AeroVironment Inc (AVAV) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter fiscal 2008 AeroVironment earnings conference call.

My name is Fab, and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will conduct and question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr.

Steven Gitlin, Director of Investor Relations.

Please proceed, sir.

Thank you, Fab.

Welcome, everyone, to AV's first quarter fiscal 2008 earnings call.

Joining me today are AeroVironment's Chairman, Chief Executive Officer, and President, Tim Conver, and the company's Chief Financial Officer, 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 components 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 further 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 statements, 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, September 5, 2007.

The company undertakes no obligation to make any revision to these 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 now to turn the call over to Tim Conver.

Thank you, Steven.

Welcome to our first quarter fiscal 2008 conference call.

Before I proceed with our discussion of results, on behalf of the entire AeroVironment family, I would like to express my sorrow at the recent passing of AeroVironment's founder, Paul MacCready.

Paul was brilliant.

He often saw things in a fundamentally different way and he had the ability to catalyze his vision into first of a kind technology demonstrations that captured the imagination of people around the world.

His world view on the balance facing humanity and our stewardship of the environment included a focus on achieving desired effects through practical efficiency, which he encapsulated in his motto, doing more with much less.

The people, the work and the success of AV were a constant joy to Paul and much of what we continue to do and how we do it are derived from the founding principles, his focus on efficiency and his innovative approach.

Paul's influence will transcend his lifetime and we'll miss him deeply.

Paul is also a fan of our public company performance, which takes me to our first quarter fiscal 2008 results.

I'm pleased to report that once again our people performed well this past quarter, delivered results that were consistent with our expectations.

On a year-over-year basis, we continue to grow our business as measured by meaningful metrics, revenue, profit, customers, geography, great employees, and the installed base of our solutions.

We continue to meet our commitments to customers, delivering highly reliable systems and services on time that perform to our promises, and our customers continue to reward us with the leading share in each of our markets.

Our markets are growing, as customers are continuing to adopt our small unmanned aircraft systems and PosiCharge solutions, and as they continue to attract new customers to our solutions.

We also advanced the development of innovative new system solutions in our pipeline that we believe will offer compelling value propositions to large market opportunities in the future.

After generating over $50 million in revenue during the fourth quarter of fiscal 2007, our first quarter of fiscal 2008 resulted in close to $50 million in revenue, but with a different mix of business.

Compared to Q1 in fiscal 2007, our quarterly revenue grew by 56%, gross profit increased by 40%, and operating income rose by 139%.

Net income rose by 182% over the same period last year.

All three segments of our business were up over last year's first quarter.

UAS experienced the most significant gain, with strong growth in product sales and even more dramatic growth in services.

PosiCharge revenue increased 8% as a result of an uptick in orders from both existing and new customers.

Our energy technology center also enjoyed an increase in revenue, generating 21% rise compared to a year ago, primarily on increased power processing product sales.

Overall, operating income this quarter increased to $4.8 million, from $2 million last year, a 10% margin compared to 6% last year.

We also continue to make good progress in important development programs and we're pleased with the status of the technical performance and the customer interest in these new system ideas.

With that summary of our overall performance, I would like to review each segment's performance in more detail, starting with our UAS segment, which represented 85% of our fiscal quarter revenue.

As I mentioned earlier, UAS experienced healthy revenue increases in both products and services.

Our customers can't say enough about how valuable these systems are to them.

Raven is a real success story.

The army, the U.S.

Special Operations Command, and the U.S.

Marine Core continue to enjoy the positive performance and high operational availability of their Raven systems and as usual, we met all of our delivery commitments this quarter.

Raven has clearly become the small UAS of choice for the U.S.

department of defense.

Raven B now represents an improvement in capability over Raven A.

Specifically relating to image quality, the ground control unit and airplane flight duration.

We continue to explore future capability enhancements for our small unmanned aircraft systems and we expect that upgrades will play a continuing role in ensuring that our customers can easily acquire increasingly capable systems.

We also developed the initial WASP III system as part of the air force's BATMAV program.

BATMAV is the first military program of record for micro UAVs.

