AeroVironment Inc (AVAV) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter, 2007 End Fiscal Year AeroVironment Earnings Conference Call.

My name is Jeremy, and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to your host, Mr.

Steven Gitlin, Director of Investor Relations.

You may proceed, sir.

Thank you, Jeremy.

Welcome to AV's fourth quarter and fiscal year 2007 earnings call.

Joining today are AeroVironment's President and CEO Tim Conver, and the company's CFO Steve Wright.

Before I hand the call over to them, 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.

Factors that could cause actual results to differ materially from the forward looking statements include, but are not limited to, reliance on sales to the U.S.

government, changes in the supply and/or demand and/or prices for our products, the activities of competitors, failure of the markets in which we operate to grow, failure to expand into new markets, changes in significant operating expenses, including component and raw materials, failure to develop new products, changes in the regulatory environment, and general economic and business conditions in the United States and elsewhere in the world.

For a future list and description of such risks and uncertainties, see the reports we file with the Securities and Exchange Commission.

We do not intend, and undertake no obligation to update any forward looking statement, whether as a result of new information, future events, or otherwise.

The content of this conference call contains time sensitive information that is accurate only as of today, June 26th, 2007.

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

With that, it is my pleasure to turn the call over to Tim Conver.

Thank you, Steven.

Welcome to our fourth quarter, and our year end fiscal 2007 conference call.

I think the quarter and the year reflect strong execution across all aspects of our business: developing our customer relationships, improving operationally, performing financially, building our human resources and our infrastructure, and creating new opportunities for the future.

Our customer relationships are definitely strong as we go into our new fiscal year, reinforced by close interaction, and by doing what we said we would do, which has fostered mutual trust and respect.

Our customers continue to tell us that our small unmanned aircraft systems are saving the lives of those who are protecting us and our interests.

To date we've delivered well over 6,000 small unmanned aircraft, including both new and production replacement systems, the vast majority within the last four years.

These systems include Raven, Dragon Eye, and now Wasp, and they have become embedded in the training and the operations of our customers.

Our PosiCharge System supports some of the most sophisticated and high velocity supply chains in the world.

They are brining increased productivity, safety, and energy efficiency to our customers' workplaces.

These systems now support over 7,000 electric industrial vehicles in factories, distribution centers, and airports.

Our development programs continue to move forward.

We are achieving key milestones along the way, and we are demonstrating the world class capabilities of our engineering and our commercialization teams.

Our Energy Technology Center is a unique and an increasingly sought after source of high efficiency electric propulsion, energy storage, and advanced battery charging technologies.

We executed well against our financial plan for this year, both in the fourth quarter, and for the full fiscal year of 2007.

In our Q4 '07, revenue grew by 66%, compared to 2006.

Operating income grew to $7.5 million from an operating loss of $900,000, and net income increased to $5.6 million, from a loss of $500,000.

For the full year 2007 we achieved 25% growth in revenue compared to FY06.

That's the high end of our guidance range.

We increased operating income 92% year-over-year.

Our operating margin of 18% exceeding the 15% to 16% range I provided in our third quarter conference call.

Net income increased over FY06 by 85%.

This growth was driven primarily by continue market adoption and successful execution in our UAS segment.

A decline in revenue from our PosiCharge system segment was a disappointment that I will discuss in more detail shortly, but we are focused on delivering improved results going forward.

With that summary of the overall performance, I would like to review each segments performance in more detail, starting with the UAS segment, which represented 84% of our fiscal year revenue.

The $20.1 million increase in UAS revenue over the fourth quarter in FY06 was due, across the board, to growth in products, and service sales, as well as customer funded R&D programs.

The U.S.

Army has communicated an acquisition objective of 1,900 Raven systems.

Each of these systems typically consists of three aircraft and associated ground control units and spares.

Fourth quarter delivery of Raven systems to the U.S.

Army increased our percentage supplied against this acquisition objective to 31%.

According to the Army, their Raven systems have now logged nearly 25,000 flight hours in the area of operation.

