AeroVironment Inc (AVAV) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the AeroVironment fourth quarter and full fiscal year 2010 earnings conference call.

(Operator Instructions). With us today from the Company is the Chairman and Chief Executive Officer, Mr. Tim Conver, Senior Vice President and Chief Financial Officer, Mr. Jikun Kim, and Vice President of Investor Relations, Mr. Steven Gitlin. Now at this time, I would like to turn the conference over to Mr. Gitlin. Please go ahead, sir.

Thank you, Jonathan. Welcome to AV's fourth quarter and full fiscal year 2010 earnings call. 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 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 and is accurate only as of today, June 24, 2010. 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. We will begin with remarks from Tim Conver and Jikun Kim. And then we'll move on to questions. And now, it is my pleasure to turn the call over to Tim.

Thank you, Steve. Today, as I discuss our performance and our major long-term growth opportunities, I'll be discussing and focusing on small unmanned aircraft systems, Global Observers, Switchblade, and Electric Vehicle Solutions. The innovation of the AV team enabled all of these opportunities. But only by combining innovation with persistence, are we able to bridge the uncertain timing of adoption of innovation. We have sustained our investment in people, technology, and customer relationships for years to develop our core competency, and our position for AV leadership in these areas when customers are ready to adopt.

With that perspective in mind, let me layout our agenda for today's call. First, I'll discuss the fourth quarter, and fiscal year-end results and the important advancements in FY 2010 that have positioned us for the future. Then I'll address our expectations for fiscal year 2011, and where we expect to see key transition milestones and programs that will be important to our long-term growth. Jikon Kim will review our financial performance, and I'll close out our prepared remarks with my view of how fiscal 2011 is likely to roll out. And then we'll open the call for your questions.

Now let's address Q4 and fiscal year 2010. Our latest quarter was a record by almost every measure. Our team successfully transitioned the Digital Raven unmanned airplane system to full rate production and increased throughput to peak rates in Q4. The result was a new quarterly revenue record of $99 million, an increase of over 30% from the prior year. Careful planning, effective execution and operating leverage throughout this production surge, resulted in a Q4 operating margin of 24%, double the 12% of one year ago. As for the full-year, in our Q3 call, I told you that we revised our expected FY 2010 revenue to $245 million, plus or minus $5 million, with an operating margin of 9% to 11%. We achieved the high end of that range, with full-year FY 2010 revenue of almost $250 million, and we exceeded our profitability range with 12% operating margin.

From an operations perspective, we successfully flexed our production system and our supply chain, demonstrating both demand surge capability and capacity, while proving our Digital Raven and Digital Data Link full rate production systems. In terms of visibility, we booked $48 million in Digital Raven orders from the government fiscal 2010 funding during Q4, and another $7 million after quarter end. However, $45 million of Army Raven orders from government fiscal year 2010 funding remain in the contracting process, and we expect to receive those orders by August. The delayed booking of this $45 million in government fiscal 2010 orders depressed our Q4 ending backlog. But we have good visibility into the value of these expected orders, and where they are in the process. Throughout FY 2010, we strengthened the connections between technology, products, programs, and customer relationships that will advance the adoption of AV solutions.

Now, let me tell you where I think we stand in four of our key market opportunities, and why I think they are important for our long-term growth. Beginning with small unmanned airplane systems, the transition of Digital Data Link to rate production for Raven small UAS was a major focus of FY 2010. And in Q4, we successfully completed that transition. We also demonstrated the newly developed Digital Puma in Q4, and we begin testing the new Digital Wasp. Integrating Digital DataLink into Puma and Wasp will be important in catalzying demand for these systems. Beyond the increased value of each of the three separate products, each of the these developments will ultimately come together to enable a completely digital, small unmanned airplane system product line, integrated with a common ground control system.

The incremental capabilities of this digital family of small UAS has the potential to materially improve force protection and force multiplication for small military units in four ways. By expanding the flexibility of platforms and payloads available for different situations, by multiplying the number of systems that are available and can be operated in the same space, by improving communication security, and by enabling ad hoc broadband communication networks in remote areas. AV's leadership in digital systems significantly improves our already strong competitive position in this market segment. And we will continue to invest to sustain our leadership position. We expect small unmanned airplane system adoption to continue within Department of Defense. We also expect future adoption to expand beyond DOD to segments like first responders, border patrol, and commercial applications. All of these market opportunities will apply globally.

For these reasons, I believe small UAS are still in the early stage of adoption. The Global Observer unmanned airplane system is at the other end of the spectrum from small UAS. Geo is large, and intended to be the world's longest endurance plane. That extreme endurance, combined with extreme altitude capability will make Global Observer the first stratospheric satellite system. In operation, one geo airplane will typically maintain a tight orbit at a selected position for about a week at a time, and then be replaced by a second geo airplane. This two-airplane system rotation will maintain seamless persistence over any 600 mile diameter space on the globe, able to perform in many ways like a satellite, but at a fraction of the cost. Geo will be able to use the stratosphere for the first time on a regular basis, as conventional airplanes have used the atmosphere, and as satellites have used space.

It is designed to have significantly lower operating costs than conventional airplanes, due to its far fewer landings and greater efficiency. Relative to satellites, it will have the advantage of repositioning, while accommodating payload repairs and upgrades, in addition to lower costs. We envision that initial applications for Global Observer will address many of the communication relays, and intelligence surveillance, and reconnaissance needs of the current sponsors of the Joint Concept Technology Development program. Other applications are likely to follow. Production adoption of Global Observer could be transformational for AeroVironment.

In FY 2010, we completed the development of the Global Observer system, and the fabrication of the first geo airplane. We moved part of our team to Edwards Air Force Base with Airplane Number 1 for ground and flight testing. We recently completed the ground testing segments of this phase of the program, and the team is preparing for flight testing now. Airplane Number 2 is in the final assembly process, as expected. The extensive ground system testing of Global Observer Airplane Number 1 essentially completes the engineering development phase of the JCTD program. This development program validated a half dozen new technologies that were necessary to enable the breakthrough capabilities of the geo system. The Global Observer program team also developed and validated the production system, the supply chain, and the production facility to support sustained low rate production of Global Observer.

Great progress was also made on Switchblade in fiscal year 2010. We successfully demonstrated this loitering miniature airborne munition system to multiple US government customers. We also supplied prototypes for advanced evaluation to many of those customers. And we saw the first public government announcement regarding potential procurement interest in Switchblade. In FY 2010, Switchblade prototypes were further validated by extended customer environmental and safety tests. Years of technology adaptations, miniaturization, and systems integration enabled this new capability that combines small size, portability, platform reliability, precision, eyes-on-target, affordability, and the avoidance of collateral damage. This unique combination of capabilities has attracted broad customer interest, especially with the ability to mitigate collateral damage in the current threat environment. I believe the probability of adoption is good, and I believe that once adopted, applications could proliferate. The volume potential of a full scale Switchblade adoption could drive significant growth for AV.

