AeroVironment Inc (AVAV) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter fiscal 2008 AeroVironment, Inc.

earnings conference call.

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

We will be facilitating a question and answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS)

I would now like to turn your call over to Mr.

Steve Gitlin, Director of Investor Relations.

Please precede, sir.

Thank you, J.D.

Welcome to AV's second 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, December 4, 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 second quarter fiscal 2008 conference call.

I believe our second quarter FY08 performance can be summarized by solid financial results, continuing support from our customers, the effective execution of our plans by our team, and the achievement of key milestones in our development programs that are positioning us well for future growth.

Four highlights of the quarter stand out.

The continued development of Raven's small UAS or unmanned aircraft systems, both within our U.S.

customer base and internationally and the continued growth of our training and support services corresponding to the growing number of systems in use.

Also, the broadening of our UAS production portfolio with initial deliveries of Wasp to the U.S.

Air Force and the Marine Corps adoption of Wasp III announced after the end of the quarter.

We took a major step forward when we achieved a contract to develop and demonstrate our Global Observer system, which I'll discuss in more detail shortly.

And our Energy Technology Center continued to demonstrate innovative new applications for practical efficient electric energy technology solutions for the future.

From a financial perspective, Q2 revenue of $53.7 million and net income of $5.2 million increased over the same period last year by 19% and 6% respectively.

Comparing the first half of FY '08 to the same period in FY '07 our revenue and net income increased by 34% and 44% respectively.

These results reflect the performance of our underlying UAS business, which is executing to plan.

Existing Raven customers continue to provide positive feedback and they continue their acquisition of new Raven systems.

New customers also continue to adopt.

In the second quarter the U.S.

Air Force placed its second contract for Raven under their FPASS system program.

That's the Force Protection Airborne Surveillance System.

Raven has replaced the competing small UAS to support this program to provide airborne perimeter security and force protection for Air Force installations around the world.

We're also continuing to see international demand for our small UAS with the Danish army placing initial orders for Raven systems in Q2.

Wasp is our smallest production UAS and the latest to win competitive procurement in support of a U.S.

DOD Program of Record.

The U.S.

Air Force BATMAV program is proceeding well.

After the quarter ended, the Air Force successfully completed their initial operational test and evaluation and authorized full rate production for Block III Wasp systems.

Also after the quarter, the U.S.

Marine Corps placed a significant new Wasp order.

The Marines sized their $19.3 million procurement to deploy Wasp to the platoon level.

We previously talked about small UAS, an asset that are used by squads or platoons, but usually issued to higher levels, often brigades.

This decision by the Marines to deploy Wasp to the platoon level is significant.

I believe it validates the value of broader accessibility of these life saving tools in the current and the foreseeable threat environment that our military faces.

Overall, the increased installed base of our systems is itself generating significant revenue now.

We spent a great deal of time and energy to ensure outstanding logistics service and support alongside our initial delivery of unmanned aircraft systems.

We had the ultimate objective of ensuring continued customer success.

Even though these services offer lower margins, our view is that they will continue to be a valuable and a growing contributor to our revenue.

Looking at our development programs, the receipt of a contract award for the joint capabilities technology demonstration, or JCTD, of our Global Observer system was a significant event for AV during the second quarter.

The objective of this three-year, $57 million base contract is to demonstrate the military utility of an operational Global Observer unmanned aircraft system.

Options for two additional aircraft could increase the contract value to $108 million.

This contract is a significant development project in terms of revenue, resources, as well as technology.

More importantly, however, I believe the greater significance of this contract is that it validates the demand for the Global Observer system and the affordable persistence in the stratosphere we believe this system will provide.

Global Observer's capability is unlike any existing aircraft or unmanned aircraft system.

It's designed to provide a relatively stationary payload platform in the stratosphere for long periods of time at a lower cost than existing alternatives such as conventional aircraft, unmanned aircraft systems, or satellites.

Global Observer is designed to be capable of flights for up to seven days in the stratosphere.