As we shared with you last quarter, they are very pleased with the reliability of these systems, which remains extremely high.

We were again able to anticipate customer needs and deliver continued improvement to our customers when in the fourth quarter we began production of our new, advanced battery charger.

This charger was developed by our Energy Technology Center and supports the batteries powering both our aircraft and our ground control units.

Based on technologies developed to PosiCharge, the advanced battery charger has many performance improvements.

It's 25% of the weight and 15% of the volume of the conventional charger previously used by our DOD customers.

This is also an example of how we can leverage R&D to benefit existing products and customers across our enterprise.

We developed our Wasp, small, unmanned aircraft system under an ongoing contract with DARPA.

Through the DARPA program, Block II Wasp systems have now been shipped to the U.S.

Marine Corps, the Army, the Navy, and SOCOM.

We've made our first sale of small UAS to the government of Singapore with the delivery of a Block II Wasp system as well.

We modified the Wasp system to a Block III configuration to satisfy the requirements of the U.S.

Air Force competition for the BATMAV system, which we won in Q3.

That program is progressing rapidly, we believe the customer is pleased, and we believe the BATMAV system has the potential to further expand the adoption of our small unmanned aircraft systems well beyond this initial program.

Once again, looking forward, our announce UAS development program, digital data link, Switchblade, and Global Observer, all continue to receive customer funding, and advance against their development objectives.

Each of these three projects is developing an entirely new capability that has not existed before, capabilities our customer have told us will be very valuable to them.

We continue to be encouraged by our technical progress and by the ultimate business potential of these technologies, and I believe that our customer are also pleased with what they're seeing.

During the fourth quarter we signed a lease for our -- 105,000 square foot system in Simi Valley to house the growing UAS advanced Engineering and Development operations.

This will allow us to vacate a small 26,000 square foot R&D facility in Simi Valley, as well as an offsite test facility, and to consolidate our UAS development initiative, including Global Observer and switchblade.

Now, I would like to move on to our PosiCharge systems segment.

PosiCharge revenue represented 10% of our total company in FY07.

The revenue declined by 12% compared to the same period last year.

This interrupted a six year run of double digit annual growth.

The key driver of this revenue decline was weakness in the U.S.

automotive industry and the resulting reduction in infrastructure spending.

In FY 2006, 62% of PosiCharge revenue came from the auto industry.

Our auto industry sales declined by 52% in FY 2007.

Obviously, we're disappointed with this performance.

We are, however, pleased with the increased diversification, and the number of customers and industries that continue to adopt PosiCharge.

Our non-auto revenue for FY07 was up 56% from FY06, and we began shipping to 20 additional new customers during FY07.

We are continuing to increase our business development activities in key markets, and we're further broadening our product offering, which we believe was already the most comprehensive solution available.

We're also adding new services, such as installation in our PosiNET, web based information tool.

I believe that PosiCharge remains well positioned to take advantage of growing adoption of fast charged technology for industrial, electric vehicles.

Our third segment is energy technology center, or ETC.

We experienced an increase in revenue of 15% for the fiscal year compared to FY06, well gross margin increased by 16%.

The primary focus of this segment is research, development, and commercialization of innovative solution based on efficient electric energy technology.

ETC also provides contract development and sells small volume products.

Our ETC team has been very productive this year.

As I mentioned earlier, our new battery charger that's not supplied as part of our small unmanned aircraft system, was developed here.

They also began work on a new $4.7 million indefinite delivery, indefinite quantity contract from the U.S.

Air Force research lab, and that's intended to develop new propulsion capability for small, unmanned aircraft systems.

They successfully developed third generation motors and generators for our Global Observer program, and they also completed the installation of architectural wind technology demonstrator systems in Camden, New Jersey and [Boron], California.

With that as an overview for the year.

Steve Wright, our Chief Financial Officer is now prepared to provide you with further details for the fourth quarter, and the full fiscal year financial results.

Thanks, Tim.

