AeroVironment Inc (AVAV) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the AeroVironment fourth quarter and full fiscal year 2009 earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after management's remarks. As a reminder, this conference is being recorded for replay purposes.

With us today from the Company is the Chairman and Chief Executive Officer, Mr. Tim Conver, Chief Financial Officer, Mr. Steve Wright and Director of Investor Relations, Mr. Steven Gitlin. Now at this time I'd like to turn the conference over to Mr. Gitlin. Please go ahead sir.

Thank you, Dustin. Welcome to AeroVironment fourth quarter and full fiscal 2009 earnings call. Before I hand the call over the management, 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 are based on current expectations, forecasts and assumptions that involve risks and uncertainties including but not limited to economic, competitive, governmental and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward-looking statements.

For a list and description of such risks and uncertainties, see the reports we filed with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on any forward-looking statements which speak only as of the date on which they are made. We do not intend and under take no obligation to update any forward-looking statements whether as a result of new information future events or other wise. The content of this conference call contains time sensitive information that is accurate only as of today June 23, 2009, the Company under takes no obligation to make any revision to the statements contained in our remarks or to update them to reflect the events or circumstances occuring after this conference call.

With that said, it's my pleasure to turn the call over to Tim Conver.

Thank you Steven. Welcome to our fourth quarter and full fiscal 2009 conference call. Today I will provide highlights on the fourth quarter and the full fiscal 2009 year and go in to more detail on the business segments before turning the call over to Steve Wright for a discussion of the financial performance. After my closing comments we will open the call up for your questions. We had record revenue in Q4, driving year-over-year revenue growth of 15% with a 13% operating margin. Our business segments each maintained our strong market share and production product lines as well as our solid customer relationships, positioning us well for continued growth in these businesses. Our development efforts showed significant progress, moving ahead multiple innovative solutions we believe will provide compelling new value propositions in large markets with significant growth potential. From a financial perfective our Q4 was strong with record quarterly revenue of $76 million resulting in full year revenue of 248 million up 15% from fiscal 2008. Operating margin in Q4 was 12%, with full year operating margin at 13%.

Beyond our financial results, we achieved many important business and market milestones during the year that will be important drivers of future financial performance. Some examples include winning the fourth US Department of Defense competition for a small unmanned aircraft system program of record. With Puma AE adding a significant new capability at the top end of the hand launched UAS spectrum. We received the first production orders for our digital data link, signaling the successful transition from internal R&D to production for DDL. Customers exercise contract options on the Global Observer program and we continued successful development performance. We demonstrated the promise defects of Switchblade for a multiple potential customers and applications that have developed sense we debuted this radical new idea. We achieved broadened exposure of our electrical vehicle solutions and charging capabilities to a rapidly evolving industry seeking to increase the probability of successful EV adoption. And we grew our team to accommodate the opportunities ahead of us.

We are all aware of the macroeconomic issues of the last year, but we also noted other important developments with the potential to positively affect the markets that we are serving. President Obama and Secretary of Defense Gates, both continue to push for fielding more 21st Century tools to support the needs of war fighter including increased ISR or Intelligence Surveillance Reconnaissance Resources. The DOD intends to cancel several high dollar defense programs and to elevate the priority and presumable the percentage of the budget for irregular warfare and soldier systems. Also there is increasing global investment in the development and deploying of electric vehicles and their supporting infrastructure. Including US government funding for transportation electrification and demonstration of clean transportation solutions. We continue to believe we are strategically well positioned with our unmanned aircraft systems focused on actionable intelligence and communication, and our efficient energy systems focused on clean electric vehicles and energy.

In our Q3 conference call, I discussed several factors that adversely impacted our revenue for that quarter. PosiCharge sales and sales of small UAS to foreign military services affected by the global economy. The economic climate and affect on those elements of our business has not changed materially, but remain committed and fully engaged in both markets. We believe we are creating opportunities for improvement in the future. Some initial loss adoption had been impacted by funding constraints in Q3 and that situation remains status quo. R&D revenue shortfalls due to hiring delays are being addressed affectively as we recruit and hire great people.

During Q3, we believe that one of our customers decided to wait to procure DDL enabled Raven systems even though it mean't system delivery delays. We believe that DDL induced delays in Raven UAS orders will go away when digital data link production availability begins in our second half of fiscal 2010. I remain convinced that our innovations and execution on systems solutions are helping customers win in important ways and I believe customer appreciation of the unique value of our solutions will continue to translate in to long-term growth.