With a system of two aircraft, one replacing the other about once a week, you can begin to think about Global Observer as a geostationary satellite in the stratosphere with a 600-mile diameter area of coverage on the earth's surface.

The number of government customers funding this JCTD is significant.

Each one of these customers has important mission requirements that can be accomplished by the Global Observer system.

Potential applications for JCTD customers and others include intelligence, surveillance and recognizance, communications relay, border security, disaster response, meteorological research, and broadband telecommunications infrastructure.

We're also designing Global Observer to the maximum extent possible with a Plug and Play payload capability.

This would permit each customer's Global Observer system to carry a payload that specifically addresses their mission requirements.

Global Observer and its affordable persistence offer an entirely new and compelling value proposition.

We believe that the long-term potential of this capability is large and that we have a solid business model and a strong technology position in this market space.

Other UAS product and infrastructure development efforts such as Switchblade and Digital Data Link continue to progress well with successful customer demonstrations of increasing capabilities during the quarter.

We expect current development and demonstration projects will continue into next year.

And we continue to be optimistic about their potential for future adoption and production.

Moving now from our UAS segment, PosiCharge provides fast charged system solution for electric material handling vehicles.

PosiCharge continues to add new customers, maintain growing relationships with large existing customers, and pursue new opportunities in both new vertical markets and geographies.

We believe we continue to have the leading market share in this competitive market space and that the market has the potential to grow dramatically as adoption extends to a majority of the target market.

Our third reporting segment, Energy Technology Center, continued to demonstrate the potential of efficient electric technology solutions that are both innovative and practical.

During the second quarter the ETC modified our Puma UAS to fly for over seven hours, a new record.

Using a fuel cell battery hybrid system, integrated under our Air Force research laboratory contract.

The ETC also applied our fast charge technology to a two-month demonstration of an on-road electric delivery vehicle in Oslo, Norway.

By rapidly charging the vehicle's batteries in less than 10 minutes multiple times a day, our on-road PosiCharge technology enabled the vehicle to travel up to 300 kilometers per day with no significant downtime for battery charging or battery swapping.

Additionally, ETC helped enable the lead gold certification of a new customer's production facility in Wisconsin by the implementation of an architectural wind system on the factory's roof.

I think we've made good progress against our business objectives during the quarter.

With that overview, Steve Wright, our Chief Financial Officer, will review our second quarter financial results.

Steve?

Thanks, Tim.

Good afternoon everyone.

I'll now review our second quarter and year-to-date results.

Revenue for the second quarter was $53.7 million, an increase of 19% over second quarter of the prior year of $45.2 million.

Looking at revenue by segment, UAS revenue was $46.6 million, an increase of 23% over the prior year period.

The growth in UAS revenue was across the board in products, services, and customer funded R&D with the most growth coming from services.

PosiCharge revenue was $5.2 million, an increase of 16% over Q2 last year due primarily to growth in auto segment sales.

Energy Technology Center revenue was $1.9 million, a decrease of 34% from Q2 of last year due to lower revenue from our power processing test equipment line.

Turning to gross margin, gross margin in the second quarter was $18.9 million compared to $17.8 million in Q2 of last year.

Gross margin as a percentage of revenue was 35% compared to 39% in Q2 of last year.

By segment, UAS gross margin was $16.9 million up 16% from Q2 of last year.

And as a percent of revenue UAS gross margin was 36% compared to 38% last year.

This decrease in gross margin for UAS was primarily due to higher program costs and lower effective fee rates on contracts.

PosiCharge gross margin was $1.4 million down 23% from Q2 of last year.

And as a percentage of revenue, PosiCharge gross margin was 27% compared to 40% in Q2 of last year.

This reduction in gross margin was primarily due to higher manufacturing and engineering support costs.

Energy Technology Center gross margin was $0.6 million, a decrease from Q2 of last year of $1.4 million due to lower sales of power processing test equipment and higher engineering sustaining.

SG&A expense for the quarter was $8.6 million or 16% of revenue compared to $6.7 million or 15% of revenue in the prior year.