Our WASP airplane carries a smaller payload and has a shorter flight duration than our Raven system, but they are much smaller and they are 25% of Raven in weight, making them easier to carry in a ruck sack.

I believe that the improved portability of WASP, its lower price point, and the ability to use our common ground control system will encourage our customers to consider deploying more of these systems to a lower level within the floor structure in the future.

Looking beyond Q1, we see more progress.

Our backlog remains at the same level as Q4 of our fiscal 2007 year, despite the higher level of activity in the quarter, and our current customer precontract activity on current products is consistent with our planning and our expectations for the year.

Further out, our announced UAS development programs Digital Data Link, Switchblade and Global Observer all continue to produce good results from both internally and customer-funded development and demonstration projects.

We have successfully tested the entire propulsion system we developed for Global Observer, achieving breakthrough performance levels and demonstrating full mission cycle reliability.

We have successfully demonstrated Digital Data Link in our small UAS, moving streaming video and voice through our aircraft to and from our ground controller.

We have flown the specialized airplane designed for Switchblade and we've successfully tested the new target tracking and guidance capability with impressive results.

The progress on these programs and the strong customer interest are very encouraging, but as always, they provide no guarantees regarding timing or financial outcome.

The nearest term opportunity to launch a full scale development of the Global Observer system is the Global Observer JCTD, or joint capability technology demonstration that was approved earlier this year by the office of Secretary of Defense and congress.

We continue to support our customer's JCTD process and I expect a decision within the next two quarters.

We also expect to achieve meaningful mile stones on the Switchblade program within that same timeframe.

I look forward to giving you future updates on both of these programs.

Now, if I can move on to our PosiCharge System segment, PosiCharge revenue represented 11% of the total company Q1 fiscal 2008 revenue, and it increased by 8% compared to the same period last year.

We continue to expand and diversify our customer base, adding more new customers in the quarter.

The PosiCharge value position continues to convert customers from conventional charging to fast charging, by increasing their productivity, efficiency, and safety in their material handling operations.

Sales in the most recent quarter benefited from this more diversified customer mix we have established, as well as from the continued adoption by customers in our initial vertical markets of autos and airlines.

PosiCharge revenue was almost double that of last quarter, when we had seen a notable decline.

Our third segment, our energy technology center, or ETC, is focused on research, development and commercialization of innovative solutions based on efficient electric energy technology.

Revenue from the ETC's contract development and sale of small volume products increased 21% for the fiscal quarter compared to the same period last year.

ETC also made great progress on internally funded development and commercialization projects during the quarter.

We achieved what may be the longest flight yet for a fuel cell-powered airplane, by integrating a protonics fuel cell with our battery system into our Puma small unmanned aircraft system.

After an initially reported flight of nearly five hours, the team modified the energy system and came back to fly the aircraft again just recently for over seven hours, completing task one of our Air Force IDIQ program.

In the fourth quarter fiscal 2007 conference call, I spoke about our advanced battery charger that we're now shipping with our small unmanned aircraft systems.

During the first quarter of fiscal 2008, we applied that same core technology and the same capabilities to win a contract to support the Air Force's brights program.

Brights stands for battery renewable integrated tactical energy system.

The purpose of this program is to reduce the weight and the complexity of the energy systems carried by our war fighters without reducing their power capability.

This program plays right into our sweet spot, combining effective, efficient electric energy technology with light weight, reliable, portable systems.

With that as an overview of the quarter, Steve Wright, our Chief Financial Officer, will provide you with further details of our first quarter fiscal '08 financial results.

Thanks, Tim.

Good afternoon.

Revenue for the first quarter was $49.2 million, an increase of 56% over Q1 of the prior year, breaking this down by segment, UAS revenue was $41.9 million, an increase of 68% over the prior year and this increase resulted from higher UAS product deliveries, higher service sales, and higher customer-funded R&D work.

PosiCharge revenue was $5.3 million, a growth of 8% from Q1 of the prior year and energy technology center revenue was $2 million, a growth of 21% from Q1 in the prior year due to higher revenue from power processing test equipment.

