work hand-in-glove in this process throughout the whole process on a daily basis, and we know what we have to do in order to get that done.

So depending on the needs of the program, we will jointly address that as we go forward and we're in a good position for the long-term value creation here as well.

Thank you for that question, Peter.

Our next question comes from Louie DiPalma from William Blair.

Kevin, you mentioned that the Puma LE has stamina of approximately 6 hours.

I was wondering, how does that translate to range?

And how does that compare to the potential range that you could achieve with the aforementioned Switchblade long endurance variant?

Right.

So Louie, great question.

I'm glad you asked the question.

We do believe that our Puma LE, which now can fly up to 6.5 hours on a single battery and a single flight, continuous flight, is really a Group 2 capability and a Group 1 footprint, the economics package as well as financial considerations.

And logistically, it is far, far easier to operate a Puma LE system than any of it's -- any of the conventional Group 2 systems that are out there.

In terms of the range of the system, typically, with the standard antenna that we have, it could fly for 30 -- 20, 30 kilometers.

We do have a long-range tracking antenna that we refer to as LRTA and essentially, what it does -- it's a slightly bigger antenna, but what it does, it allows the Puma to fly almost as close as 40, 50 kilometers.

So it's pretty much longer range.

Additionally, over the years, we've even demonstrated the ability to be able to control and communicate Puma through SatCom, satellite communication.

So we have developed and demonstrated that capability with our Puma systems already more than 1 year ago.

And so number one, the existing Puma by itself, great range and great endurance.

With the long-range tracking antenna, it expands even further and also the capability exists to go even beyond on a satellite communication and connect it that way for much longer ranges.

And potentially, you could have the Puma connect to the -- a Sunglider antenna, right?

That is accurately -- a very accurate statement, Louie.

I mean our vision of these unmanned family of systems, robotic systems, absolutely encompasses that type of future state capabilities.

Great.

And one final one.

In July, you announced that you won the $21 million flight control system domain award that's currently under your army IDIQ that's for -- has a ceiling of $249 million.

And you said that there are a total of 6 domains for this IDIQ.

And I was wondering, what are the other domains?

And was your award last year for $45 million for, I think it was 200 Raven aircraft?

Is that also part of this IDIQ?

And I'm just trying to size of what the potential opportunity is remaining here.

Sure.

So Scott, you're absolutely right.

We did get that award.

It was basically -- it's called the FCS portion of that contract.

That contract is an IDIQ contract that encompasses the small UAS and it's -- there's been many task orders underneath that for a number of years now, maybe a couple of years or so.

And Steve does have the specifics of what the 5 or 6 categories are.

Steve, do you want to...

Sure, sure, Louie.

So those 6 domains were defined by the Army as systems, tactical open government-owned architecture or TOGA.

Other major components: RT 28 Puma spares, RQ 11-B, Raven spares and Flight Control Systems, FCS.

Those are 6 domains.

They all fall under that $248.5 million 5-year IDIQ-type contract.

And it -- yes, go ahead.

Sorry.

And for this, I know there were -- I think there were 4 other vendors as part of this IDIQ.

It might have even been 5 other venders.

But as far as you're aware, have you won the vast majority of the dollar amount thus far for this idea?

Louie, that is accurate, both comments are accurate.

There are at least 5, maybe 6 different players on this IDIQ contract from inception.

We have competed against task orders for all the years against that.

We believe, based on the math that we've done, as the amount of awards that have been issued against that contract and the amount of awards that we won, that we've won the vast majority of them, vast majority of the dollars.

And so essentially, you could see that it's very consistent with our track record of having a high win rate within our category both domestically as well as internationally.

We'll take our next question, again, another follow-up question from Joe DeNardi.

Joe?

So Wahid, in the first quarter, you disclosed $9.5 million in revenue from TMS.

I think you said that the LMAMS contract contributed, too.

So does that mean that the $7.5 million difference is coming from variance?

And if so, can you say how many variants are making that?

So Joe, very good insight.