The growth in SG&A expense of $1.9 million was caused primarily by higher selling and marketing infrastructure associated with business growth plus some added expense for being a public company.

R&D expense for the quarter was $3.8 million or 7% of revenue compared to $3.2 million, also 7% of revenue in the prior year.

Customer funded R&D during the quarter was $5.8 million or 11% of revenue compared to $5.1 million or 11% of revenue in the prior year.

And total R&D, internal and customer funded, was $9.6 million or 18% of revenue compared to $8.3 million last year or 18% of revenue.

Operating income for the quarter was $6.6 million, a decrease of 17% from the prior year Q2.

This decline in operating income was due to the higher SG&A and higher R&D, partially offset by increased gross margin.

Net income for the quarter was $5.2 million or $0.24 per fully diluted share compared to $4.9 million or $0.31 per fully diluted share in the same quarter last year.

Now moving quickly through our year-to-date results, revenue for the first six months was $102.9 million up 34% from the prior year period of $76.7 million.

By segment, UAS revenue was $88.5 million, up 41% from the prior year period.

PosiCharge was $10.6 million, up 12% from the prior year period.

And Energy Technology Center revenue was $3.8 million, down 13% from the prior year period.

Gross margin for the first six months was $35.8 million compared to $29.8 million for the same period a year ago, gross margin as a percentage of sales 35%, a decrease of four points from the prior year period.

By segment, UAS gross margin was $31 million up 30% from the prior year.

PosiCharge gross margin was $3.3 million a decline of 11% from the prior year.

And Energy Technology Center gross margin was $1.4 million, down 36% from the prior year.

SG&A for the first six months was $16.3 million or 16% of revenue compared to the prior year of $12.9 million or 17% of revenue.

And R&D expense for the first six months, $8.1 million or 8% of revenue versus $7 million or 9% of revenue in the prior year.

Operating income for the first half was $11.4 million, an increase of 15% from the prior year amount of $9.9 million.

Effective tax rate for the first six months was 33.2% down from the prior year amount of 38.7%.

And this decrease was largely due to tax benefits from tax-exempt interest.

Net income for the first six months was $9 million or $0.42 per fully diluted share compared to $6.3 million or $0.40 per fully diluted share.

Looking at backlog, funded backlog at the end of the second quarter was $66.3 million, up $4.6 million from the first quarter amount of $61.7 million and up $5.4 million from the end of our last fiscal year.

Turning to the balance sheet, cash equivalents and short-term investments at the end of the second quarter totaled $107.1 million, up $5.7 million from our prior quarter ended July.

Positive cash flow during Q2 was largely due to reduced inventories, tax benefits from stock option exercises, and income.

At the end of Q2 our accounts receivable including unbilled were at $38.9 million, up $0.2 million from the prior quarter ended July.

Total day sales outstanding were approximately 65 days versus 71 days as of the end of Q1.

Taking a look at our inventory, inventories were $12.7 million at the end of the second quarter compared to $16.7 million at the end of the first quarter.

Days in inventory were approximately 33 days versus 46 days at the end of the first quarter.

Turning to capital expenditures, in the second quarter we invested approximately $2.9 million or 5% of revenue in property improvements in capital equipment.

Now I'd like to turn things back to Tim to discuss expectations for the remainder of the year.

Thanks, Steve.

I think the first half of FY '08 has got us off to a good start.

We still expect to finish the year with the 20% to 25% revenue growth and 12% to 14% operating margin that we projected at the beginning of the year.

The last few quarters have looked smoother than during our prior history.

But I don't think that reflects any fundamental change in the business.

We still expect to see bumpy quarters in our future.

We continue to be excited about the growth opportunities for AV and we remain confident of our positioning.

Our growth plans as a technology innovator remain the same.

To continue to grow in the markets where we already hold substantial market share by staying number one with those customers and by developing compelling new value propositions for new customers and other large markets.

And now Steve and I'd be pleased to answer any questions.