Turning next to gross margin, gross margin in Q1 was $16.8 million versus $12 million in Q1 in the prior year.

Gross margin as a percent of revenue was 34% versus 38% in Q1 last year.

Within the segments, UAS gross margin, $14.1 million, up 52% from Q1 of last year, and as a percent of revenue, UAS gross margin was 34% compared to 37% in Q1 of the last year, primarily driven by lower fixed price relative to cost reimbursable contract mix compared to the same period in the prior year.

PosiCharge gross margin was $1.9 million, unchanged from Q1 of last year, and as a percentage of revenue, PosiCharge gross margin decreased from 39% to 36%, primarily due to increased manufacturing and engineering infrastructure costs, and energy technology center gross margin was $0.8 million, up 3% from Q1 of the prior year due to higher sales volume.

And lastly, as a percentage of revenue, energy technology center gross margin declined from 48% to 41%, largely due to higher sustaining engineering costs for the power processing test equipment line.

SG&A expense for the quarter was $7.7 million, which compared to SG&A expense of $6.1 million for Q1 in the prior year due to higher marketing and bid and proposal expense.

R&D expense for the quarter was $4.3 million versus the Q1 prior year amount of $3.8 million, and customer funded R&D work for the quarter was $4.2 million versus Q1 in the prior year of $1.9 million.

Total R&D, that is customer-funded and internal R&D, was $8.5 million, or 17% of sales in the quarter compared to the prior year amount of $5.8 million, or 18% of sales.

Income from operations for the quarter was $4.8 million versus $2 million in the prior year, and this improvement was due to the higher gross margin, partially offset by increased SG&A and R&D expense.

The effective tax rate for the quarter was 33.6% versus 38.5% in the prior year, and this decrease was largely due to tax exempt interest income received in the current quarter.

And net income for the quarter, $3.8 million, $0.18 per fully diluted share versus $1.4 million, or $0.09 per fully diluted share in the prior year period.

Backlog, funded backlog at the end of the first quarter, $61.7 million versus $60.9 million as of our fiscal year end April 2007.

Turning to the balance sheet, first, cash, cash equivalents, and short-term investments at the end of the first quarter were $101.4 million versus $109.6 million as of our fiscal year end April 2007, and this decrease was largely reflected working capital needs.

At the end of the quarter, our accounts receivable, including unbilled receivables were at $38.5 million, up $4.3 million from the prior fiscal year end, and total day sales outstanding were approximately 71 days compared to 61 days as of fiscal year end 2007.

Moving on to inventory, inventories were $16.4 million at the end of the first quarter compared to $14 million at the end of last fiscal year, and days in inventory were approximately 46 days compared to 40 days as of last fiscal year end.

Capital expenditures for the first three months of fiscal 2008 were approximately $2.2 million versus $0.7 million for the same period a year ago.

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

Thanks, Steve.

Q1 was a success for us in most every respect.

Our customers continue to adopt our solutions throughout their organizations, and they continue to enjoy increased productivity, safety and efficiency as a result.

New customers also continue to adopt both small unmanned aircraft systems and PosiCharge.

Our product and service capacity and capability continue to be tested at higher levels of output and are proving up to the task.

We continue to develop improvements for our core programs and our products that we believe may yield future revenue streams, and our new development programs are progressing in ways that are validating the technology performance and the market assumptions that we believe can create compelling solutions that our customers will demand for their future needs.

We're focused on ensuring the growth of the business through all of these areas.

Accordingly, we reiterate our guidance that we provided during our Q4 fiscal 2007 call, which is our target of fiscal year 2008 revenue growth of 20% to 25% with a 12% to 14% operating income margin.

Thank you, all, for your continued interest in and support of our organization.

We look forward to reporting our progress to you on our second quarter fiscal 2008, and Steve and I would now be pleased to answer any questions you might have.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Brian Gesuale from Raymond James.

Please proceed.

Hey, guys, nice job on the quarter.

Thanks, Brian.

Appreciate you taking my question here, and Tim, I thought that dialogue on some of the new product developments was very helpful.

Wondering if you could elaborate on the guidance a little bit.