Our efficient energy systems segment set the stage in FY 2010 for the production launch of our Electric Vehicle Charging Solutions this year. Plug-in electric cars are coming to a dealer near you next year, and the charging infrastructure to support their adoption is poised for rapid growth. We secured the first large scale competitive commercial award in this emerging electric vehicle infrastructure space in fiscal year 2010. In our Q3, Nissan North America selected AV to supply the home charging dock for the Nissan LEAF all-electric vehicle. Then early this quarter, Plug In Carolina announced the selection of AeroVironment to provide the public chargers for cities across South Carolina.

We believe that this is the first full and open commercial competition for a nationwide automotive contract for home charging. We are delighted to have won both of these competitions, and we are committed to the success of those customers, as they start rolling out in the second half of our fiscal year 2011. These are important early relationships, supporting our goal of electric vehicle charging market leadership. Our Electric Vehicle Solutions product line will include both private and public charging systems. Residential charge systems, like those supporting the Nissan LEAF will typically be installed in a garage. They will be used primarily for overnight charging at home.

Public charging will include commercial versions of the residential charging systems, as well as fast chargers. The public charging systems will typically be located at places like work, retail stores, car dealerships and airports, to provide recharging while parked. Our fast chargers can provide a full recharge in minutes. These public systems are anticipated to be strategically located, to support drivers traveling beyond their battery range. Corporations and governments are expected to use both opportunity charging, and fast charging to support their electric vehicle fleets in the future.

We made some important changes to our leadership team in fiscal year 2010, that also positions us well for long-term growth. John Grabowski became our first Chief Technology Officer, and is ensuring the appropriate focus and allocation of enterprise resources to innovation and market needs. Tom Herring became General Manager of our UAS Business segment, after leading UAS Strategy and Business Development. Prior to joining AV, Tom successfully led multiple divisions for a large defense company. Roy Minson joined us as Vice President of Business Development and Deputy UAS General Manager. Roy brings deep experience building large defense programs, and has led successful capture teams for multi-billion dollar initiatives in the defense market.

Kristen Helsel became our Vice President and Product Line General Manager for Electric Vehicle Solutions, within our EES segment. Kristen previously directed our Product and Business development for EV Chargers, and has both corporate and entrepreneurial experience in the auto industry. Jikun Kim became our interim CFO, after serving as our Vice President Finance and Controller. Before joining AV, Jikun served as CFO for a business unit within a large defense company. I'm pleased to announce that this week the Board made Jikun AV's Senior Vice President and Chief Financial Officer. These FY 2010 accomplishments laid important groundwork, to both enable and drive AV's long-term growth.

Now, let's take a look at the, into FY 2011 and the major milestones and the transitions we expect this year, starting with our small unmanned airplane systems. Digital DataLink is proving to have broad appeal, supported by positive feedback from the field, and is likely to continue to grow in importance. The largest component of our FY 2011 revenue is expected to be Digital Raven systems and retrofits. Digital Puma will be ready for production later this summer. Puma systems have received high marks in user evaluations to date, and I believe the near-term availability of Digital Puma is likely to catalyze broader adoption, and generate significant revenue this year. Production readiness and associated investments are starting now, to support the anticipated demand for Puma production ramp-up later in 2011.

Wasp is next up for digital transition, and is likely -- and is already in test. We expect it to be in production later this year, in our second half. Like Puma, analog Wasp evaluations have been well received by multiple customers. The Army has completed training on it's initial family of systems, and will evaluate it's effectiveness with the deploying brigade combat team. While we don't expect army adoption of family of systems for their future small UAS requirement before 2012, the opportunity is large, and we will remain focused on anticipating and meeting our customers' needs. International interest in small UAS remains high, and I believe represents significant opportunity for us. We are engaged on multiple opportunities, and we are optimistic about their potential. However, we are cautious about order timing.

We expect successful ongoing Switchblade evaluations will drive continued small orders for multiple customers in FY 2011. I am optimistic yet again, that we could see initial adoption of Switchblade beyond small orders this year. We are fully prepared to support the early adoption of Switchblade in larger quantities this year, if customers so decide. And we are prepared to optimistically persevere, if they are not ready. In FY 2011, the JCTD program for Global Observer will be primarily focused on flight test and operational utility assessment at a Edwards Air Force Base. This is the most important phase of the program for customers considering adoption. The innovative Global Observer solution is so different from legacy solutions, that it's flight test and it's operational utility assessment are prerequisites for customer adoption decisions. The results of these evaluations will inform requirement and procurement decisions for multiple customers. When the mission effects, and their relative affordability have become obvious to demonstration, we expect them to be compelling.

Within our EES segment, we believe we maintain the leading market share in both industrial electric vehicle fast charging and Electric Vehicle Test Systems. However, we expect industrial forklift demand, and consequently PosiCharge revenue to remain low in 2011. We also expect stable demand for our EV Test Systems. We expect activity in the area of on-road Electric Vehicle Solutions will continue at a very high rate throughout FY 2011. We plan to roll out both residential and public EV Charging Solutions in production this year. Revenue should begin to grow in the second half as our charge dock installation ramp to support the rollout of the first new plug-in electric vehicles.

Initial public charging infrastructure should begin to be installed in the same timeframe. We are actively engaging multiple other business opportunities as we work to broadly support the charging infrastructure needed for the coming plug-in electric vehicles. While we worked towards market adoption of all of these growth opportunities, we will maintain our focus on anticipating and responding to the needs of our current customers to ensure that we remain valuable contributors to their ongoing success. And now, Jikun Kim, our Chief Financial Officer, will review our financial performance for Q4 and for FY 2010.

Thank you, Tim, and good afternoon, everyone. AeroVironment FY 2010 Q4 results are as follows. Revenue for the fourth quarter was $99.4 million, an increase of 31% over Q4 last year of $76 million. Looking at revenue by segment, UAS revenue was $92.1 million, an increase of 41% over the prior year. The growth in revenue -- UAS revenue was largely due to higher products and service revenues, driven by Raven DDL system deliveries and retrofitting of Raven B analog systems with DDL capabilities. This growth was offset by lower customer funded R&D work, largely due to the Global Observer transitioning into the ground test and operational utility assessment phase of the program. EES revenue was $7.3 million, a decrease of 32% from Q4 last year, primarily due to lower PosiCharge and Electric Vehicle Test System deliveries.

Turning to gross margin, gross margin in the fourth quarter was $43 million, up 63% from fourth quarter last year. Gross margin as a percent of revenue was 43%, versus 35% in the fourth quarter last year. By segment, UAS gross margin was $39.2 million, up 88% from the fourth quarter last year. As a percent of revenue, UAS gross margin was 43%, compared to 32% in the fourth quarter last year. The increase in gross margin percentage was largely due to higher absorption of fixed overhead costs, and higher mix of fixed price contracts in the quarter. EES gross margin was $3.8 million, down 31% from the fourth quarter last year, primarily due to lower sales volumes. As a percent of revenue, EES gross margin was 52% versus 51% in the fourth quarter last year.