(OPERATOR INSTRUCTIONS)

Your first question will be from the line of Richard Safran of Goldman Sachs.

Hi, good afternoon.

Hi, Rich.

Hi, Rich.

First on BATMAV and Wasp, I just wanted to know if you could just give us some guidance here on how you think that program is going to ramp up and how we should think about that?

I think, let me just start, that BATMAV program that we just announced within the last month is going to be a lot like our other programs in that it's going to be roughly a six to nine-month type program.

And Rich, what you may recall the original competition and contract award was through the Air Force for the BATMAV program.

The latest contract from the Marine Corps actually comes through that Air Force contract.

So it's a Marine requirement and funding but they're flowing through the Air Force contract.

And I think we'd mentioned initially that that contract had made provision for others to use it.

So it appears to be not only a vehicle now for the Air Force clearly also for the Marine Corps.

And I think it's possible that others that might choose to adopt this system could use the same contract vehicle.

Okay.

Just switching for a second.

On your R&D, year-over-year I realize it was flat.

Sequentially, it looks like it was down.

What I was expecting kind of a ramp up in R&D.

Is there something happening where government is taking over more of your R&D?

And should we think about maybe -- is that going to be a general trend through the rest of the year?

Are you going to have spend lower as a percent of sales on R&D?

Well, we were internal company funded R&D was 7% for the quarter, 9% in Q1, averaging 8% year to date.

I think we go forward we continue to look for our own R&D to be roughly 8% to 10% of revenue.

Okay.

It's going to bounce around.

It happened to be at $3.8 million a bit lower than Q1.

Okay.

And if you've given this I apologize.

But can you just tell us what you think your tax rate might be for the full year of '08?

I think it's the tax rate for the full year of '08 should be consistent with the year to date tax rate.

Okay.

Average rate, we calculate it on a full year basis and then we use that as we go through the year.

Okay.

And that's it.

Thanks very much.

Thanks, Rich.

Your next question will come from the line of David Gremmels of Thomas Weisel Partners.

Thanks.

Good evening.

Hi, David.

A couple of questions on margin and specifically the PosiCharge margin.

Looking at kind of flattish revenue sequentially but the margin came down a fair amount.

Just trying to understand what's behind the margin gyrations there.

Obviously the April quarter wasn't so hot but then you had a very good July and then kind of a mixed October.

So can you help us think about that?

I can start.

I think the margin situation on PosiCharge, I mean it's a small -- we're talking about lower volumes.

So we're going to see more variability in those results than we do the rest of the business.

But the basic phenomenon is similar to what we've talked about in the past.

And that is we've got a fair amount of fixed engineering infrastructure in place, sustaining work, supporting the product, and introducing minor product improvements.

And that level of fixed costs is absorbed by the lower level of sales.

It's really sized for a higher sales volume level.

And what we would look forward to is if we see increasing sales that those fixed costs will be spread over a larger base and see some margin improvement.

I think to add a little bit of color to that, David.

We continue to be optimistic about the potential market growth for fast charging in industrial electric vehicles.

And as a result, we're investing in that business with an eye to that growth.

And that's both above and below the gross margin line.

So it's continuous improvement in the product line to position it for ramping when the market adopts at a higher rate sometime in the future.

Would it be fair to assume that the margin in PosiCharge going forward looks more like Q1 than Q2?

Or would maybe somewhere in the middle?

I don't think we can guide on that.

I think we're obviously hopeful the margins improve.

But it's a smaller level of volume.

So it's going to have more variability.

But in general that is a commercial business.

And we do expect as we get significant scaling of that business that we should see some benefit in the P&L.

Okay.

And then just a similar question at a higher level.

Looking at your margin guidance, it does imply some fairly significant improvement in the second half.

Can you just remind us what's driving that second half improvement?

Is that seasonality or something else?

Well, in aggregate we're guiding on operating income.

We're at 11% year to date, 10% in Q1 and 12% in Q2.

So it doesn't really take a lot to move us up into the full year range of 12% to 14%.