In terms of the top line, the 20% to 25% number, maybe remind us how much new product contributions contribute there and then on the margin front, the 12% to 14% operating margin level, can you maybe explain some of the differences in the mix of business as we move from this lower margin first half of the year to the higher margin second half of the year?

Thanks, Brian.

I guess your first question is the revenue growth projection, and the components of that.

Most of our revenue for this fiscal year, we expect to come from existing customers and existing products, and probably the next category would be existing products and new customers, and then finally new products, either from existing or new customers.

And there's a clear change in percentage as we kind of walk down that line.

As to the margin, I can -- Steve, do you want to talk about that a little bit?

Yes, let me jump in there.

We had a 10% operating income margin in the quarter.

We're guiding 12% to 14%.

In terms of the mix of business, Q1, we saw a lot more service business, a lot more project R&D and that's probably what we think is going to obtain for the balance of the year how we get to the 12% to 14% is really -- if we achieve the guidance at the top line, we think we'll get some margin improvement due to efficiencies.

Okay, terrific.

And I might have missed it, but did you have the fixed price contract contribution as well as the customer-funded R&D number in the quarter, Steve?

Roughly 40% cost plus, cost reimbursable contracts in Q1.

Okay, terrific.

And did you have a customer-funded R&D number by chance handy?

Yes, $4.2 million in Q1.

Okay, great.

Which, by the way, is a decline from the project R&D amount in Q4, and is probably one of the bigger contributor to the sequential, the slight reduction in top line sales from the fourth quarter.

Okay, great.

And then following up in the other segment on PosiCharge, seems like that business really sprung back a lot quicker than I would have thought, both in terms of revenue and then obviously the economies of scale were pretty substantial in terms of profitability here.

How sustainable is that?

How smooth is that, and maybe give us a little bit of a future outlook there, Tim.

Well, I think the main point from my perspective, Brian, is it's -- it looks to me right now like Q4 of last year was the blip, so we, we -- it's -- I think we're back on the same kind of trail that we had previously been on and we just hit a bump there.

I would say, though it, is a smaller business.

Our overall business is bumpy it is smaller and it's -- there's probably as much or more variability just because of size of PosiCharge as in the overall business.

And then in terms of the margins, what we were saying was the margins in Q4 of last year were quite a bit lower, just because of the lower sales volume, not enough sales to absorb all the, the infrastructure and that we would get improvement with the higher sales.

That's what happened in Q1 and we think we -- if the sales continue to grow, we can see more improvement in margin as a result of absorption of those fixed costs.

Okay, well.

Great.

I'll jump back into the queue.

Congratulations, again.

Thanks.

Your next question comes from the line of Troy Lahr from Stifel Nicolaus.

Please proceed.

Thanks.

Can you guys talk a little bit about seasonality?

I was looking back over the past two years and it looks like first quarter revenue averaged about 20% of the full year.

And if you did that same 20% this year, you would probably be looking at about 40% growth.

As you have more service and more R&D, is that seasonality kind of been reduced?

I, I'll just -- I'll start.

I don't know that we've ever -- we suspect there may be some seasonality in parts of the business, but I don't think we could -- I think that's probably overtaken by events and individual contract action.

So I don't think we look at our quarter to quarter fluctuations and see seasonality as a big component of that.

We see the same thing you do, Troy, but I don't think we draw any conclusions on that yet.

Okay, and I guess I'm just trying to get a better handle on your revenue outlook.

It's kind of a wide range there, as well as the margins.

Is there a way you guys can tighten that up or kind of give us a bias one way or the other?

I mean 12% to 14% operating margins is pretty wide.

Was this quarter lower than expected, and you expect a recovery, or are you now kind of looking at the bottom end of that range?

I think we wouldn't want to taylor expectations towards one end of the range or the other at this point in the year.

I think we still feel the same way about our guidance as we did earlier.

Okay.

I mean as you go through the year, do you think you'll tighten that up a little bit?

TBD.

I don't know if you feel differently about that, Tim.

I guess we'll know more as we get in, Troy.

Right, I don't think we're currently anticipating a change one way or the other.