Now, focusing on our UAS business, we moved forward on multiple fronts, generating revenue and creating growth opportunities from existing products. The services supporting our customers continue to be successful with our own products, system upgrades, new product wins, and the progress on development programs that promises future new product introductions. We have seen a growing amount of our UAS funding reflected in DOD budget line items over the last few years. The current FY '09 supplemental and FY 2010 DOD budget requests although not yet final suggest that this growth trend will continue. Raven remains a capability that our customers plan to proliferate and build on throughout their organizations. Our customers view this as a standard capability that they wish to have and use where ever ground troops operate.

The Army's acquisition objective for Raven was raised to 2182 systems during our fiscal '09 and their procurement objective was set at that level. After upgrading most of the Raven As to Raven Bs two years ago and upgrading frequencies last year we look ahead to a strong upgrade cycle to digital data link for the installed base of Raven Bs beginning in the second half of this fiscal year. We also continue to work with current Raven customers to address their desire for a broad Raven system product improvement program, anticipated in the future.

Our service business has maintained an extremely high level of operational availability of Raven in Iraq and Afghanistan, so the ground troops can rely on our systems when they need them for self protection and operate more affectively. In fact, one gunny sergeant with multiple rotations in the Middle East told us his marines did not go outside the wire without their small UAS. We have received many questions about the drivers of our service business. As a result of how ore customers manage their spare parts inventory we have not yet been able to correlate their buying patterns directly with overseas Ops tempo. You can see how that part of our business fluctuates by comparing our Q4 results to Q3.

We believe one factor affecting repairs demand is that when we process their vehicles through our depot for system upgrades the general refresh that we perform on these vehicles results in extending the time before they require additional repairs and spare parts. Essentially rolling some future service revenue in to our current upgrade revenue. Separately, we continue to work with our customers to determine the appropriate level of replacement parts they will need to support the legacy analog systems and the pending conversion of their fleets to digital data link. I expect the introduction of our digital data link to be very successful and significant both in the value delivered to our customers and for our business.

DDL is moving towards production now with final testing and production readiness, it will dramatically enhance the capability of Army Raven systems by increasing the number of air vehicles that can be flown in a given geography, and enhancing communications encryption. It will also enable a portable ad hoc network capability where ever and when ever needed. As we mentioned previously, we anticipate cutting DDL in to Raven production and making DDL upgrades available in the second half of fiscal 2010. We view the upgrade cycle associated with DDL as an important contributor to your revenue this fiscal year, after introducing DDL and Raven we plan to transition it next to Puma AE and sometime later to WASP. In time we expect all small unmanned aircraft system customers to want to adopt digital data link. I expect DDL to become increasingly important enabler of how customers use our small unmanned aircraft systems.

Also, in 2009, we won the US Special Operations Command All Environment Capable Variant or AECV competition with our Puma AE. We received the award at the end of June 2008 and received full rate production authorization just 11 months later in May 2009. We are now working with our customers to support activities aimed at moving Puma in to production. We believe Puma AE is viewed as an important capability by our current customer and that demonstrations to other customers which are just now beginning could result in much broader demand for this unique platform and capability. AV is now the prime contractor for each of the small -- four small unmanned air craft programs of record in DOD. Each program satisfies that customers requirement with the unique airplane platform, WASP, Raven or Puma.

Each of these different airplane systems employs our common ground control, common user interface and common training of support systems. In the future we expect these systems will also incorporate a common digital data link. DOD would then have thousands of airplanes and ground control systems capability of persistently collecting ISR while each is a node capable of bidirectionally linking information and communication. It would then be very easy, perhaps compelling, for our customers to mix and match our different airplane platforms and a growing array of payloads to address a much broader spectrum of missions all without incurring the additional cost and risk of new airplanes, control systems and their development, system integration, system training, support, and O&M.

I continue to believe that we are still in the early stages of adoption of small unmanned aircraft systems and may not yet have seen their highest and best use. We are looking forward to the growth potential in our on going production programs through further market penetration and broader value creation. We are at least as excited about the new growth opportunities promised by our UAS development initiatives in Switchblade, Global Observer, Stealthy Persistent Perch and Stare and Nano Air Vehicle. Other wise known as the SB2S and NAV, these development programs are both moving forward. While SB2S is still in the early development stages and Nano Air Vehicle is still in the lab each represent unique and entirely new capabilities for Stealthy Intelligence Surveillance and Recognizance and the resulting actionable intelligence desired by our customers. We continue to make good progress on development and performance demonstrations and we believe our development customers shares our perspective.