That could be through gross margin or it could be through the below the line items, SG&A and R&D or a little bit for -- in each area.

Okay, that's helpful.

And then just a couple of housekeeping items.

I apologize if I missed this.

Did you provide the percentage of revenue from cost plus contracts?

No, but I can do that.

Not a lot of change there from last quarter.

Fixed price in Q2 at the Company level, 62% of the total is fixed price and 38% cost plus.

Very similar to what we've seen the last couple of quarters.

Okay, and the unfunded backlog in the quarter?

Yes, just a moment.

Unfunded backlog [$486 million].

Just a footnote there, the options on the Global Observer contract, we are not reporting that as unfunded backlog just because it's a little bit different than what we've been reporting in unfunded in the past, i.e., it's a development project as opposed to a manufactured, i.e., IQ type program.

Okay, so is the of that $57 million Global Observer development contract, I guess how much of that went into funded backlog?

And did anything go into unfunded?

Yes.

That program will be incrementally funded.

So it's in both the funded and the unfunded line.

We don't have clearance from the customer to disclose the funding level.

But I can tell you that the majority of that $57 million is in the unfunded at the current time.

Okay, thanks very much.

Thank you.

Your next question will come from the line of Brian Gesuale of Raymond James.

Hey, guys.

Nice job on the quarter.

Thank you.

Thanks, Brian.

Wanted to maybe follow up on the last question here from David in that can you maybe give us a little color on milestones?

If you can't really talk too much about where the funding levels are between funded and unfunded backlog, can you talk about maybe some key milestones we should look for going forward?

Are you talking about programmatic milestones, Brian?

Yes, that would be great.

We, as you know, we got the contract in September.

We've already had a couple of significant customer reviews.

They're going well.

We'll move through ultimately to preliminary and then critical design reviews next year.

The, I think we are internally we're pretty much moved into the new facility that we intend to execute that program in, in Simi Valley.

And in general we're pretty pleased with how we're moving along.

Okay, terrific, and a follow up to the PosiCharge business, too.

That business really stabilized quickly off of its April base these last couple of quarters.

Can you maybe talk about the pipeline for top line in both new leads as well as kind of progressive engagements with current customers, which you're recently signed?

Well, I think they're both healthy.

We, I think the pipeline is or the funnel of customer contacts and business development opportunities continues to grow.

And our relationship with our existing customers I think uniformly continues to grow with their continued adoption and our basic strategy of working with large customers to try to accelerate the adoption up to and across the enterprise level is still in effect.

And customers are continuing to move in that direction.

So I think that's all, it's all positive.

We'd like to see the revenue growing by leaps and bounds.

But it's an interesting technology adoption marketplace.

So we'll see when the large portion of the target market begins to adopt and I think that'll be a significant event.

But it's, as you know, it's almost impossible to predict.

Yes, sure is.

Just one final one from me, wanted to get a sense and make sure I had the timing right here.

But the Marine Corps Block III Wasp is not in any of the backlog numbers right now, that $19 million order?

That's correct.

That was after the quarter.

Okay, great.

Thanks a lot guys.

Thanks, Brian.

Your next question will come from the line of Chris Donaghey of SunTrust Robinson Humphrey.

Hi, good evening guys.

And again, good job on the quarter.

Thanks, Cliff.

Tim, I was wondering if you could talk about some of the new programs that may be emerging for Raven type or Puma applications?

Particularly I know there's a fed biz op solicitation on the [IV Class Socom] program that looks very similar to a Wasp in the small class and a Puma type system.

What are the timing expected on those types of, on that contract in particular or that competition I should say?

Well I'm not sure what the customer's intent is.

As you noted, they do have an RFI or request for information out right now.

That's not a request for proposal.

Right.

And it doesn't ensure any follow on, any related contracts.

But it's clearly a full spectrum of small-unmanned aircraft system requirements that they're looking for information on.

And we noted the similar fits as you did.

So we've made a practice of not commenting on our proposal activities that are in process.