I, I do suspect that as we get farther into the year, we certainly know more.

We've got more behind us than ahead of us, and it's possible.

Okay, and Tim, I think you mentioned that you would expect a decision on Global Observer in probably two quarters.

Could that be a no-go decision, or what -- I guess what are the two outcomes there?

I kind of thought that the program was -- looked like it was going to be funded by congress and it was just a matter of time.

But could there be a no-go here, or something like that?

I think any time we're in a, we're in a, in a contracting process, we've always got the option that it goes, it doesn't go, or there's some -- it lands someplace in between.

We're optimistic.

We have been consistently.

We're completely committed to moving this capability into production and, you know, I can't really predict where or -- and obviously when we're going to get to a conclusion on the process that we're currently supporting with our customer.

We do have constraints from our customer on how much we can talk about when, and we're kind of trying to give you the response that you're looking for and still be consistent with our commitments to our customer.

Okay, but I guess just to clarify, then, over the next two quarters, you would expect, I guess action on that presolicitation notice, or what exactly could we see coming out of the customer?

What could we expect?

Well, yes, I think we'll see a result on the contracting process that began with the approval of the JCTD, with -- and the sponsorship of quite a large number of customers, and then moved into that precontract solicitation that you saw in fed bus-ops and I think there's a 45-day waiting period after that and then an RFP process and the implementation directive that needs to get signed by half a dozen different customers, each of which have to staff it, you know.

I could go on for a long time.

Okay, and then just lastly, do you have an IDIQ number?

I guess it was like 478 in the fourth quarter.

Yes, unfunded backlog, 454.

$454 million.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Patrick McCarthy from FBR.

Hi, good afternoon, and thanks for taking my call as well.

Hi, Patrick.

Traditionally you guys have given out some statistics on Raven deliveries relative to the DOD requirement.

I was wondering if you had those handy.

Yes, the, the -- what we've talked about is the army acquisition objective of 1900 systems, if you recall, and through our Q1, we were 32% delivered against that.

Okay.

And if you go back to what we've said in previous calls, I think it was only 30% or 31% as of the last quarter, because in fact most of our deliveries this last quarter were made to other agencies.

Okay.

And can you give a general sense as to, into what the production deliveries were this quarter in total?

In total, we're continuing to run about 200 arrow vehicles a month.

Okay, thank you.

Just on the working capital side, looks like DSOs took a pretty decent pop-up.

Is there any one thing in particular that caused that to occur, or is there a little bit of seasonality there?

First, what I've been saying is there have been DSOs in the 70-day range, so we've enjoyed lower DSOs for sometime and we finally popped up to what I've been talking about.

But there were, there were some late payments on the part of one government contract that have since come in, but they came in right after quarter end, which probably contributed more than anything to the uptick in DSOs.

Okay, but you think it's now time to start modeling something close to 70 days as compared--

I've sort of -- I've always thought of 70 days and there's probably improved -- upside, you know, upside in the improvement sense to that number, but 70 days is a good safe way of modeling it.

Okay, and then just more kind of a strategic question, just based upon Tim's comments at the beginning of the call, I mean clearly your customer base continues to grow and I'm just trying to get a sense as to what type of structure you guys have internally to ensure that you've established the right relationships with your customers that you're on top of what their changing requirements are and those type of things.

Is there anything different that you're doing now than this time a year ago?

Well, we, we have continued to grow and expand our, the business development portion of our UAS business actually across the board in all three of our segments, but -- and we're -- our structure there, Troy -- or Patrick, is focused on really three different levels.

We have, we have a constant relationship with the, our user community through our training process, through our program managers, and our project managers.

John Grabowski is constantly talking with the senior leadership of our UAS program management.

I talk with our customers on a regular basis and then we have a growing group of people focused primarily on business development that kind of split their time between staying in tune with our existing customers and what they need, and talking with potential new customers, both here and abroad.

I don't know if that was where you were--

Yes, that's helpful.

I think it's something I need to think about a little bit more as well.

But that's very helpful.

Thank you.

I guess my last question, just with the cash on the balance sheet, I realize it's from the IPO, but any thoughts as to what you're going to do there?