Switchblade creates a unique new capability combining in one system portable ISR, lethal payloads precision delivery and minimal collateral damage, demonstrated Switchblade operation in multiple concepts of operation and there is growing interest among multiple customers many in this systems unique capability. We believe adoption of Switchblade is increasingly probable and expect revenue in fiscal 2010 as initial adoption begins. The timing of production decisions remains difficult to predict.

We have begun final assembly of the first Global Observer airplane and beginning fabrication of the secondary airplane. We anticipate flight testing in the second half of this fiscal year, culminating in military utility assessments of initial systems at the end of the three plus year development program. Options for two additional Global Observer airplanes have been exercised and the total Global Observer contract funding now exceeds $120 million. The value proposition of Global Observer is ISR and communications provided affordable, seamlessly and persistently. By exploiting an extreme endurance aircraft in the stratosphere for the first time, GO will open an exciting and high value new business opportunity in between conventional atmospheric aircraft and space satellites T.

The market for each of these development solutions was white space when we began. We help define the market by continuing to work with potential customers to create the concepts of operation that will deliver the highest value mission affects in tandem with completing and adapting the platform developments and demonstrating their performance. The timing associated with customer adoption and production decision making on these innovations is hard to predict because they are each new ideas with capabilities that change the way users think about how they operate; however, there are huge up sides. Customers have the potential for a leap to innovative and potentially game changing new capabilities that can help them win, and we have the potential of launching important new system solutions producing long-term business growth based on original innovations and the market leading positions they create.

Our efficient energy systems business segment also had positive performance both in existing product business as well as in the development of potential new market and product opportunities. We created the EES or Efficient Energy Segment at the beginning of FY '09 by combining two prior segments with the intent of improving our effectiveness and our efficiency. The organizational integration was completed successfully and it produced higher operating margins, 25% revenue growth and robust product and market development in fiscal '09 all in the face of significant economic challenges in the primary markets that segment serves. The global interest in clean transportation and electric vehicle development stimulated record sales of our electric vehicle test systems, which play an important role in design and development efforts in this emerging industry. General Motors, for example, recently opened their global battery development lab in Michigan. They selected our EV test systems as their battery cycling solution procuring more than 30 systems just for that facility.

Our production PosiCharge systems support industrial electric vehicles and material handling markets. The global economic slowdown and resulting pressure on capital spending drove an overall lift truck industry contraction. At the same time, we broadened the PosiCharge product line to address both lighter duty opportunity charging and heavy duty electric vehicle charging and strengthened our distribution with a new relationship with Toyota material handling USA. We think there remains a significant market opportunity for this line of industrial EV charging systems and we will continue to strengthen our market position by pressing what we believe to be our advantage in both market share and fast charging and our financial strength. From a development perspective our EES segment made significant progress in introducing our new product line of EV solutions to the emerging electric vehicle industry and we believe our charging infrastructure can be a key enabler of transportation electrification success, and EV adoption. We believe that electric vehicles will make their way in to the mainstream. Although it is difficult to know when. We intend to be ready to support passenger and fleet EV adoption with comprehensive charging solutions ranging from slow overnight charges to our flag ship solution true fast charge systems capable of fully recharging certain battery packs in fewer than ten minutes.

During FY '09, we learned more about small wind generation and urban environments. After three years of studying this market and installing and monitoring almost 20 early adopter architectural wind systems we had good success in product development, marketing, regulatory approval and tax treatment but we have not achieved the ROI proposition we wanted to deliver to customers. We conclude for now architectural wind rooftop clean energy generators are suited for green customers and institutions that are less sensitive to energy pricing.

The engineering team and our EES segment also continues to produce great results on Global Observer subsystems. We believe the efficiency and performance of their motor generator and battery pack technology currently represents the state of the art. These systems are essential contributors to the unique capabilities of Global Observer Electric Propulsion system and extreme endurance stratospheric flight capability.

For that is an overview, at this point Steve Wright will take you through the financial performance in the fourth quarter and full year.

Thanks Tim and good afternoon. Revenue for the fourth quarter was 76 million, an increase of 18% over fourth quarter prior year of 64.3 million. Looking at revenue by segment, UAS revenue was 65.4 million, an increase of 17% over the prior year. The growth in UAS revenue was largely due to higher customer funded R&D and higher product deliveries partially offset by slower services. The increase in customer funded R&D and product revenues were largely due to increased activity on the Global Observer contract and product deliveries to DOD customers respectively.