SG&A expense for the quarter was $11.6 million, or 12% of revenue, compared to $10.3 million or 14% of revenue in the prior year. SG&A expense was higher, primarily due to higher administrative and infrastructure costs. R&D expense for the quarter was $7.9 million, or 8% of revenue compared to the prior year amount of $7 million, or 9% of revenue. Growth in R&D was primarily driven by increased development initiatives. Operating income for the quarter was $23.5 million, or 24% of revenue. Operating income was 161% higher in the fourth quarter, than the fourth quarter last year, primarily due to higher gross margins, partially offset by higher SG&A and R&D expenses. Net income for the quarter was $15.6 million or $0.71 per fully diluted share, compared to $5.8 million, or $0.27 per fully diluted share in the same quarter last year.

Now, moving quickly through our year-to-date results, revenue for the full-year was $249.5 million, up 1% from the prior year period, $247.7 million. By segment, UAS revenue was $224.2 million, up 6% from the prior year. The increase in revenue was largely due to higher service revenues of $20.9 million, primarily driven by retrofitting Raven -- Raven B analog systems with DDL capabilities, increased customer funded R&D work of $12 million, primarily driven by increased spending on the Global Observer program, and partially offset by lower product deliveries of $20.1 million due to lower SUAS deliveries.

EES revenue was $25.3 million, down 30% from the prior year period, primarily due to a decrease in product deliveries of our PosiCharge and Electric Vehicle Test Systems. Gross margin for the full-year was $96.8 million, compared to $88.6 million a year ago. Gross margin as a percent of revenue was 39%, up 3 points from the prior year. By segment, UAS gross margin was $85.1 million, up 20% due to higher mix of fixed price contracts. EES gross margin was $11.7 million, down 34%, primarily due to decreased sales volumes. As a percent of revenue, EES gross margin decreased from 49% to 46%, driven by lower product revenues.

SG&A expense for the full-year was $42.5 million, or 17% of revenue, compared to the prior year period of $34.2 million, or 14% of revenue. R&D expense for the full-year was $24.5 million, or 10% of revenue, compared to $21.8 million or 9% of revenue in the prior year. Operating income for the full-year was $29.8 million, or 12% of revenue. Operating income decreased 8% from the prior year. The effective tax rate for the full-year was 31.1%, up from prior year of 28.3%. This increase was primarily due to the expiration of the federal R&D tax credit program. Net income for the full-year was $20.7 million, or $0.94 per fully diluted share, compared to $24.2 million or $1.11 per fully diluted share last year. Looking at backlog -- funded backlog at the end of the fourth quarter was $72.3 million, down $42.5 million or 37%, from April 30, 2009.

Turning to our balance sheet, cash equivalents and investments at the end of the fourth quarter totaled $171 million, up $25.8 million from the prior quarter. Positive cash flow was generated by income and depreciation, partially offset by capital expenditures. Turning to receivables, at the end of the quarter, our accounts receivable, including unbilled receivables totaled $57.4 million, down $5.2 million from the prior quarter. Total day sales outstanding were approximately 52 days, compared to 89 days at the end of the prior quarter. Taking a look at inventory, inventories were $20.9 million at the end of the quarter, compared to $29.7 million at the end of the prior quarter. Days in inventory were approximately 33 days, compared to 72 days at the end of the prior quarter. Now, turning to capital expenditures, in the fourth quarter, we invested approximately $3.2 million, or 3% of revenue in property improvements and capital equipment. Now, I would like to turn things back to Tim to discuss AV's expectations for our FY 2011.

Thank you, Jikun. I would like to now describe how I see our performance developing over fiscal year 2011. I have characterized our FY 2011 as a year of transition, where we expect to see the initial adoption of some of our new products, and key milestones on others. We are sensitive to the uncertain timing of innovation adoption and order flow, and have therefore tempered our optimism in planning for FY 2011. As a result, we expect about 10% to 15% growth in fiscal year 2011. We again, expect operating profit of 12% to 14% of that revenue. This year, the key Global Observer milestones will be flight tests and operational utility assessment. Because we have completed the development phase and most of the production phase, the remaining fiscal 2011 program revenue is expected to be about half of last year's revenue.

We do think it's likely that we will see broad adoption of Puma, possibly generating enough revenue this year, to more than offset the declining revenue we expect from the Global Observer JCTD program. We are optimistic about the adoption of Switchblade, but somewhat uncertain on the timing of significant volume adoption. Therefore, we are limiting our fiscal 2011 planning revenue for Switchblade to less than $10 million for now. We're planning on our PosiCharge and our test equipment business to remain about flat year-over-year. Our Electric Vehicle Charging team is planning to ramp up revenue by Q3, and grow significantly by Q4, driving high double-digit year-over-year growth in our EES segment revenue. Overall, we expect fiscal year 2011 revenue timing to be a little more balanced than last year, with about 40% in the first half, and 60% in the second half.

Three factors have shaped the general timing of our fiscal 2011 financial plan. Because $45 million in government fiscal 2010 Digital Raven orders will not be received until August, we will have low first quarter revenue, probably representing about one third of first half revenue. Because we're preparing for Digital Puma and Electric Vehicle Solutions production in the second half, our FY 2011 research and development investments will be heaviest in the first half of this year. And the Digital Puma and EV Charging shipments are expected to generate revenue in the second half. More specifically, Q1 will have high SG&A and R&D expenses, combined with lower revenue, which I expect will produce a loss of about 20% in the quarter. Then Digital Raven orders in August should support a strong Q2. New Puma orders should add to revenue in Q3 and Q4, and we expect production EV Charging Systems to contribute revenue in Q3, and to accelerate in Q4.

I hope this gives you a good sense of how we see the dynamics of our business shaping our results for FY 2011. Beyond the financial performance that we've guided on, we expect key milestones in FY 2011in major developments that we have been working on for years. If Digital Puma and Wasp are adopted with the same acclaim as Digital Raven, which we anticipate, we will be well-positioned for strong long-term, continued growth in small unmanned airplane systems. If Global Observer demonstrates the performance of the mission effects we expect in it's flight test program, production adoption probability increases significantly. And production adoption of Global Observer would certainly drive significant growth for AV. If Switchblade continues to perform as it has, under increasingly rigorous evaluation, it could be adopted in large quantities, creating a major new business for AV.

And drivers around the world are about to start buying plug-in electric vehicles. In many cases, our electric charger -- electric vehicle chargers will be bought to support them. If the adoption of this innovation is sustained over time, the automotive business, and it's associated fueling infrastructure will change. That would be a very big deal, and a good thing, and AV will be part of it. We are excited about the large opportunities in front of us, and I'm confident of our extraordinary team's ability to execute both on the developments, and on our customer responsibilities. Thank you for your continued interest in AeroVironment and Jikun and I will now take your questions.