Good afternoon, everyone.

Beginning with fourth quarter results, revenue for the fourth quarter was $50.7 million, a growth of 66% over Q4 the prior year.

Looking at this by segment, UAS revenue was $44.9 million, an increase of 83% over the prior year, and this growth resulted from higher product deliveries, higher service sales, and higher customer funded R&D.

PosiCharge revenue was $2.7 million, a decrease of 29% from Q4 the prior year, due to lower installations of fast charging systems for the reasons that Tim discussed.

Energy Technology Center revenue was $3.1 million, a growth of 42% from Q4 of last year, due to higher revenue from power processing test equipment.

Turning to gross margin.

Gross margin in the fourth quarter was $19.1 million, compared to $12.4 million in Q4 the prior year.

And gross margin as a percentage of revenue was 38%, compared to 41% in Q4 of the last year.

By segment, UAS gross margin was $17.1 million, up 77% from Q4 of the last year.

And as a percent of revenue, UAS gross margin was 38% versus 39% in Q4 of last year.

PosiCharge gross margin was $0.4 million in the quarter, down 73% from Q4 of last year, and this reduction was largely due to lower sales volume that reduced manufacturing operating efficiency.

Energy Technology Center gross margin was $1.6 million, up 25% from Q4 of last year due to higher sales volume.

And as a percent of revenue, Energy Technology Center gross margin decreased from 57% last year to 51% this year.

And the difference in gross margin between those two years is due to favorable sustaining and warranty cost in fiscal 2006.

SG&A expense for the quarter was $7 million, which compared to SG&A of $7.8 million of Q4 of the prior year.

SERP, or Supplemental Executive Retirement Plan accruals accounted for approximately $600,000 of SG&A in Q4 of 2006, and there were no SERP expenses in Q4 of 2007.

R&D expense for the quarter was $4.7 million, compared to Q4 of the prior of $5.5 million.

Customer funded R&D work in the quarter was $7.1 million, compared to Q4 in the prior year of $2.9 million.

And total R&D, that's customer funded and internal funded, was $11.8 million, or 23% of sales, compared to Q4 of the prior year of $8.4 million, or 27% of sales.

Operating income in the quarter was $7.5 million, versus a $0.9 million loss in Q4 of the prior year, and the improvement in profitability was due to higher gross margin, lower SG&A, and lower R&D.

And net income for the quarter was $5.6 million, or $0.27 per fully diluted share, versus a loss of $0.5 million, or $0.04 loss for the same quarter last year.

Moving next to the full year.

Revenue for the full year 2007 was $173.7 million, up 25% from the prior year period of $139.4 million, and by segment, UAS revenue at $146.5 million was up 32% from the prior year.

PosiCharge revenue for the 12 months was $17.6 million, a reduction of 12% from the prior year period.

This reduction was largely due to weakness in the automotive market.

And lastly, Energy Technology Center revenue was $9.6 million, up 15% from the prior year.

Gross margins for the 12 month were 68.5 versus 56.8 in the prior year.

And as a percentage of revenue, total company gross margins were 39%, a slight decline of two percentage points from the prior year.

By segment, UAS gross margin was $57.6 million, up 29% from the prior year, and as a percentage of revenue, UAS gross margin was 39%, a one percentage point decline from prior.

PosiCharge gross margin was $6.1 million, a decline a 24% from the prior year, mainly due to lower revenue and higher manufacturing support costs.

And lastly, Energy Technology Center gross margin, $4.8 million, up 16% from the prior year.

And gross margin as a percentage of revenue, unchanged for Energy Technology at 50%.

SG&A for the 12 months was $24 million, and this amount included reversal of expenses associated with the SERP of $2.2 million.

Excluding the SERP from both fiscal year 07 and fiscal year 06, SG&A expense in '07 was $26.3 million, compared to the prior year period of $22.6 million.

And the growth of SG&A year-over-year was due to growth primarily in selling and marketing infrastructure.