EES revenue was 10.6 million an increase of 27% from Q4 last year primarily due to higher deliveries of EV test systems. Turning to gross margin, gross margin in the fourth quarter was 26.4 million, up 15% from Q4 of the prior year. Gross margin as a percent of revenue 35%, versus 36% in Q4 last year. By segment, UAS gross margin was 20.9 million, up 4% from Q4 last year, primarily due to higher sales volume, partially offset by higher program cost as a percent of revenue, UAS revenue was 32%, compared to 36% in Q4 last year. EES gross margin was 5.4 million, up 91%, from Q4 last year, primarily due to increased sales volume, operational improvements and product mix. As a percent of revenue EES gross margin was 51% versus 34% in Q4 last year.

SG&A for the quarter was 10.3 million or 14% of revenues, compared to 9.1 million or 14% of revenue in the prior year. SG&A expense was higher primarily due to higher sales in marketing efforts and bidden proposal activity. R&D for the quarter was 7 million or 9% of revenue, compared to the prior year amount of 4.7 million or 7% of revenue. The growth in R&D was primarily due to increased investments in various UAS development initiatives.

Operating income for the quarter was 9 million, or 12% of revenue. Operating income 2% lower than Q4 prior year due to higher SG&A and R&D partially offset by higher gross margin. Net income for the quarter was 5.8 million or $0.27 for fully diluted share compared to 6.4 million or $0.30 per fully diluted share in the same quarter a year ago.

Now moving quickly to our year to date results, revenue for the full year was 247.7 million up 15% from the prior year period of 215.7 million. By segment, UAS revenue was 211.4 million up 13% from prior year period, and EES revenue 36.3 million, up 25% from the prior year period. Gross margin for the full year was 88.6 million. Compared the 78.5 million a year ago. Gross margin as a percent of revenue was 36%. Unchanged from prior year. By segment, UAS gross margin was 71 million, up 3%. EES gross margin was 17.6 million up 77%. SG&A for the full year 34.2 million or 14% of revenue. Compared to the prior year period of 33.7 million or 16% of revenue.

R&D for the full year was 21.8 million or 9% of revenue, versus 16.4 million or 8% of revenue in the prior year. Operating income for the full year totaled 32.6 million or 13% of revenue. Operating income increased 14% from the prior year. The effective tax rate for the full year was 28.3%. Down from the prior year of 33.7%. This decrease was caused primarily by higher R&D tax credits in the current fiscal year. Net income for the full year 24.2 million or $1.11, per fully diluted share compared to 21.4 million or $1 per fully diluted share last year. Looking at backlog, funded backlog at the end of the fourth quarter was 114.8 million. Up 32.8 million or 40% from April 30, 2008.

Turning to our balance sheet, cash equivalence and investments at the end of the fourth quarter totaled 145.2 million, up 14.6 million from the prior quarter amount of 130.6 million. Positive cash flow is largely due to improved income, and working capital partially offset by capital expenditures. Turning to receivables, at the end of the fourth quarter, our accounts receivable including unbilled receivables totaled 62.6 million up 9.4 million from the prior quarter. Total day sales outstanding approximately 74 days compared to 92 days at the prior quarter end.

Taking a look at inventory, inventories were 11.6 million at the end of the quarter, compared to 20.4 million at the end of the prior quarter, days in inventory were approximately 21 days, compared to 52 days at the end of the prior quarter. Turning to capital expenditures. In the fourth quarter we invested approximately 4.4 million, or 6% of revenue, and property improvements and capital equipment.

Now I would like the turn things back to Tim to discuss expectations for our fiscal year 2010.

Thanks Steve. I believe we are well positioned for long-term growth. We are the market leader in small unmanned aircraft systems providing all existing programs of record in DOD. The utility and value of these systems continues to increase, at the same time DOD is increasing its priority on supplying tools to the ground troops that enhance protection, ISR and effectiveness. Development programs address both DOD and electric vehicle market priority with unique value propositions, strong customer relationships. And our outstanding team of high performance associates continues to perform. We look ahead to 2010 and beyond with excitement and confidence. I expect this year's operations and revenues to be heavily affect by the transition of digital data link to production and the retro fit of Raven systems. Our development programs will continue to be on the front burner by far the largest being the Global Observer.

Business development will also be a strong focus this year especially with the opportunities to move towards production adoption of Switchblade and the numerous electrical vehicle infrastructure decisions in the [offering]. We anticipate that our FY 2010 revenue will grow 18 to 22% over FY '09. With operating margin between 12 and 14%.