(Operator Instructions). Our first question comes from Peter Arment from Gleacher & Company. Your question, please.

Tim, Jikun. Question on, Tim, on Global Observer. When exactly are you expecting flight tests for the first aircraft?

Peter, we've been saying, at least I've been saying first flight in the first half of our fiscal year. So obviously we're in first half. We've completed most of the ground testing, and we're preparing for flight tests. But beyond the general timing there, I, I don't want to predict a specific date.

Okay, and was -- is there an expectation that you would also have a second aircraft in the air this fiscal year, or how is the time line -- how do we think about that?

Airplane Number 2 is still in it's final assembly process. There are three stages on that assembly 4 and it's in stage 3 with initial installation of it's propulsion and fueling systems. So it would be available for initial testing later in this summer.

Okay, and then just regarding your guidance, I mean you had really great execution. Again, the back half of this fiscal year that you just completed, and looking out at your kind of your revenue guidance, your operating income kind of projections. It looks like this is going to mirror a lot of what last year, in terms of a loss in the first, first quarter, and then sequentially ramping quite steep again, even though that you're going to have more of a more balanced revenue, is that correct?

Yes, I think we clearly see a very light first quarter, different rationale than last year, but you're right about the general pattern of that very low first quarter. Obviously this year, it's the delay of that -- of FY 2010 government funding process. So I think the key aspect of that is, we do have good visibility of where that contract is in the process.

Have you seen any changes from your customers in terms of demand? I mean you've indicated the adoption of the DDL and the feedback continues to be very good. But any change in terms of the Army's desire in terms of their overall requirements?

No, I think they seem to be consistently supporting the value of these systems to small teams and, and the adoption of new improvements in those systems as they become available. So we have seen strong uptake on the Digital Raven systems. And one of the reasons for the -- one of the multiple reasons that contributed to the delay of that $45 million contract was the high priority the Army put in on the initial contract for the family of systems last year, which bumped that up in front of the larger Raven production contracts in the Q.

Okay, and then just quickly, on Puma, when will the -- you be ready for production with the full DDL, for Puma?

We have gone through initial testing with our customer on that system, and we are preparing for rate production as we speak. So we would be expecting to be ready for production deliveries early in the second half.

Okay, and then just lastly, you mentioned EES regarding the LEAF adoption. How -- what has been so far the feedback on what you've heard from Nissan in terms of -- we've heard that they have sold out on a lot of their preregistration for the initially for the LEAF, but it's difficult to predict the adoption rate or the conversion rate there. What have you heard initially from Nissan?

Well, I, I can tell you what I look as in the public domain, which I'm sure you are equally aware of, but they seem to be very positive about the level of interest and takeup. The website opened -- the Nissan website opened for scheduling assessments for charge dock installation a week ago. And of course we operate the back end of that for charge dock scheduling. And I can tell you that we are in the first week, approaching 1000 registrations, for charge funded registrations for charge dock assessments. So I think that's all very positive news so far, about the adoption intent around that vehicle.

Okay, great. Thanks again. Congratulations.

Thank you.

Thank you. Our next question comes from the line of Brian Gesuale from Raymond James. Your question, please.

Hey, guys, how are you doing?

Hi, Brian, how are you?

Good, good. Say, Tim, I wondered if you could give us a little bit of help on the split in revenue in fiscal 2011, between the EES segment and UAS segment. It seemed to me, if I kind of do the back of the envelope on some of your comments, that your guidance implies almost flat UAS revenue, with significant growth of up to maybe $25 million or so in the EES business. Is -- was that intent with your comments -- and is that roughly correct?

Well, I think what I would characterize it as a high percentage growth in EES, driven by the adoption, the additional adoption of Electric Vehicle Charging solutions, within UAS, as I mentioned, we see a decline in revenue in Global Observer, as we reach the latter stage of the existing development contract, with the emergence of Digital Raven's being significant this year, relative to last year.

Okay, okay, that's helpful. And then on Global Observer, if I might, part of that down 50% in that business, did that requires some additional contract work, or are those contracts been left, to kind of extend you through the testing phase? How should we look at that?

I didn't quite catch your, the intent of your question, Brian. Could you try it one more time?

Yes, I'm sorry. If we look at Global Observer, you had mentioned that being about half as large as you -- in fiscal 2011 versus fiscal 2010.

Right.

And if I recall back to the $123 million or so contract you had, I think you're very close to the end on that. And I think your -- your comments suggest a $30 million to $35 million run rate for Global Observer, in 20111. Do you need additional orders to support the test phase of that program to get to that number, and when should we expect the timing?

Okay, thank you. I think the expectation for Global Observer in FY 2011 is lower than your assessment. And we're expecting some additional revenue, or some additional funding to be applied to that program. But most of the funding we're planning on is from the basic contract and within that original $120 million that you mentioned.

Okay, thank you. And then my final question is back to the residential charging product. If we look at the way the year kind of loads in the second half of the year, and a large part of that growth looks like it comes in the fourth quarter, driven by the adoption of LEAF, how comfortable are you with the margin profile on that incremental revenue, this year with Raven? And your fourth quarter, the execution has been superb to put record operating profits up. What does it look like with LEAF being a preponderance of that back half ramp in fiscal 2011?

That entire Electric Vehicle Solution business obviously is a new business, in a new market. And they are, they are new products. So having said that, our approach in this new market area, is similar to our approach in all prior areas, where we've been investing for years in the technology, and the development of the applications solutions. Such that we position ourselves to be the innovator, and have a good chance of becoming a market leader, as customers begin to adopt in these areas. And we have in the past, and in this case as well, relied on that positioning, that technology, and having proven out those solutions ahead of time, to provide the ability for our customers to be more comfortable in adopting our solutions, and to assure their success when they do adopt. And based on that, we have not been in a mode of buying in, to new opportunities with losses. So long answer, to our intent is to have profitable growth, as we, as we grow with the new market adoption.

Okay. When you say profitable growth, is this kind of in line with the corporate 12% to 14%, or should we expect a little better or worse?

Well, I think if we go to our guidance, this year, we're continuing to expect 12% to 14% operating profit for FY 2011. And as you've noted, we expect to see some significant percentage growth in EES, driven entirely by volume of the charging systems.

Okay, okay, and then, Tim, just one final one on LEAF. Are you guys -- I think there was some discussion at AeroVironment as to whether you would be doing the charger roll out globally, or just domestically. Is there any, is there any color on that, that you can provide?

Sure. Our current contract is with Nissan North America, and it covers the nationwide roll out of LEAF across the United States.

Okay. Terrific. And just one last one on the cleanup, can you give us your tax rate assumptions for next year, please?

Yes, I think for now, we should stick with the 35%. It does depend on the federal R&D tax credit, but the 35% assumes no extension of the R&D tax credit.