I'll start, and I think our thoughts are the same as they were earlier this year, when we went public.

You know, some modest usage for working capital, which we saw a bit of in Q1 and beyond that, cash to help grow the business.

Most of our growth has been and probably will be in the future, organic growth.

A large start with Global Observer, Switchblade, or any of the other items could carry with it, you know, considerable requirement for CapEx and other than that, I would probably turn it over to you, Tim.

Yes, I think each of our current businesses started with an innovative new solution that, that really started an entire new market niche that's now grown into large market opportunities for us.

Each of the developments that we have in our pipeline has a similar potential and what we have found to be the most difficult thing to predict in that kind of a new technology launch is the rate of adoption.

So we think the market opportunities in both small UAS and PosiCharge are very large and that adoption rate could increase at any time.

We also think that we could get one of these or more of these developments out of the development channel and into the market and that they have the potential for large growth, but since we can't predict when, I think the advantage of having significant amount of cash available, having flexible financing options, puts us in the optimal position to take advantage of those growth opportunities when they arise, rather than worrying about how we would finance them after we see them.

Okay, great.

Thank you very much.

Thank you.

And your next question comes from the line of Howard Rubel from Jefferies.

Thank you very much.

Gentlemen, just a couple of questions.

I think, Tim, you talked about having some additional international customers for some of the UAS products.

Can you give us a little color there?

Well, we're having, I think, good success in that area, Howard.

We've said for sometime that we think there's a large opportunity there and we're going after it, and we're -- we have been working with a number of customers.

We have recently received one of those contracts.

We haven't been able to announce it yet because we're just getting customer approval, but I expect that to be forthcoming and we'll be able to talk about that.

In general, there's, there's a, I think a broad adoption of this small unmanned aircraft system capability across the military of most of our allies, and we are working with most of them in -- as they look at how they are going to fill that.

Was that in your backlog, this contract, or is that subsequent to the close of the quarter?

Steve?

I don't, I don't believe it's in our backlog.

No, not in our backlog.

Now I have to figure out whether it's bigger than a bread basket, right?

It's about the size of a very small bread basket.

All right.

-- very well said.

Second thing is, also on PosiCharge, could you elaborate a little bit?

You indicated some additional customers.

Again, can you be specific with respect to markets and you talked a little bit about this quarter not being, or that the fourth quarter was the aberration, and I think you've hired a new manager to help with sales and distribution.

Could you talk about his Marching orders a little bit there.

Let me talk about PosiCharge business sequentially first and then let Tim take it from there.

$5.4 million of revenue in Q1 versus $2.7 million in Q4, in Q1, the automotive segment was about a third of our revenue at $1.8 million versus $1.7 million of revenue in Q4, so the growth sequentially from Q4 to Q1 is essentially all in non-auto and airline ground support segments.

Okay.

And in terms of new customers, Tim, I don't know if--

Yes, I think we, we've made a habit of trying not to identify specific customers, but I think the -- there was one of those customers -- one new customer in the auto industry and all of the rest were outside of the auto industry, including both food and large retail distribution opportunities and third party logistics providers.

So those are kind of the, maybe the three verticals outside of airlines and auto that we're currently focused on, Howard.

No, I appreciate you not identifying customers.

No, I had meant verticals, and that's very helpful.

And then you have a new manager, I think, for distribution, or--

Yes, John Kim's now joined us and is in charge of all of our sales organizations.

He's done the, his obligatory reorganization already and is just hit the ground running.

We're really excited about, about what he's brought to the organization and I think the sales team and PosiCharge is continuing to grow.

I think they are all on board with John's approach and we just think it's the next step in stepping up our business development.

We're focused, as I think we've talked about before, at the national level of large accounts, where we're communicating at the corporate level and we also have a sales organization that's focused on a regional basis, communicating directly with facilities.

In some cases, that's -- those regional business relationships are focused on companies that literally are regional and in some cases, those are the local facilities of national or global corporations.

So in that case, we're approaching those larger customers from the top down and from the facility up, just because decisions get made on this kind of a material handling product at different levels.