We -- the revenue profile within our Tactical Missile Systems product line is made up of different categories of items, one of them being the original Switchblade, which we said we recognized about $2 million worth of revenue in the quarter for that.

There's also a chunk of revenue in that is related to like training and sustainment of existing Switchblade systems for our customers and repair of what we refer to as training vehicles or training rounds that we provide to our customers for training new war fighters.

Additionally, there's customer-funded R&D dollars that comes in for the funding, for example, new variants of the systems or maintenance of the similar enhancements on that.

As the variance -- the other variance that we've spoken about publicly is the Blackwing variant.

Obviously, that's in a much specific target market and a smaller more specific targeted market of submarines.

But those are the different types of revenue that's in that bucket of TMS product line category.

Okay.

Okay.

And then, Wahid, during your tenure and even back through Tim's, there's been, I think, a challenge around predicting timing and magnitude of adoption.

But if you look back over the last several years, there aren't many defense companies with a better track record on meeting revenue guidance.

So I feel like you have better visibility into the business on the revenue side than maybe you give yourself credit for.

So the question is given the strong track record of visibility, when do you think you'll be in a position to provide more longer-term 3- to 5-year financial targets?

So thank you, Joe, for recognizing and noticing that.

We try our best.

We never consider it to be done, done.

We always strive for better and more accurate information and predictions.

In terms of the long term, again, look, we're very fortunate that we're in a position in a market that promises so much growth and prosperity for us.

Yes, the whole world is challenged with the pandemic that's going on, and it's affecting every one of us all around the globe.

But we believe that given our strong balance sheet, given our strong positions in these -- leading positions in these markets and the growth portfolio that we have and the track record that we've had in the years, this will be the fourth year of consistent profitable growth that we've been able to at least plan as well as deliver so far.

So we look forward to that.

In terms of long term, it is really a difficult challenge to see beyond the fiscal year.

We do believe that these markets are large.

We have a plan of strategy.

So far, we're very much pleased with our results, and we look forward to executing and delivering more value.

And as we have the ability to predict further along in a more accurate way, we would absolutely make sure that we keep you aware and informed on that front.

Thank you, Joe.

(Operator Instruction].

Our next question comes from Ken Herbert of Canaccord Genuity.

Ken?

I wanted to ask a question for Kevin, perhaps.

You delivered really good cash in the quarter, and it sounds like receivables specifically helped working capital.

But are you -- I know the last couple of years, conversion has been lower than maybe in the prior years, and it can be fairly volatile.

But can you talk about either way we should think about conversion on the free cash this year, say, relative to net income?

Or maybe just some of the key puts and takes for the remainder of the year?

And -- because it looks like you're positioned coming out of this quarter to have a really nice rebound in cash generation for the fiscal year.

Yes.

I mean, we're looking at a very much positive cash flow year.

I mean, one of the key drivers is the investment in working capital items like inventory receivables and unbilled receivables, and we did bring that down substantially in the first quarter.

The unbilled has been running kind of high in the $75 million, $76 million range.

That should come down somewhat during the year, but potentially could be back at the same level by the end of the year as we recognize revenue on some of the contracts.

But the other items there should stay fairly close to their current levels throughout the year.

We did spend $4 million of CapEx in the quarter.

That probably type of spending per quarter would be expected in the next several quarters.

We are investing in new products and things like that.

And so that -- the spending should continue through the year.

Thank you, Ken.

And our next question comes -- a follow-up question from Peter Arment at Baird.

Peter?

Yes.

Actually, Ken just asked what I was going to ask on the receivables.

So thanks, Kevin, for all the details.

I'll jump back in the queue.

Thank you.

And with that, we have no further questions at this time.

We appreciate everybody's engagement and interest.

Thanks for your attention.

And an archived version of this call, all SEC filings and relevant company and industry news can be found on our website, www.avinc.com.

We wish you a good day.

We look forward to speaking with you again following next quarter's results and continued good health and safety.

Good afternoon.