R&D for the 12 months, $13.9 million, versus prior year of $16.1 million.

Customer funded R&D work for the year, $19.4 million, versus prior year of $11.7 million.

And grand total R&D, funded and internal, was $33.4 million, or 19% of sales, versus the prior year amount of $27.8 million, or 20% of sales.

Operating income for the full year, $30.5 million, an increase of 92% from the prior year.

Effective tax rate for the 12 month period was 35.7%, up from the prior year level of 30.2%.

And this growth was largely due to lower federal research and development tax credits as a percent of revenue.

Net income for the 12 months, $20.7 million, or $1.22 per fully diluted share, compared to $11.2 million, or $0.75 per fully diluted share last year.

Looking at backlog, funded backlog at the end of the fourth quarter was $60.9 million, versus $79.7 million at the end of our last fiscal year.

Looking at our balance sheet, cash, cash equivalents, and short term investments at the end of the fourth quarter increased $93.8 million from the prior year, to $109.2 million at the end of our fiscal '07.

Increase in cash is primarily due to proceeds received from our IPO of $80.5 million net of expenses, and cash generated from operating activities of approximately $15 million.

At the end of Q4, our accounts receivable, including unbilled, were at $34.2 million, up $7.8 million from the prior fiscal year end.

And total day sales outstanding were approximately 61 days at the end of the year, versus 78 days at the end of the prior year.

Taking a look at inventory, inventories were $14 million at the end of Q4, compared to $11.5 million at the end of our last fiscal year, and days in inventory were approximately 40 days at the end of '07 versus 57 days at the end of '06.

And capital expenditures for the 12 month of fiscal 2007 were approximately $3 million, versus $4.2 million in the prior year.

And with that, I would like to turn things back to Tim to discuss expectations for the upcoming year.

Thanks, Steve.

Overall, I think our fourth quarter and our FY07 validated our plans both for customer adoption and for business execution.

The customer value deliver by our small UAS has further embedded them into the U.S.

military standard training, equipping, tactics, and procedures.

Even with the decline in revenue, PosiCharge products continue to be adopted and embedded into the global supply chain, increasing productivity in factories, distribution centers, and airports.

Delivering to tight deadlines while remaining flexible and cost effective, demonstrated our execution effectiveness while we rapidly increased the size of the business.

Attracting and retaining the best people is a key part of one of the pillars of our business being a great place to work.

We attracted over 70 new employees to AV during the year, and they've been an extraordinary addition to our team.

We've maintained our profitability through consistent, significant growth, and we're well positioned for the future.

The engine of AV's long term future remains our ability to innovate.

At the core, we're a technology company.

I believe that our people are the best in the world at what they do.

They're highly talented, motivated, and innovative.

They are skilled at developing new solutions that deliver entirely new value propositions.

They are competitively effective at ensuring that customers are successful when they adopt our innovations.

They have created new businesses that are increasing the efficiency and the effectiveness of energy use and information collection from the factory to the battlefield, and thereby helping our customers win.

There is demonstrated demand for our existing small, UAS, and PosiCharge product portfolio, and we have a robust pipeline of innovative solutions and development.

Based on these factors, we're targeting a five year, compounded annual growth rate for AV of 20% to 25% in revenue, with 12% to 14% in operating income.

We've said that we plan to provide annual guidance only, because historically we've been able to predict annual numbers reasonable well, even though quarters tend to be bumpy.

I think you'll agree that our FY07 demonstrated both of those trends.

As we start our FY 2008, I see this year's revenue growth to be consistent with our long term target at 20% to 25%, with operating income margin for the full fiscal year at 12% to 14%.

Based on our history, I anticipate more bumpy quarters.

At the end of our first fiscal year in which we have become a public company, I want to acknowledge my deep appreciation to our customers and to our employees.

They have enabled the sustained growth of AV.

I also want to thank our public shareholders for their interest and their confidence in us.

As we look forward to completing our year, we will also look forward to reporting our progress to you in our upcoming 2008 fiscal year.