And then finally -- thank you.

And then finally, the, the customer-funded R&D is up sequentially -- or year-over-year, I believe, and if -- is this directed at -- is this going -- I mean have you been able to win some additional contracts, or is this just the existing programs that continue to just play out?

I think we're winning -- these are all -- generally these are small project R&D contracts and they are always churning, Howard.

So project R&D in Q1 was -- project R&D sales in Q1 were $4.3 million and they were $3.8 million for the same period a year ago.

So I don't think there's any one thing we would point to.

It's just sort of continuously churning.

Maybe with the exception of this new Air Force program, what was it, Bright, that you called it, with the batteries?

Yes, that's -- I -- that particular program isn't going to be an enormous contributor in here.

It's at least not in Q1.

I, I mentioned it, Howard, because I think that's -- it's a very important milestone as we push forward with these new small, more efficient advance technology battery, energy management systems for DOD.

We think there's a real opportunity there to take a load off the war fighter literally, and also generate some attractive business opportunities.

So that's up -- that's a key program from a technology perspective and from a visibility perspective.

And I just want to correct the metrics that I just threw out to you, Howard.

they were incorrect.

I was giving you our internal R&D numbers.

The project R&Ds, $4.2 million in Q1.

$1.9 million in Q1 of the prior year.

Yes, so it was substantially.

It was, but if you look at -- it does hop around.

For instance in Q2 of last year, it was over $5 million, so there is a certain amount of variability in here quarter by quarter.

Thank you very much for your help.

Thanks, Howard.

Your next question is a follow-up from the line of Troy Lahr from Stifel Nicolaus.

Thanks.

I just wanted to get some clarification here.

I think first quarter you said cost plus work was about 40% and I guess service was also about 40% of sales.

But margins might improve throughout the year as it shifts away from cost plus and service work, but I thought you were expecting full year cost plus work to stay at about that 40%.

So what changes there?

Well, what changes is how, how we do on individual contracts as we go through the year and also if we have -- if we achieve higher sales volume, we will achieve some efficiencies, just because we have a larger base to absorb some of our sustaining and engineering costs.

So when we look at the gross margin at 34% in Q1 and we look at the operating income in Q1 at 10%, to grow to the 12% to 14% guidance, we would expect to see some improvement in the gross margin line as the sales grow consistent with the guidance and also we probably pick up a little bit of improvement in the expense side, SG&A, in particular.

Okay, but it seems more like it's leverage and efficiencies not really a mix shift away from cost plus work or service work, right?

Yes, I'm -- I think what I try to say is we are 60/40 in Q1.

I don't have a specific prediction for the balance of the year, but I, I suspect that we will not see a significant change from that Q1 mix as we go through the year.

So 60/40 for the full year is probably not a bad prediction of the full year.

Okay, and then the way you guys break out your revenues, product versus services, it was also about 60/40 from products versus services.

That should also be about the same?

Full year?

Most likely, yes.

60% products, 31% services, 9% project R&D in Q1.

And it's going to move around a little bit, but that's probably a good, a good estimate for the full year as well.

Okay, and one last question on Digital Data Link.

Is there kind of a target on when you think that could be kind of a meaningful contributor to revenues?

Is it next year or, you know, should we be looking for something -- I guess, I don't know.

Is it four quarters out, eight quarters out?

Troy, I think that it's probably at least a year out before that becomes a significant revenue contributor.

The, the technology development and demonstration is going very well, but there's, there's a lot yet to do and there's a lot of programmatic elements that have to fall in place to bring that online in a very substantive revenue level.

So I think it's at least one year and it may take a little longer than that, but it's, it's a very big, it's a very big piece of our long-term future.

Okay.

Thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS) And there are no further questions at this time.

I would now like to turn the call back over to management for closing remarks.

Well, thank you, all.

I appreciate your continuing interest.

We continue to be excited about not only our business future, but we're actually enjoying our public life here and we hope we're getting closer to addressing the questions the way that you want to have us look at them.

So we'll continue to appreciate those questions and respond and try to hone our message as we go forward.

Thanks.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.