Okay. Thanks so much for bearing with all of my questions.

Thank you, Brian.

Thank you. Our next question comes from Michael Lewis from BB&T Capital Markets. Your question, please?

Thank you. Hey, Tim. If you could just walk through the Raven expectation in Q1, again for me. And I think the question really has to do with, what portion of your funded backlog, should be performed upon with regard to Raven, Raven work in Q1. In in other words, how much do you have left in backlog on Raven right now?

Well, let me see if I can provide some help on the question without actually answering it, Mike. So if we go back to the government fiscal 2010 budget and funding for Raven and Raven Digital DataLink upgrades, we booked, I think $48 million of that in FY 2010, another $7 million, since then as we've entered FY 2011, and then we have the additional $45 million in process. So that -- that $55 million that was -- some of that was shipped in Q4 of FY 2010. The balance is in backlog, in that $70 million starting backlog, and then we have another 45 on the way, we believe, in August. Now, there's -- not all of that backlog is immediately shippable. The customer has some schedules that they have laid out, on when they want to receive shipment on that. As usual, virtually all of our backlog is shippable in less than 12 months, but not necessarily immediately.

Okay. And so, where I'm trying to go here, is there any inventory in the system that is at risk -- that is an at-risk inventory amount to AeroVironment? In other words, are you producing it before you have the contract in hand, right now?

We, we, we do that on, in a number of occasions, as a matter of course, Mike. So that's -- and without commenting specifically here on any given program, our -- our basic production process, and our process of supporting customer needs, has driven that behavior for as long as we've been serving the defense department.

Okay, yes, and that's fair. That's a fair assessment. Let me just -- let me just shift gears here real quickly. If you look at the way that you had highlighted the guidance in the first quarter, you had -- I hope I'm quoting you correctly. You said you're looking for a loss of 20% in Q1, or was it $0.20 in Q1?

20%.

20% versus the prior -- the prior year quarter?

No, I would say that 20 -- we expect to have a first quarter loss of -- representing about 20% of first quarter revenue.

Got you.

Yes.

Yes, a negative 20% operating profit margin.

Got you, okay, that's helpful. Then two housekeeping questions here. Can I get operating cash flow in the -- rounding out the year, also your D&A? And then just one more quick question, a qualitative question for Tim while you grab that for me. Tim, we hear a lot of talk about the Global Observer. It's a huge opportunity for the Company, but what's really lacking in this conversation, has been AeroVironment actually coming out publicly, and trying to quantify this opportunity for the investment community. So I guess the question to you is, if you look out over the next three to five years, and if this program is actually awarded to you, what do you think this opportunity is worth, with regard to potential revenue over that time period?

Well, we have not put a specific number on that, Mike, for the reasons that -- that this capability has never existed before, and therefore is not an established market for this capability. We would expect that it would -- disintermediate some of the gap-filling procurements that have been made over the last number of years, to provide persistence for both communications and ISR. And if you look at those programs, they add up to billions of dollars. There -- and new programs to address that need continue to roll out, and they appear to stay in the hundreds of millions and billions of dollar level. So, that -- and that doesn't address the satellite solutions. So I, I think the -- the size of the market opportunity that Global Observer could be in a position to address, is in that realm. And if you compare that to the $250 million size of AeroVironment, it, by any measure, it is a huge opportunity.

And getting down to specifically guessing how many might be procured when, is -- would be a guess. And for that reason, we've tried to avoid it. I'll take -- I'll try to go one step further, though, and say the size -- a Global Observer system would need to be, at a minimum two airplanes and one ground control system. And many customers might decide, they want to have three airplanes, and more than one ground control system. If you look at that, you would expect that minimum system size to be tens of millions of dollars, compared to the hundred thousand-ish size of a small UAS Raven system.

So to ask the question another way, more in a comment, it's likely a billion dollar plus opportunity to the Company?

Well, again, I want to avoid putting a specific number on it. But I think what I've tried to do is characterize the size of the market opportunity, in is -- in that realm. And I think further, we would expect as adoption goes on, it would -- the rate of adoption is likely to increase.

Very helpful. Thank you so much.

Just to go back to the cash flow metrics that you were requesting, operating cash flow for the quarter was $47.5 million and depreciation and amortization was $2.5 million.

Thank you.

Thank you. Our next question comes from Troy Lahr from Stifel Nicolaus. Your question, please?

Thanks. I just wanted to kind of drill down on the revenue guidance a little bit. The growth that you're calling for, of about 10% to 15%, I guess had the 45, 50 million not slipped into this year, it really looks like revenues would have been down quite a bit. Can you just kind of help me walk through the puts and the takes and why? Is this all Global Observer? And I thought you said earlier, and maybe I misheard you, but did you say Puma is fully offsetting Global Observer, or did you mean Raven?

Well, let's start -- if we start at the first part, Troy, I think you're right. We, we had a flat year last year. And had the G FY 2010, and a few other orders not slid out of 2010, and if we had shipped those in 2010, then we would have had a growth year in 2010, and then you're looking at about a flat year in 2011. So between the two years, we've got a flat year, and a growth year. I think I see characterization of FY 2011 as a trans -- a key transition year is, from my perspective a good one. With the adoption of the, initial adoption of Electric Vehicle Charging Solutions, the probable adoption of Digital Pumas, not Ravens, but Digital Pumas, by possibly multiple customers, being significant upside potential, or upside growth in FY 2011. And that's offset by the Global Observer program, which is in the final year of it's a little three-year plus plan, and as a result, the planned revenue is tailing off significantly. I did say, that it's likely that the adoption of Puma is, is likely to more than offset the reduced volume in Global Observer that we expect this year.

Okay. I guess am I missing something now? Is it going to be a flat year? I guess you did about 250 last year in revenues, $250 million. But assuming you had that extra $50 million, you would have done probably closer to 300. You back out the $50 million from 2011, I mean it looked like you would have been down quite a bit, though. Am I missing something? Because you said flat.

Yes, let me see if I can help you out here. I think the reference that you're talking about was in our Q3 call, where we discussed a $50 million guidance reduction. Not all of that had to do with the revenue slip, only about 75% was associated with the revenue slip. The other 25 was EES. And as you know, the EES business as it currently stands is a book and burn business. So that, that's really not a slip. It's just -- the market never materialized to the position that we thought it would be at the beginning of the year. Does that help any?

Yes, okay. I'll go back and take a look at that. And then so just so I'm clear again, then, you are assuming -- because at one point, you said there's probable adoption of Digital Puma. But then, your guidance is based on that adoption?

Yes, well, our FY 2011 plan is -- assumes that we will book initial contracts for Digital Puma in the first half, and we'll be shipping those in the second half.

Okay, and then lastly, can you talk a little bit about how the 2011 budget for Raven should start impacting your business later on in the year next year? And it looks like 2011 versus 2010 for Raven was off quite a bit. Is that going to be a head wind that you're going to have to face next year, or is that more of a fiscal 2012?