And now, Steve and I would be pleased to answer your questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of David Gremmels with Thomas Weisel Partners.

You may proceed.

Thank you, good afternoon.

Hi, David.

How are you?

Good, thanks.

Tim, Steve, you're guiding to '08 margins are well below what you delivered in '07, even when we adjust for the SERP.

So can you just talk about the changes in business mix, or what would be behind that decline?

Well, David, I think we're looking primarily at what we think is a sustainable profitability over time as we grow the business.

Most of our business currently is coming from DOD, we have some built in regulatory factors there.

We're focused on growth and meeting our customers needs and objectives, and are maintaining our competitive position.

And we think that that's a good target to plan on.

And, David, I'll just add, I think we had very good performance in fiscal '07.

As we look forward to fiscal '08, and look at the elements of the P&L, while we're not guiding on individual elements, we would see continued compression at the gross margin level as the product become more mature and we go through more bidding cycles.

You sort of, as you know, you start over each time.

And, in terms of SG&A, you pointed out the SERP.

That was worth at least a point in margins in fiscal '07.

Also, in fiscal '08, this will be our first year for full SOX compliance, so I would expect some accelerated or enhanced activity in that area.

And also looking at R&D, we closed fiscal '07 at self funded R&D at 8% of revenue, which is sort of on the low end of the band of R&D spending that we would expect to see.

Thanks, that's helpful.

I want to ask about the Raven production deliveries.

And I think that was a little bit slower in the first half, and presumably, improved in the second half.

And I'm assuming that a full year of full rate production of the Raven would benefit your margin.

Is that a fair assumption, that Raven production is running at a full rate now?

We are running at a full rate for Raven, and I think that that assumption is baked into our guidance assumptions going forward.

Okay.

And then another one on Raven.

Last quarter you talked about this $53 million order that came in later than expected.

I'm just wondering, in retrospect, did that ultimately have any impact on the April quarter numbers versus the July numbers?

No.

We made deliveries as planned on that contract.

Okay, thanks very much.

Thank you.

Your next question comes from the line of Patrick McCarthy with FBR Capital.

You may proceed.

Hi, good afternoon.

Tim, I was wondering if you could just take a couple minutes and talk about what's in the backlog today, and in the order flow, both for the quarter, and then on a go forward basis?

Are you expecting it to begin ramping up a little bit coming out of this quarter?

Well, as you know, most of our backlog, most of our production -- and I think that's reflected in the backlog, is the Raven program, or the Raven product, used by the Army as well as Special Operations Command, and now the Marines.

We've also sold that system to multiple other customers.

So that, I think, is reasonably the largest part of the backlog.

It's bumpy.

That order flow, actually, is what drives the bumpy nature of our quarters.

But I think it's moving ahead.

We did close that contract we talked about in Q3, and definitized that contract.

And there are subsequent CLS contracts that are continuing to be released against the basic IDIQ.

And what would you expect for the Wasp now that you're rotating in - really mainly, a Block II configuration, but there's also the Block III out there.

When would that be more influential on backlog, do you think?

Well, I think we could begin to see more effect of that product within this next year.

We modified the Block II, as I mentioned, to what we refer to as Block III for the BATMAV program, that's what is, basically, adds IR, or infrared night vision capability to the system.

I did mention that that's moving along well.

I think that as other users have had the experience with the Block II system, now, and they are aware of the capabilities of the Block III system, that it does provide an attractive opportunity for many of them.

It also provides, I think, an ability to begin to have an opportunity to move farther down into the force structure towards the company and the platoon level, something we've talked about in the past.

And with this much smaller aircraft as part of a system, I think it might enable that going forward.

And then, this is my final question, just on Global Hawk.

You mentioned that it's still in development, obviously, and it seems to be on track.

Is there any updated status about what the timetable is on that, or the next milestone that needs to be met either from your side or from your customer's side to move that program forward?

Not really much of an update.

I think we're talking about the Global Observer product.