For reasons which all ready stated, we expect quarterly results to start lower and grow higher in FY 2010 than in prior years. Over the past three fiscal years we seen our second half results generate the majority of total annual revenue. We anticipate DDL production to be up and running in the second half and expect that to drive FY 2010 revenue to be more heavily weighted towards the second half of the year representing up to two-thirds of the total fiscal revenue. We also expect first half revenue to ramp from the first to the second quarter. In formulating our fiscal 2010 guidance we looked at internal and external factors that could affect our business. We assume reduction in operations in Iraq and increase in troop levels in Afghanistan. We assume that on balance overall Ops tempo would decline a bit potentially effecting the repairs and spares portion of our UAS service business. We also considered delayed in orders due to customers waiting for small UAS systems with our Digital Data Link to become available.

We Integrated the demand for small unmanned aircraft systems as evidence by the government's FY '09 supplemental and FY 2010 procurement plans with planning information from customers to anticipate small UAS revenue. The fact that our Global Observer program has been funded beyond $120 million, provides good visibility into that program revenue. We expect initial adoption process for Switchblade will generate preproduction orders this year although we are not counting on significant production revenue for Switchblade in fiscal 2010. We expect Puma AE product sales to begin slowly and grow in this fiscal year after the recently received full rate production authorization. We anticipate lingering softness in PosiCharge revenue as a result of the continued impact of recession on capital spending, some what offset by new product and new distribution affects on revenue.

We assume the demand for electric vehicle tests equipment will moderate somewhat with some initial orders for on road electrical vehicle charging solutions developing. I'm very encouraged by what I see ahead of us, I temper my enthusiasm by reminding myself and our investors that predicting the timing and the rate of adoption of innovative solutions has always been the biggest challenge in our technology innovation strategy. I believe that what we are doing at AV is important work and creating unique value for our customers, that it will enable us to can you be the to grow rapidly while creating value for our stockholders. Thank you once again for your attention and interest in our company.

Steve Wright and I will now take your questions.

Thank you sir. (Operator Instructions). Michael Lewis from BB&T Capital Markets.

Thank you, very much, for taking my call. Steve two quick questions, unfunded backlog level?

Unfunded backlog at the end of the quarter was 511 million, and again the caution there, Mike, this we don't believe this is an indication of future sales. No expected value put on by management on those numbers.

That's fair. I needed to plug in the model. Customer funded R&D, where did that come in the quarter?

Customer funded project R&D, 20.4 million. In Q4.

Okay. Thank you. Now, Tim, just two very quick questions for you as well. First with regard to the [Vee Toll] Perch and Stare technologies, we are starting to see more activity here, when do you believe the dod is going to start to push these ISR R&D projects more aggressively, in other words, when do you anticipate more dollars will start to swing in to the R&D efforts versus what you already announced then has been put to out to the community.

Mike as you know, that is currently a development funded by [Darpa], and we recently announced another extension to that contract. It's going very well, I think we are going to have some beta versions in the field for evaluation through that contract operation we will get feed back from that. We expect to make adaptations and push those back out in for next generation of evaluation. So we are still in the, I would say, relatively early development stages and not anticipating that would transition into a production program in the near future, certainly not that year.

That's -- I understand, with regard to the [Darpa] testing when they get to initial sets will they do doing that at [Aberdeen] by chance?

I don't know what the specific plan is, Mike, although our expectation would be they would end up with operators.

Okay. Then just a second question with regard to the way that you had addressed the guidance. I'm going to try, you may not answer the question, but did you see Q1 revenue around where we witnessed Q1 revenue in fiscal year nine or directionally is that around the area that we should anticipate to see coming up in July?

I will jump in first. I think what Tim said is traditionally we seen heavier second halves than first halves but this year it's accentuated by digital data link in the second half. We said up to two-thirds of the volume in the second half, one-third in the first half, and then further, trailing up Q1, will be the pinch point, the lowest quarter followed by Q2 and then on.

Thank you very much.

Patrick McCarthy with FBR Capital Markets.

Good afternoon and thank you for taking my call as well. I was wondering for you have comments on the restructuring. I'm wondering whether kind of breaking that program up a little bit, either opens the door for you on some of your UAS systems.

From our business perspective it's not a bad thing. As you know, the class one category of unmanned aircraft systems within FCS, was looking for a Perch and Stare capability in that platform. I think with whatever happens with the program and with that particular element of the program, if the Army determines they want to deploy an operational Perch and Stare capability in a small unmanned aircraft I think we will be in a stronger position to address that now than we would have been previously.