No, I think we're generally looking at year-over-year Raven revenues being generally about equal FY 2010 to FY 2011.

Okay. So the FY 2011 budget then should -- the decline that we saw in the FY 2011 budget year, that's more of a 2012 issue for you guys?

Well, I'm not sure how to characterize it, but I -- other than to say we are, we are expecting about the same level of revenue on Raven this year as we had last year.

Okay, all right. I'll let somebody else ask some questions. Thanks, guys.

Thank you, Troy.

Thank you. Our next question comes from Josephine Millward from The Benchmark Company. Your question, please.

Good afternoon.

Hello, Josephine. How are you?

I'm good, how are you, Tim?

Very well.

I just wanted to follow up on the Puma question. Now, you received an ID/IQ contract from SOCOM, I believe in late 2008, and haven't really seen a sizable Puma order since. Can you talk about what's driving demand for Puma at this point? If you can give us a little more color on where the business might be coming from?

Let me give it a shot, Josephine, and then I'll probably get a follow-up from you. The initially, our initial Puma customer was, as you point out, Special Operations Command. They took delivery of an initial small quantity, and as they often do, went through extensive user evaluation in the field with those systems. And I think in general, were very pleased with them. We got a lot of good feedback. At the same time, we, we -- not at the same time, but we subsequently received a contract to integrate Digital DataLink into Puma. And it was that contract that we developed, or demonstrated the initial performance on in Q4 of last year.

Like Raven, when we did the digital upgrade to Puma, we took the opportunity to address other system upgrades that were available, based on new technology and new learning. So we believe, we have not only added digital capability to that system, but we have upgraded its capability beyond it's initial instantiation. And so, a third element on the Puma was that multiple other customers, primarily during last year, we were finally able to supply evaluation systems to other customers, beyond Special Operations Command. And those customers have all -- no, maybe all is an exaggeration. Many have -- many of them have developed requirements for the adoption of that system. And as we now make the digital version of Puma available, I think that is likely to catalyze orders, from more than one additional customer for that system.

So Tim, based on your earlier comments, is it fair to assume you're looking at maybe between $20 million to $70 million in Puma revenue in your fiscal 2011 guidance?

Well, again, Josephine, I don't want to get too specific revenue numbers for, at the product line level. And I want to keep our guidance at the enterprise revenue and operating profit level. But within that, our ex -- the level of appetite for this capability, across more than one customer appears to be significant. And we are aware of activity within those customers to translate that requirement into contracts. Now, obviously those contracts aren't here yet. So there's -- we're, we're trying to be conservative about order timing. But the -- in order to exceed the fall off in Global Observer revenue, we'd have to have revenues, at least in that order of magnitude.

That's very helpful. Thank you. Tim, one more question. Now Congress recently attempted to cut funding for Honeywell's Micro Air Vehicle, due to performance and reliability issues. And I think the Air Force is also complaining about the Global Hawk with their cost overruns. So that's -- how do you think this could impact your competitive position going forward? Can you talk about that?

Well, I think in general, our strategy has been to focus intently on ensuring that our customers are successful when they adopt our solutions. And I think to my knowledge, our customers are indeed happy with the support and the performance they get from our existing production products. I am -- I know that there is a -- Puma has been very well received by those customers that are evaluating it. And we believe the digital version of Puma will improve in many areas on the analog systems performance.

In general, our small unmanned airplane systems are an order of magnitude lower cost, than the next size of UAV platform. And like small electronics in the commercial sector, the performance continues to improve. And our intent, and in many cases we've been successful in that, is to continue to drive costs down as our volume and our learning curve grows. So I believe that that is appreciated by the customer base, and I believe it continues to position us well to compete for ISR and communications requirements that can be served from unmanned aircraft.

Thank you. I just have a quick housekeeping question. Can you tell us how many Ravens you shipped during the quarter and where you are, in relation to the Army's acquisition objective? And also, if you can give us a sense of what the service revenue was for small UAS and customer-funded R&D?

Okay. So in the fourth quarter, against the Army objective, we are at 70%. So in the fourth quarter, we shipped 159 systems against that. And your second question was service revenues in the fourth quarter?

Yes.

Okay. So $32 million of service revenues, and $16.5 million of project R&D work at the Company level. Again, we don't go down below that level for segments.

Great. Thank you very much.

Thanks, Josephine.

Thank you. Our next question comes from Jeff Evanson from Dougherty & Company . Your question, please.

Good afternoon. Thanks for taking my questions.

Hi, Jeff, how are you?

Well, Tim, can you tell me a little bit about what has happened in the family of systems, to push your expectation out beyond 2012? I'm looking at the transcript from last quarter, and there was a great deal of discussion about that opportunity then. So what changed there?

I don't think anything has changed in our anticipation of timing on family of systems, Jeff. Our -- the Army is clearly interested in evaluating a family of systems, as the next generation of their small UAS requirement. And I think our prior discussion was pointing out those, the location of those planning discussions within Army's documents, and about the Army's contract for a one-system, one family of systems outfitting of a brigade combat team to evaluate that capability, and it's utility for future Army planning. So I believe that the interest remains as it was, if not stronger. And we'll see over time as they evaluate this initial system of Ravens, Pumas and Wasps in the field, how that meets their, the development of their requirement over time. The -- I don't believe we ever thought or stated that we expected adoption prior to FY 2012.

Fair enough. You didn't. These two Global Observers you're making right now, who owns those at the end of the project? Are those deliverables under the JCTD?

That's correct. The, the customers that funded the JCTD take ownership of the residual assets of the program, after the flight test and the utility demonstration assessments.

Okay. Mr. Kim, a question for you on the quarter. I guess I'm having a bit of a hard time understanding the profitability here in the quarter, and I'm hoping you can clear that up. What confuses me is kind of incremental margins versus gross margins. If I -- and these are just assumptions, but if I were to assume you did a quarter where you had $75 million of revenue with an 18% operating margin, that would then imply that the incremental $24 million of revenue beyond that had operating margins of over 40%. And that's, in fact, in excess of your gross profit for UAS in the quarter. So can you help me understand the profitability or absorption rate adjustments? Or was there anything unique in the quarter, that we should know about?

Okay. So going back to the fourth quarter revenue, approximately -- we had approximately 40% of the year's volume in the fourth quarter. And relative to Q1 and Q2, you can see that we had some operating losses in Q1, and not such a good performance in Q2. So the fixed overhead costs, I think you might be able to do some calculations there. You could see that the absorption in the fourth quarter was pretty high, and as a result, the margin did expand quite a bit. The other contributing factor is the fixed price to cost plus mix. In the fourth quarter, we actually had -- let me just confirm that number. Yes, we had a fixed price contract mix of 74% versus 26% cost plus. So those two factors, really drove the performance in our gross profits in Q4. Does that help?

There's -- the repairs work is fixed price?