We're basically, moving along on a defined development test, and -- well, I guess development and test program that's been coordinated between ourselves and our customer.

I mentioned, and I'll reaffirm, we're really pleased with the technical performance of all of those subsystems.

It's a process, as you know, we're moving along, and we really don't have anything material to report at this point.

Is that a large component of the increase in the customer funded R&D, or is that a separate contract?

I think it represented a significant increase in last year's customer funded R&D, and that was a contract, yes.

Okay, thank you very much.

Your next question comes from the line of Howard Rubel with Jeffries.

You may proceed.

Thank you.

I'll start with a follow up on the Global Observer question.

Could you help me understand -- I know you were negotiating with SOCOM for $129 million contract, or thereabouts, Tim.

Could you bring us up to date on where that status stands, or are you getting letter contracts on an incremental basis?

Well, I think you're referring, Howard, to that [Vis-Ops] announcement that was made earlier in the calendar year with an intent to negotiate a contract of that size.

We're aware of that, that's a process that, you know, is a process.

It's moving along.

And the customer decides the rate of that progress.

So, again, we're very comfortable with how we're developing the technology in that program.

We are working with customers, and we don't have anything that we have that's material to announce at this point.

Well, I'm trying to see if I can put up another, paint you in a corner a little bit.

And you are doing a very good job of saying we're on track, but I don't understand what that means.

Does that mean that you are working on margin rates, or the timing of when you will have deliverables, or something else?

Because, I think that's an important part of your growth for next year, or for this upcoming year, fiscal '08.

Well, if my voice sounds a little weaker, that's because I'm backed into a corner over here.

But when I'm talking about our being comfortable with our milestone progress, I'm referring primarily to the development and testing of the various subsystems of the program.

The contractual issues associated with the customers intent that they announced is just something that we haven't commented on in the past, and I don't think we want to get into commenting on now, other than when we are issued material contracts, we have announced them.

So, I'm not sure how much more help I can be in term of the specific questions that you are asking about.

We've never provided guidance by program Howard, and I think we want to continue that process.

And I guess, another point I would make is most of our financial performance for the upcoming year, in this year, or probably, any year, is primarily a function of current products, and mostly current customers.

And we see our development programs as critically important to building new growth platforms for the out years to support our long term growth targets.

I appreciate that.

I have just two more questions.

One, to talk about, if you would talk about, for a moment, how many new customers were you able to get for Raven during the year?

And how many do you believe that you could target for the upcoming year?

I don't have an answer to your questions on specific number of Raven customers.

I can follow up with Steve later on that, that's fine.

Our largest one would be the Marines.

The Marines jumped on the IDIQ type contract during in the year, and there are variants in some of the smaller customers.

Yes.

In terms of volume of actual orders placed, Steve is absolutely right there.

And I think we mentioned that last call, Howard, that the Marines have decided to, now that they've acquired over 1,000 Dragon Eyes, to develop or acquire their future small UAS as Raven systems, and they're buying through the Army contract.

I think the second part of your question was how robust did I think the future opportunity for new customers for Raven is.

I think there are a lot of customer that would be likely candidate to acquire Raven.

We're talking with a large number of customers who have expressed an interest both domestically and internationally.

And I see that as an ongoing, large opportunity for us.

That is because it's clear that you've broadened the portfolio by doing that.

And then the last item is, if you could talk about energy systems for a moment.

The numbers seems very good, and I think we are all in an environment where people are looking for more solution to save money on utilities.

How is your Camden Aquarium, I'll call it a beta site for a moment, on architectural wind performing?

Well, I think beta site is a good term, that's pretty much how we look at it.

And I think we and our customer there are very pleased with how it's operating.

I think it is aesthetically a great installation, and the reports I have had are that they agree with us there.

We're continuing to advance the technology of that product.

We're about ready to come out with a third generation of architectural wind, that basically, will look pretty much like the installation on the Camden Aquarium, but it will generate more energy.

So, we're pleased at the way that development's continuing to roll out.