So I guess I don't want to go into too much detail other than to just point out the nature of the request for information as opposed to a request for proposal.

Okay, great.

Thanks.

And also if you could give us an update on kind of what the expectations are for Switchblade and Digital Data Link in terms of their production beginnings?

Well, they're both moving along well.

As I mentioned in the previous comments, they're both being funded both by ourselves and customers at this point.

And our demonstration of capability has continued through the quarter.

The results are good.

I think the customers are pleased and increasingly encouraged about the potential these capabilities will bring them.

We don't have any specific announcements to make at this point.

I do think that last call my feeling was that within, by the end of the first quarter we'd have some indication of both Global Observer and Switchblade.

Clearly, we got good news early on Global Observer.

And we still expect to see some stronger indication of where the customer thinks the next step is on Switchblade certainly this fiscal year.

Okay, great.

Thanks, and then one last question.

I just want clarification.

You said that the Marine Corps Wasp III contract is a six to nine-month program.

Did you mean that it was going to take six to nine months to ramp into production?

Or that it would take six to nine months to actually deliver?

To deliver.

Okay, great.

Between six and nine, in other words that's a short-term contract like most of the rest of our manufacturing contracts.

Right.

Okay, great.

Thank you very much.

Thanks, Chris.

Your next question will come from the line of Howard Rubel of Jefferies.

Thank you very much.

Just a couple of things, first on the balance sheet your receivables are fairly significant.

And I just didn't know whether there was anything there that you can do to accelerate payment from your customer?

Well, our day sales are at 65 days, Howard, which is down from where we were last quarter.

And as I look at it from a modeling perspective, I'm thinking anything around 70 days is where we will tend to be.

You don't want to tell your customers you'd like to be higher than where you are now then.

I'm not telling them, yes.

We'd like to be faster.

But you if you think about even cost plus work, you're almost at 60 days de facto.

30 days to do the sales.

And then you bill at the end of the month or the beginning of the following month and then you've got another 30 days.

So we actually are running a little bit lower as of the end of Q2 than we would normally.

Thank you, then just two more things.

One, if you keep up this pace of sales growth it looks like you may very well come through the high end of your forecast for the year.

Is there anything I'm missing or --?

I don't think we're guiding towards the high end or the low end.

Our guidance is that range.

Somewhere in the middle of the golf course.

I understand what you're saying.

But it just looked to me that where you are, unless there's some change in trend, you'll be very close to the high end.

I think this goes back to what Tim was talking about in his opening remarks.

In that we've been fortunate so far.

We've had a sort of a nice, smooth trend.

But there is if you look back in history, there is a lot of variability and bumpiness in our revenue.

And we would expect that would be the longer-term trend.

And as you kind of talk about lumpiness, I mean I agree with you.

You had a nice quarter in PosiCharge.

But we can be surprised one way or the other as the world changes.

As you look at your customer, Steve, as you look at your customer contacts and talk there are you continuing to feel like the current -- like there's an ongoing pace of customer dialog that assures consistent delivery schedules?

In PosiCharge?

Yes, sir.

Well PosiCharge, we are continuing to enhance our selling and marketing infrastructure and PosiCharge in particular.

And growing the pipeline like Tim indicated.

But it is a book and ship type business.

It doesn't have much backlog, if any.

So it sort of is what it is at the end of an accounting period.

We do believe that the longer-term trend is towards growth, but it is probably one of the bumpier pieces of the Company.

But to your specific question, Howard, in terms of dialog with customers.

My sense is that this trend that we've seen in the past albeit slow for large customers that have adopted this technology solution to try it, try it, put it in multiple facilities, and then over time increasingly tend towards a more proactive adoption across their enterprise.

Now I think we see continued indications of that trend in our discussion with large existing customers.

I mean there should be sort of what I'd call like a core, everyday bit of demand for some of those large customers.

And then you'll have some new people that show up and that'll start building on that core base.

Is that the way to think about it?

Well, that's our business model.

And so far that has continued to roll out plus or minus the way we have thought it would be.