There -- it's a combination actually. The DL kits are sometimes fixed price or cost plus. In this particular quarter, we did have the higher volume of fixed price DDL retrofit kit activity.

Does that mean you might have a shift back to cost plus DDL upgrades in future quarters?

It really depends on the contract, and different customers provide different types of contracts for retrofits.

Did you work more on fixed plus, as a proportion of your contract volume this quarter?

Yes. I mean based on the performance, absolutely.

Yes, okay, good. Thank you, gentlemen.

Sure.

Thank you. Our next question comes from Michael Ciarmoli from Boenning & Scattergood.

Hey, good afternoon, guys. Thanks very much for taking my question. Tim, if we can on Switchblade, I've heard, thinking about volume adoption, and what it's going to take to get that product delivered to various branches, divisions, I've heard that the customers are requiring a day/night infrared lens, and that's sort of one of the gating factors right now, that the Switchblade only has a visible lens. And that might be acceptable to go out in lower volumes, but in high volume, it's going to be necessary to have that IR capability. Is that, is there truth to that? Is that what's kind of holding up some of this adoption that's causing you guys to guide to, I think you said $10 million in Switchblade revenues?

Well, I -- to go back to my original, my earlier comments, Mike, we're limiting our planning to, to basically a continuation of the kind of small quantity trial and evaluation and development funding that we saw last year. A little more, but limited to that, that quality of contract versus the adoption of more significant volume. It -- I don't believe that the, the capability that you specified is an initial inhibitor of initial adoption. Clearly, a production version would implement capabilities beyond the prototype configuration that we have been demonstrating to, with great success for the last year. But I don't think, the lack of full scale production characterization is unexpected by the customers. And in fact, I think customers that have looked at and evaluated the prototype systems are very impressed with it's current level of capability.

Okay. Fair enough. And then just on Puma and Wasp, can you give us a sense -- and you've been talking about a lot about Puma. And I just wanted to know if you're including the Puma all environment variant as well. But if you can also give us a sense of what the existing Puma and Wasp install base is, where you might have retrofit opportunities. Some of you might have a better sense to kind of size up what retrofit is versus deliveries going forward?

Well, I'll -- I'll qualitatively address the last question first, Mike. It's relatively small. The Puma sales have -- were -- the initial deliveries against the ID/IQ, there was one in competition couple of years ago was limited, but it's less than $20 million of total revenue from the initial deliveries to now.

Okay.

So most of the opportunity that, that we would expect to see would be new system deliveries.

Okay. And then last question, regarding your service revenues, not the contract R&D, just your service, spares, repairs, they have toned it down now for three years. Are you anticipating, or what are you assuming in your full-year guidance, given an uptick, up tempo in Afghanistan, got to think increase usage, will lead to more needs for repairs to maintenance, what have you. Are you assuming any change to that trend this year?

Well, again, qualitatively, I would expect other things equal, that these small airplanes that basically crash land on every operation, would see more damage in the geographical environment that they see in Afghanistan, than that's what they would see in the desert. So, so I agree with you, in just in a qualitative assessment. One of the other -- if there's two other factors, as we look at our historical service mix, and our ability to project in the future. The first is that this is still very early on with the adoption and use of small UAS. So getting customers, as well as us, getting a good feel of what to expect over the long-term is a process that's still ongoing.

Secondly, most airplanes are operated in a rigorously controlled maintenance and repair and scheduled overhaul system. These airplanes are operated by soldiers, sailors, marines, airmen on the ground, in combat, and they really don't keep records. So they use them, and when they are -- when they need repair, they send the box in. So the record keeping is fundamentally different, and as a result, we have to learn experientially from the rear view mirror.

Right. Okay. Are you seeing any uptick in service now, given the recent troop surge in Afghanistan?

I don't think we've seen any effect to date, that is, remains significantly different than the past.

Okay.

But it's relatively early on, as you know.

Right, right. Fair enough. Thank you guys for answering my questions.

Thanks, Mike.

Thank you. Our next question comes from Howard Rubel from Jefferies & Company. Your question, please?

Thank you very much. Just a couple. First, with the customer funded R&D, are you picking up, Tim, additional business in terms of other, for other vehicles?

You mean other development, other UAV development programs, Howard?

Yes.

Yes, we continually pursue and work on multiple customer funded R&D programs, some of which are complimented, or compliment our IR&D programs. And others are independently pursuing work that different customers are looking for, and that's an ongoing process that we've had. We usually aren't talking publicly about most of those development programs. We've limited our public discussion, either to programs that are well into the development stage, and are with, approaching a window of potential adoption into production, or programs that customers announce independently of us and then we have addressed them and to that extent, I would bring to mind I guess the Nano Air Vehicle.

So you do have some new starts in the quarter, or am I mistaken on that?

New -- you mean in Q4?

Yes.

I don't think there were any major new starts that would have made significant contributions to revenue in Q4.

Okay. When I try to understand Global Observer for a second, I sometimes try to gain an appreciation of where you are, as a percentage of complete on the program. And I'm struggling a little bit to gain that, but my guess is you're probably 80% or so done, is that fair?

Yes, I think that's a, that's a good guess, Howard.

And so does your customer have budget money -- I mean you sort of said there's going to be some incremental dollars. I mean, one of the challenges is that all of a sudden we're going to see incremental R&D, if you don't get the budget dollars from your customers, if you find out there's something in flight test, or the ground test that isn't what you expected.

Well, I -- there's always that potential, that our I R&D funding might move around within the year to address opportunities or challenges on any given program. But I -- again, I would go back to our guidance of 12% to 14% operating profit, which obviously is below the I R&D line in our income statement. So I, I would expect that whatever we -- whatever movements there are in different programs within the enterprise, that we would accomplish that within the context of the 12% to 14% operating profit.

Because what will happen is Puma will contribute gross margin, and you might get some offset with incremental spend on Global Observer as an example, and that keeps you within that range?

Sure, but that -- I could probably imagine a dozen other scenarios that would be -- that would increase one program, and decrease another, but still end up within the revenue and the operating profit guidance we have provided. And that's typical of any given year for us, Howard. That's -- that moves around like that on a regular basis.

That portfolio that you want, and I understand that. Just two more things. One, could you go back to something Troy asked earlier, I mean the FY 2011 budget, at least the way we counted it, is substantially below the FY 2010 budget. I think FY 2010 budget for Raven was like $120 million, and the FY 2011 budget is on the order of $20 million, give or take a little bit. And so we're trying to square the box, that given what's left, and what's to go, there should be substantial pressure on your Raven business in the second half of next year. Excuse me. It was up $40 million. So I mean it was an $80 million fall off, and granted some of that was government office stuff. But you still see fairly dramatic drops. I'm trying to understand how that -- how you are thinking about it, given that they give you the money, and you get a sense of how to manage the planning.