Thank you, gentlemen, very much.

And you next question comes from the line of Richard Safran with Goldman Sachs.

You may proceed.

Good afternoon, how are you?

Good, Rich, how are you?

Good.

I just was curious if you could tell me in your gross assumptions how much you have baked in for international sales?

If you king of like parse that out.

I think that continues to be a large opportunity for us.

In all of our product areas we believe that there are substantial international markets for the same or similar product solutions that we are currently, primarily supplying in North America.

We're continuing to invest in the development of that business and the ability to address those customers.

We don't have much of significance to report right now, but we think that that is a long term growth opportunity for the business.

We have not, in the past, broken out any guidance by domestic versus international, and I don't think we're prepared to get specific about that right now.

Maybe I could say international was about 5% of our total revenues in '07, Rich.

And, not to guide on it, but looking into '08, probably something in that neighborhood is going to make sense as well.

Thank you.

The next thing is, I'm just wondering, you haven't talked a lot about cash, for obviously reasons.

I just want to know do you think you'd still be cash flow neutral in '08?

You made note today in the call, it seemed to be that you are making some improvements in working capital, and stuff.

So I just thought you might provide some update and color, on what you might see for '08?

We were free-cash positive in '07 and have been for the two years before that as well.

I'm not sure about '08 in aggregate, but I would say in the near term our days in inventory and day in sales are probably a little bit on the light side.

So I would probably see some net use of funds for working capital in -- let's say the first half of '08.

And also, our CapEx was very low in fiscal year '07 at $3 million, a bit lower than we expected, and I think that as a result of that, in our new facility, we will see higher CapEx in '08.

Okay.

And the last thing is, is could you just talk a little bit about where you are in Switchblade?

I know the government -- not too long ago funded you on that, on R&D.

And I just wanted to know, is there anything on that coming out on the horizon soon?

Well, that program, like the others, Rich, is on a relatively fast track of development.

We are on, or ahead, of the development schedule.

The contract that we have is intended to take us through a prototype demonstration of the full system.

And right now, we are ahead of schedule on that program.

We are very pleased with the results to date.

And again, I think the customer, to the extent that they've been exposed to those results, is equally impressed.

What happens after a successful demonstration is up to the customer, and I don't have good insight into what their reaction will be in terms of order flow.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS)

Your next question is a follow up from the line of David Gremmels.

You may proceed.

Thanks.

I wanted to ask you about the backlog.

It looks like the funded backlog came down almost $20 million between the end of fiscal '07 and the end of fiscal '08.

So you would have had a book to bill for the year of below one.

Can you just help us understand the disconnect between the decline in the backlog and this very healthy projected revenue growth of 20% to 25%?

David, the funded backlog is going to be bumpy.

It's a snapshot at a point in time, and that's really the reason.

That gets to the bumpy nature of our quarters and our annual guidance.

The $61 million is down from year end, but in fact it's up from where we were in Q3 -- we were around $40 million.

So, it's going to flop around.

I don't think for the foreseeable future we are going to be like a larger defense contractor and have multiyear backlog.

In addition to the funded backlog, we do have the unfunded backlog, which is really the starting point of a lot of the orders that get converted into funding.

And that data point at the end of the year was approximately $478 million.

Looking at that growth projection that you put out there for fiscal '08, can you drill down a little bit in terms of the drivers of the growth, things like what you are assuming for Global Observer and Switchblade, at least qualitatively?

I'll start and say, just to repeat what Tim said, is we don't really guide by segment or program, but the guidance we gave is after looking at what we think is reasonable for the overall business.

But having said that, I think the drivers will be the main drivers we had in 07, the existing product lines for PosiCharge and UAS.

We think there is a lot of growth potential in those two business areas.

And layering on top of that, we've got these items in the pipeline, many of which we have identified.

Tim, if you have any color you want to add to that?

Well, other that to go back and reinforce the prior comment.

We're much more sensitive in the year ahead to revenue generated from existing products and existing customers rather than any new developments.