You did -- close enough to the end game development wise to play a role?

Well, we are -- I think our last press release on the [Darpa] program identified we are going to deploy operational prototypes and expect feed back from the utility assessment, we plan to incorporate if a second generation that would go back out in to the field. So that's the stage of the current development program which in fact is moving in to demonstration.

There is also been discussion about integrating fuel cell technology in the smaller UAV, I seen your name mentioned a couple of times, how do you view that. What's the impact on AV AE if that happens?

Implementation on the fuel cells has the potential to extend the duration of small UAV's beyond what they can achieve with batteries. We have demonstrated a number of fuel cell integrations and flight Ops, and we talked about the publicly in the context of a contract we have on going with Air Force Research Lab. We initially incorporated fuel cells in our Puma prototype airplane and I believe exceeded nine hours of duration on the last test that we talked about. And we have on going development and integration programs on that AFRL contract, as well as others. The potential has been demonstrated to increase duration and to the extent that our customers have an appetite for that, we will be in a position to provide it.

Okay. One quick one, any sense, what is left on Global Observer, what hasn't been spent?

I don't think we talked about the specific backlog on that contract, Patrick.

Patrick, we are probably halfway through roughly on that program both from programmatic and financial perspective.

Tim Quillin with Stephens, Inc.

Quick details for Steve, one expected tax rate for fiscal 2010?

I don't have good guidance on that, Tim, but as we look at it now, we would think something like 35%, mainly because the Federal R&D tax credit is currently set to expire in December. If that is reset and extended then our tax rate would be lower.

Then the progress towards the Army Raven target?

As of the end of Q4 we are 57% delivered against the army acquisition objective, which is 2182 systems, we delivered about 169 Raven systems to the Army against that acquisition during the quarter.

Brilliant. On the EES business, it actually grew faster than in fiscal '09 and gross margins expanded significantly so it's a meaningful contributor to earnings right now and there was a lot of different moving parts that you discussed with regards to the potential growth in fiscal 2010, puts and takes, so is the net of it we should think about that business growing at the same rate as you're overall revenue guidance and gross margins staying relatively static with that FY '09 levels or how should we think about that.

I think that's a fair way to look at it, Tim.

That's easy. Thank you. See you in a couple of days.

We don't guide by segment but we certainly been happy with the performance we seen in that area in the last year.

Thank you.

Our next question is from Troy Lahr with Stifel Nicolaus.

For fiscal 2009, SG&A finished around 14% of sales and R&D around 9. Are those kind of levels you would expect for 2010 or should we start looking at it as kind of repeating fourth quarter dollar levels?

Well, fourth quarter dollar levels were a bit high if you recall we started talking about ramping up the investment in SG&A and R&D back in Q2, we didn't really achieve that in Q3 but it came on in Q4. The way I would think about it, Troy, is the 12 to 14% operating income, the -- that's our guidance, gross margin in the mid-30s, SG&A and R&D make up the difference. So the FY '09 results are not a bad way of thinking about it for the future.

So now it's my turn to help Steve. I think the way to think about that, Troy, is from the annual perspective. So we most of our SG&A a lot of it is IR&D and a lot of it is business development. We are going to be spreading that pretty much evenly as it grows over the year. Even though as we discussed earlier we see the revenue being skewed towards the second half because of the DDL upgrade initiative.

The revenue guidance, are there certain things that need to happen that haven't occurred to get to that 18 to 22%. Do you need international orders to come through? I mean is that really predicated on any one thing in particular or how should we think about that.

I would say Troy we had 115 million of backlog, we add it like any year we have a lot of things that have to happen to fill out the order book that would include international follow on orders data link order Is and so on and so forth. I don't know there is any one thing we would point to. It's a repeat of prior years where there is a lot of go gets.

Okay. That's helpful. Lastly, did you mention there were higher program costs at UAS in the quarter?

Not just in the quarter but certainly we did see some of that in Q4 with higher product deliveries which resulted in a 32% gross margin, a little bit lower than we like to see the full year at 34%, is sort of in the ballpark of where we think that business is sort of in the mid-30s plus or minus.

Higher cost was a mix shift issue, not really execution or anything like that.

Correct.

Thanks, guys.

Howard Rubel with Jefferies.

I want too follow up on troy's comment I'm not sure -- the first quarter, if we look at the run rate for the fourth with SG&A and R&D, that would mean we see below average profitability in the first half relative to what you're going to see for the full year?