Well, we think there's about $55 million that's currently identified in the G FY 2011 budget at it's current stage. So, so with the combination of some portion of that, and the balance of the G FY 2010 funding, we look at that, and come up with about an equal revenue split, on FY 2011 and FY 2010, as to overall Raven revenue.

We do have some backlog going into FY 2011 also.

Yes, I appreciate that. And the last thing is, are you at a point yet where there are other --

Howard, Howard--

-- people working on electric vehicles that are close to signing a contract with you for the fast charger?

Well, we, we are working broadly across the industry to, to work on, helping to support the rollout of these plug-in electric vehicles, with appropriate charging infrastructure. And that leads us to working with automotive OEMs, with utilities, with municipalities, and with federal governments, who are the major participants on the other side of that, of the table. There are also commercial enterprises that are engaged in charging infrastructure rollout. So we're, we're very broadly engaged. And we have a very broad set of solutions that I think will be attractive to different customers.

Okay, thank you.

Thank you. Our next question comes from Doug Christopher from Crowell. Your question, please?

Thank you for being so thorough on the call, and I do have some follow-up questions. I think on a follow-up to the last question, you said you delivered 159 Ravens to the Army I think in the quarter. And in the past, you had provided some guidance. Does that bring the total delivered to about, what is it, 1610, 1500, something like that?

Yes, yes.

Okay.

A little north of there, but yes.

Okay, and then can you just comment, what's the cumulative UAS delivered to date? Do you have that?

When you say UAS, you mean all their vehicles?

Yes, you had provided numbers like about 14,000, last year was about 12,000.

Okay. Let me refer to that data.

And just while you're looking that up, I just wanted to clarify as well, I think you said total capital expenditures in the quarter for the year was, what, $10.8 million, is that correct?

Yes. So let me refer you back to the total air vehicles.

Sure.

It was just -- just about 16,000, greater than 16,000 units.

Okay, great.

And for the CapEx for the year, it was -- correct, $10.8 million for the year.

And what would you expect to spend in 2011?

From a guidance standpoint, or I guess just estimation standpoint, if you assume 4% to 5% of revenues, that's probably a good metric to use.

Okay, 4% to 5%. Thank you for that. And then regarding the electric charging docks, can you go into maybe what are the economics, what type of sales you might make per dock, or what the potential is there? Give us a range of the economics there.

Yes, Doug, the Nissan had in terms of their LEAF program and our support of that program with the charging dock, they have announced the initial pricing for the charge dock itself, and it's installation at $2200 for a, quote, standard installation. And about $200 of that is associated with fees and permits, which leaves about $2000 for the hardware and the installation. And that's a standard installation, which assumes certain distance from the, the breakers, and a certain level of infrastructure in the breakers and in the house. So a non-standard installation would presumably cost more in certain circumstances.

And then, what portion -- I guess what I'm driving at is the portion, the economic portion to AeroVironment.

Well, that, so that -- we'll be providing the hardware and the installation.

Oh, okay.

And the revenue associated with that is about $2000.

Okay, okay, great. That does clarify it. Thank you.

Yes.

And then lastly, regarding the non-DOD and the foreign, non--US potential of the UAS, how -- would you expect it to be -- come from the non-DOD US sources first? Or might the international segment -- which one would be first?

Well, it's a guess, right?

Okay.

Having said that, probably international, military, allies first, and non-DOD customers within the US second. And I say that, because if you're not the Department of Defense and you're -- even if you are the Department of Defense, if you're operating within the national air space of the United States, you need permits and -- from the FAA. And the FAA is still in the process of establishing the rules for giving unmanned aircraft systems access to the national air space. So predicting when that might happen is, is like predicting the timing of adoption of innovations.

Okay. So that's basically the ongoing issue. It's still there, right?

Right. But there are -- there is clearly a market opportunity beyond DOD, once that, once that access to the air space is available.

Okay. Well, thank you very much. Thanks for being thorough on the call.

Thank you, Doug. Let me make one clarification on your question on total UAVs shipped. That is total airplanes that include -- so it's airplanes, not systems, and it's a combination of new airplanes on contracts, and replacement airplanes within the services segment.

Yes, absolutely. Thank you.

All right.

Thank you.

Thank you. Our next question comes from Erik Olbeter from Pacific Crest. Your question, please?

Yes, hey, guys. Thanks so much for staying on the call and taking so many questions. Appreciate it. Real quickly, can you tell me what your assumptions on budget passage, both on the supplemental and the fiscal year 2011. I know last year, this became an issue on the timing of revenues. And so as a result, what are you assuming on that guidance today?

Well, our assumption is that the, the supplemental funding will, will actually happen. Although as you know, that's been -- I think it got pulled back off the floor couple of weeks ago. And -- but my assumption is that that will go forward.There is a lot of chatter about continuing resolutions for the main budget. We are quite a ways away from that . And I am sure there are people on the call that have a more informed opinion than I do, of what Congress will decide to do on that -- in that area. But even in the context of a continuing resolution, it doesn't seem like a huge challenge for -- for the -- for us this year. So we are basically assuming that contracts that would come to AeroVironment out of the FY 2011 budget will happen within our fiscal 2011. And in fact, we are assuming that we would take some revenue from those contracts yet, in the latter part of the fourth quarter.

Okay. So just to clarify, if we get a long continuing resolution -- you don't see that stopping the contract of Puma?

No, I think the Puma adoption that we're expecting, would not be a function of new FY 2011 budget funding.

Okay. That's helpful. Maybe just one last question on Global Observer, I don't want to beat a dead horse, but in your -- you talked about sort of a low level production rate for Global Observer. Can you put some parameters on that? I'm interested in sort of why you chose those words. What do you think sort of low rate production is?

Sure. The facility that we stood up for the developments of the system, and the production of the three airplanes in the ground control systems that are -- were ordered under the Joint Technology Concepts Development program, when we did that, we went beyond the -- we built capacity beyond that JCTD supply. So between the facility, it's infrastructure, and the supply chain behind it, including tooling, we built a capability to deliver on an ongoing basis small rate production of Global Observer. With the -- that's in place now. Were we to go beyond that small rate, we would then need to set up a second additional facility at a rate production scale, which would be much larger, with much higher volume capability, but we wouldn't see making that investment until we saw the demand for that level of sustained production. Does that help?

That's very helpful, very helpful. That's all I got. Thanks a lot.

Okay. Thank you very much, Erik.

Thank you. Our final question is a follow-up question from Michael Lewis from BB&T Capital Markets.

Thank you. My question's been answered.

Okay. Thanks, Mike. That was a very easy question.

That is all the time we have for questions. We would like to at this time return the call to Mr. Gitlin for any additional or closing comments.

Thank you very much. With that, as our final question and answer, thanks for your attention and your interest in AeroVironment. I would like to remind you that an archived version of this call, all SEC filings and relevant Company and industry news can be found on our website, www.avinc.com. We look forward to speaking with you again following next quarter's results.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.