And I think the other thing that we keep in mind is look at the probability of timing of order flow.

We put a higher probability on those existing products and existing customers than we do on the translation of development programs into significant production programs.

Because there is always a time factor there, and there is uncertainty as well.

So we tend to factor all of that into a consolidated outlook, and that's really what we're giving to you for the yearend guidance.

Thanks, that's helpful.

And just to confirm -- I think I know the answer to this, but just to confirm that the revenue growth guidance that you've provided does not assume any acquisitions, correct?

That's correct.

Okay.

And then, just last one a clarification on what you said on Raven.

I think in the prepared remarks you said you were 31% of the way through the 1,900 requirement, which would be around 590 cumulative deliveries.

And I had in my notes that on the road show that you said at the end of October that the number was around 582.

So it seems like I got one of those numbers wrong.

Could you help me understand where I am off there?

I don't know about the 582.

The last time we reported on this, I think, was on the last quarters conference call, and we were about 29% into that.

And what really happened in the last quarter is we made more deliveries to other customers under that contract than we did to the Army.

I think you know that on that contract the Army buys for itself, and it buys for SOCOM, and now it buys for the Marines.

So in Q4, we actually made more deliveries to those other agencies than to the Army.

And deliveries to the other agencies don't count toward the 1,900 requirement?

That's Army only?

That's correct.

Okay.

That's helpful then.

We use that as a data point because it's out there published in a number of places.

And so, we can use that as an indication of demand.

We don't have a nice convenient figure for the other parts of the DOD.

Right.

Do you have the -- if you are 31% through at the end of fiscal '07, do you have the comparable number for a year ago?

No, I'm sorry, we don't.

Okay, thanks a lot.

You have another question from the line of Howard Rubel.

Thank you.

Since PosiCharge has been ignored a little bit I want to ask about it.

And Tim, I think what you said -- you did $2.9 million in revenues in the quarter, and notably absent was the auto companies from the business.

How do you think about the business going forward this year?

You sound very bullish on every other market other than auto.

Does auto come back?

Is this a run rate you might expect for awhile, or are there some other things that I'm not appreciating?

I don't think we're baking in a huge short term resurgence in auto demand, Howard.

Our sense is that our auto customers will continue to adopt and install PosiCharge as they had originally planned.

The real issue is A), the rate and timing, and B), how they come down on their long term structure, how many facilities for manufacturing and distribution they plan to end up with.

And I think all of that will affect how much they acquire at what point.

We do see some near term procurement opportunities in that industry.

But I think we're looking for primary growth coming from other verticals in the near term, in the next year.

No, you went to great pain -- it sounds like auto is not longer now the largest single customer, whereas before it was.

Howard, auto was 34% of our revenue -- Posi revenue in '07, versus a little over 60% in '06.

So I think we've made a lot of effort to become less dependent on that segment.

And you broadened the customers substantially, it sounded like, as well.

Is that fair?

And then I think you developed an additional battery recently, or an additional technology you had a press release on which will also help sales of that product.

Is that correct?

Yes, I think all of that is correct, Howard.

We have had, I think, good success in penetrating different vertical markets in adding multiple new customers, as well as expanding our business relationship with existing customers that are very large, and outside of the auto industry.

And there has been and continues to be the development and introduction of new products within that overall product line that expand the breadth of customer applications that we think we can provide a compelling solution for.

And then just to see if I can bring this home.

If we look today at the outlook for PosiCharge versus six months ago, and sort of maybe one, look at the revenue outlook for what one might have expected, it would seem that PosiCharge is probably going to account for a smaller share of the business, and that the UAS business is probably doing a little better than you might have thought?

Yes, I think we'd agree with that.

Thank you, very much.

Thank you

And at this time there are no further questions.

Thank you all very much.

We look forward to talking with you again in our next quarterly call.

Thank you for your participation in today's conference.

Ladies and gentlemen, this does conclude the presentation and you may now disconnect.

Have a wonderful day.