Maybe I didn't catch the question right. I was talking about the full year, profitability will be impacted in the first half of the year because our SG&A and R&D are largely going to come in at a rate that we saw in the second half of last year. And those are rates that are higher volume levels essentially that we will see in the first half of the year.

That's fine, I understand that. On arch wind, it sounds as if you're turning down the heat it a little bit. You have going to de-emphasize it. Is that a fair way to think about it. And -- sorry.

I think that's pretty much what I was saying Howard. We were very happy with almost everything we found and developed in that evaluation with our early adopter customers, with the sole exception of not getting to the that we wanted to be able to deliver to customers. Until we can change that mix, we think it's -- where I suggested, a very attractive renewable energy option that's unique and we will probably continue to be attractive to green customers that aren't sensitive to the economics of their energy costs.

I mean, I had this conversation 7 year pay back is not what you like to offer to people as a way to think about it.

That's right. Yes.

Two more questions one is on Switchblade, outside looking in it's been painful that you haven't been able to start in earnest on this, can you talk about some of the fits and starts, why now maybe there is hoops you've passed through that give you a bit more confidence that this is really it?

I think the confidence we are expressing is a function of the performance of the system that we demonstrated. Both in the initial carnation and as additional customers have come to the floor, each with a somewhat different application, they have funded incremental demonstrations of their own application, all of which have continued to be successful. So there is now a even larger set of customers all of whom appear to be very exited about what this capability can bring to enterprise, a continuing demonstration of product performance success and customer appetite and more customers with similar responses. All of the customers have the same issue of beginning of having to wrestle with how do they incorporate this new capability which is quite different in to their enterprise and how do they fund its adoption and do they do it alone or in tandem, so this is just a lot of moving parts but we have seen no abatement in what appears to be a strong appetite for the capability.

When it happens will lower R&D a little bit because you will be able to take it off nickel and absorb some of it.

I wouldn't assume -- I think about our R&D as back to the basic 8 to 10% of revenue internally funded on a long-term run rate as a target we are planning to operate the business on, if we are doing less R&D on one program we are going to want to start doing more on another. But I do agree with you as more customers weighed in for production adoption, then our internally funded portion of the development would trail off.

Last on -- you have I think you said $145 million in cash, Tim, and that's a very rich problem to have. How have you thought about deploying some of it or -- or is there the anything on the agenda that would add higher returns than what you are getting now?

Well, we continue to think about the cash primarily as an opportunity to invest in support and where appropriate accelerate our internal growth opportunities. And as I talked about in my comments this difficulty in predicting timing and rate of adoption, not only addresses or not only affects our top but it addresses our capital investments and our product development investments as well. So we are typically investing heavily before the fact in IR&D, increasing investments in business development and then as we close in on assurance of the timing of production adoption, we historically started to weigh in with capital investment and other high dollar investments that support the launch. So if we were to spool forward to a point in time when we would be anticipating large production commitments to Global Observer, for example, we then would be looking at significant CapEx investments and I think the flexibility to be able to pick our own timing and making those investments gives us a strategic advantage in that and other innovative technology market entrance.

Thank you. Thank you, Tim.

Next to Michael Ciarmoli with Boenning & Scattergood

I guess, Tim, on the guidance for fiscal 2010, what has to happen to hit the higher end of projections, 22% top line growth are you assuming some Switchblade revenue in there or are you assuming Puma significant level of Puma AE revenues?

I think I mentioned a number of the key assumptions we built in to the guidance, that does include expectations we are going to begin to see some Switchblade adoption, via small quantity preproduction procurements although we are not counting on significant production revenue this year in those numbers. I think the content of the low end versus the high end will be largely the same in terms of programs, probably just a little bit more of everything. Because 5 points like 15 million of revenue. So it's a lot of what you mentioned, Mike, some Puma, some other things. And I think the mix would be very similar between the low end and the high end. It's just a little bit more.

Do you see your Raven unit deliveries in fiscal 2010 being up dramatically over '09. I think you delivered 456 units, do you see that pace changing at all? Given the funding that's been laid out that's existing funding and new funding that's been laid out for 2010?

I would say I don't think we want to it down by program. We are aware of that funding and take that in to consideration along with the information that our program managers at the Raven Army level tell us how they think the year will unfold, we are considering a budge budget and the best information we have.