And then the last thing is to talk about Raven for a moment.

Could you either address sort of utilization in the field or the number of total vehicles you now have out there or the hours?

I can start.

Total air vehicle deliveries through Q2 of new production units a little bit in excess of 6,000.

And when you include equivalent units that run through our services business, it's a little over 7,500.

And you're continuing to hire to add people to your service business?

Yes.

Our service is growing significantly.

Thank you, gentlemen, very much.

Thanks, Howard.

(OPERATOR INSTRUCTIONS)

Your next question will be from the line of Troy Lahr of Stifel, Nicolaus.

Thanks.

Can you maybe talk about some of the international opportunities that are still out there?

Last time you gave us an update that you signed up a new customer I believe it was for Raven.

Any more on the horizon there from international militaries?

And then also I think you were in discussions with Boeing on their SBInet and using some UAVs for U.S.

border security.

Anything on that front that might be coming down the line?

Well, as to the international business, Troy, we continue to be actively engaged with a number of different countries, all of whom are in various stages of either developing requirements for small UAS or pursuing a procurement process for small UAS.

We've announced one this quarter.

I think one the prior quarter.

And that's a very active area of business development for us now on a global basis.

And what we also find is those customers are as about as reluctant to disclose who they are or what they're doing as many of our DOD customers.

So not much difference there.

So as a result I don't want to get into specific customer programs other than to say there's a significant number in process now.

As to the border security opportunity, we continue to watch that closely.

And I think that opportunity along with other government agencies and commercial opportunities for small UAS is largely hanging on the decisions that the FAA is in the process of making as to the rules for access to the national airspace for unmanned aircraft of all types.

However, they have decided to address small UAS first, come to a ruling on those, and then move on to the larger systems.

And the most recent information I'm aware of has some proposed rules now being reissued for review with a suggested timeline of coming to some conclusions next year.

Okay.

And then say over the next 12 months, do you think we're looking at maybe locking up one more international military customer?

Or do you think it could be something like three?

Or like what could be the order activity there potentially?

Is it like one every six months we should potentially look for?

Well, I think in Q2 we announced Denmark.

And there was one that we won that we cannot announce because the customer will not clear it.

And so I would think in terms of over the next year or so there may be a handful of decisions that get made by international customers in small UAS procurements.

Okay, that's helpful.

And then when you said that you're getting customer funding on Switchblade and Digital Data Link as well as your internal funding, I mean is that like a 50/50 or are you guys like 90% and a customer's throwing a little bit in there?

I'm just trying to gauge the level of customers' interest in these programs by their funding right now.

That has changed over time but most recently the vast majority is customer funded.

And it started 100% internally funded.

And then has transitioned as Steve said to the current situation.

Okay, thanks.

And also on Global Observer, as that program ramps up are we going to expect a negative mix shift, more development type margins?

Or how should that impact UAS margins going forward?

This year, probably the mix that we have in the business in the first half of the year is what you can think about for the balance of the year.

Next year we haven't guided yet.

But it is a large CP development program.

So if anything it may have some impact on the mix.

It'll take a while to get there.

Okay.

And then lastly can you maybe break down PosiCharge?

How much is auto customers versus non-auto right now?

In the quarter PosiCharge actually had a good quarter in the auto segment this quarter as I mentioned in my remarks with about half of the revenue coming from their auto market.

Okay, and you think that trend is going to continue?

Or is this kind of a one-off quarter?

That's hard to say.

The auto segment is an important and a good segment for PosiCharge.

We had one problem customer in the past, but I think going forward it'll continue to be an important piece of the business.

I don't have a projection on how much it makes up of the overall mix, though.

Okay, thanks guys.

Thank you.

Thanks, Troy.

And there are no more questions.

I will turn it back to Mr.

Tim Conver for closing remarks.

Well, thank you all.

We continue to be excited about our relationship with the public markets.

And we look forward to telling you about how we faired after the next quarter.

Thank you for your participation in today's conference.

This concludes our presentation and you may now disconnect.

Have a great day.