On the services line item you said funded R&D, about 20.4 million, that would imply this your services broke that downward trend, are you gaining better visibility in to that line item? Do you expect it to continue to be bumpy and lumpy in 2010?

The easy answer to that is yes, it will be bumpy and lumpy like all other line items. The services number was 12.2 million, if you do the math. That's up a bit from the prior quarter. I don't think this indicates a trend by itself. It is one quarters worth of volume. Represents backlog that we had the work off in the quarter just like the prior quarter sequentially before it indicated.

Okay. Last question, and I will jump off here. There has been a lot of talk within the DOD about creating common ground stations, for some of the higher altitude larger UAV 's but on the smaller scale with the micro, tactical UAV's do you see that as an opportunity and I would imagine considering all of your UAV 's are on a common remote already, it would make it would an easy choice to look to you guys a at the model. Is that a near-term opportunity or something still in the works by the DOD?

I don't think it's anything we focused on as a major incremental opportunity in the near-term, Mike. All of our airplanes operate off the same ground control system. And we have all of the programs of record in DOD for this hand launch class of airplanes. So I think this is the defacto current standard. We've done demonstrations operating other platforms off of our ground control system, and I think the transition to digital data link makes it much easier to integrate other platforms in this same ground control scheme. I think we are well positioned in this class which is quite different from the larger airplane programs as well as the larger vehicle programs.

Okay. Perfect, thanks, guys.

Thank you.

Next to Jeff Evanson with Dougherty & Company.

Thanks for taking my questions.

Hi, Jeff.

Tim, after let me make sure I understand where we are on the first flight of the Global Observer, are you seeing you expect that somewhere and April? Is that any change from the Q3 call?

Yes and no. Yes, that's what we are saying, no, that's no change.

Can you talk me through what you see happening after the flight. We looking at 6 to 12 months of data evaluation, walk me through the time line would be after that.

The program anticipates flight test tests of the aircraft and then integration of payloads onto the aircraft. And ultimately delivery of the entire system to the initial customer for military demonstration of the military effectiveness of the entire system in operation. And that was originally anticipated to happen in the latter part of what was initially a 3-year joint development plan that timing is now stretched out a bit as the customer has added additional airplanes to the one airplane program that was originally scheduled in that 3-year period.

Is the military thinking about the GO as a system and does the addition of extra aircraft suggest anything about the flight times that can be achieved? Yes, it is looked at by us and our customers as a system. And the primary concept of operation for this system is intended to deliver seemless persistence. That would be done by putting one platform over a specific spot on the earth where it orbits looking much like a GO sink from a satellite at a regional level . Say 5500 feet that platform is looking at a footprint of 600 miles in diameter. If the airplane stays on station for about a week, then a secondary airplane can come on that station take over that orbit the first airplane returns, refuels, the secondary plain stays there for say a week, and the first airplane returns, takes over the station, the secondary plane returns. So we got a rotation of two airplanes over a common geographic area providing seemless persistence.

So you still anticipate a two aircraft rotation.

At a minimum in order to provide that level of persistence. Some customers may determine they want another airplane either for increased system reliability or for the ability to put up a orbit some place else that pops up.

Okay. Couple of questions about the guidance. Do you expect UAS to grow faster than EES relative to the guidance you gave?

I think our guidance has consistently addressed the enterprise level and we haven't broken out individually segments although, overall, you can see historically that the relative percentage of the business has stayed generally consistent over time.

Two quick detailed questions for Steven. Steve, do you did our service revenue include any DDL revenue? I am guessing it would not have but I'm wanting to clarify.

There is 20.4 million of project R&D and 12.2 million of services, those are smashed together as service on the P&L, 20.4 million may have had a smidgen of DDL development in it. We have small R&D contracts. I don't want to say nothing but it's a small amount if there is anything there.

Then the funded backlog, anything in there for DDL.

I'm not sure I wouldn't be surprised if there is a some small bit of backlog but it would be a very small project DDL, I think there is some backlog.

That was a Q2 R&D contract that's still --

If you go back to Q2 we got a 6 or $7 million R&D contract, and I think we worked off most of it. There may be a smidgen of that left in backlog.

Great. Thank you very much.

That is all the time we have for questions. Would like to return things to Mr. Gitlin for any additional or closing comments.

Thank you, all, for your continued attention and interest in AeroViroment. We would like to remind you that an archived version of this call as well as all SEC filings and relevant company and industry news can be found on our website at www.AVINC.com. We look forward to speaking with you again following next quarters results, have a good day.

That does conclude today's conference call, thank you for your participation.