AeroVironment Inc (AVAV) 2011 Q2 法說會逐字稿

Good day ladies, and gentlemen, and welcome to the AeroVironment Incorporated second quarter fiscal 2011 earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. With us today from the Company is Chairman and Chief Executive Officer, Mr. Tim Conver, Chief Financial Officer, Mr. Jikun Kim, and Vice President of Investor Relations, Mr. Steven Gitlin. At now this time, I would like to turn the conference over to Mr. Gitlin. Please go ahead, sir.

Thank you, John. Welcome to AV's second quarter fiscal 2011 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 file 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 that is accurate only as of today, December 7, 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. Welcome to our second quarter fiscal 2011 conference call. Before I get into the details of the quarter, I would like to emphasize two main points. First, we executed effectively this quarter, keeping us on track for our FY 2011 plan. Second, our major developments are hitting important milestones that are moving them closer to market adoption, and realizing their long-term growth potential. You will see underlying elements of these summary points throughout the balance of today's comments. Our comments will be organized as follows. I will review our performance in the second quarter. And then I'll summarize key progress made across our businesses during the quarter and year-to-date, before turning it over to Jikun Kim to review our financial performance. After Jikun's comments, I'll address guidance for the year.

Second quarter revenue was $64 million, with an operating profit of 1%. Early Puma shipments and an uptick in PosiCharge sales produced significantly higher revenue than we expected at the time of our Q1 call. The higher revenue offset our increased investments, and produced a slight profit for the quarter, rather than the loss we projected. We're very pleased with our outcomes this quarter, and we continue to view 2011 as a year of executing our traditional businesses, while trans -- translating our development programs towards market adoption, supporting our long-term growth thesis.

We saw growth in R&D, SG&A, and manufacturing and engineering overhead this quarter, which reduced margins. This spending reflects the incremental FY 2011 investment we discussed during our last call. These investments will sharpen the match between our solutions with emerging demand, and strengthen our ability to achieve the growth opportunities we see ahead of us. We made broad progress in Q2. Some highlights include $64 million in orders for Digital Puma systems and support services, full rate production approval and early initial production deliveries of our new Digital Puma systems, the successful completion of initial flight testing for Global Observer, the start of home assessments for Nissan Leaf customers, and the beginning of charging system installation at Nissan dealerships, and an agreement with NRG to provide a broad set of public and residential network charging solutions throughout Houston, Texas. These accomplishments reinforce our full fiscal 2011 plan. They also support our confidence in the long-term potential for each one of these opportunities, and the larger growth potential in their respective business segments, which I'd like to discuss with you now.

In prior discussions of our unmanned airplanes systems business, you heard me say that I believe we're still in the early stages of adoption for small UAS. Today, I point to Digital Puma, the newest and the largest of our small UAS, as the latest example of continued adoption. When I discussed FY 2011 guidance in our Q4 FY 2010 call, I said that we expected new Puma demand to more than offset the anticipated decline in Global Observer, JCTD revenue this year. At the time, I could not point to any line item in the DOD budget that could support these expected Puma orders. Many of these recently announced Puma orders will support a new mission requirement for small unmanned airplane systems, one focused on route clearance patrols. This high priority application evolved from earlier field evaluations of Puma systems. Those evaluations demonstrated new endurance and and payload capabilities of Puma, that support new mission requirements with compelling cost effectiveness.

It's important to note, that the way much of our growth in UAS took place over the last decade, was a combination of customer funded R&D, urgent needs and reprogramming driving initial adoption, with successful field deployments followed by Program of Record line items in the budget, and operation and maintenance funding. The Army UAS program manager recently indicated that the current number of small UAS in Afghanistan was insufficient to support the need. He said, "We're finding units are saying, that's not enough. They want more and more." The Army recently increased it's acquisition objective for Raven systems by about 8%, reflecting continued demand. Demand for both new and upgraded Puma and Raven systems surged with the introduction of new digitized capability. In general, we expect system upgrades will continue to be a significant revenue driver in our UAS business for the foreseeable future.

The long delayed government fiscal year 2010 funding for Raven systems totaling about $45 million, appears much closer to converting to orders, and then to revenue. We recently completed negotiations with the US Army for the government fiscal year 2010 funded Raven procurement. And we expect to receive the resulting contract modification by later this quarter. This contracting schedule will allow us more than enough time to deliver in support of our FY 2011 revenue plan. We expect the current five year ID/IQ contract vehicle for the US Army Raven program to be extended to enable continued procurement and support of Raven systems.

Moving from our small UAS production programs to our major UAS developments, Global Observer is our hybrid electric unmanned aircraft system, designed to be the first to provide an affordable, persistent, stratospheric capability. These unique capabilities will allow Global Observer to operate like a regional geosynchronous satellite, wherever, and for as long as needed, at a fraction of the cost of space satellites. Global Observer demonstrated continued progress this quarter by successfully completing initial low altitude flight testing at Edwards Air Force Base in California. The production configuration energy generation system has now been installed on both airplanes number one and airplane number two. And airplane number one is currently being readied for it's next phase of flight testing at Edwards. We're planning to begin the second phase of Global Observer flight testing this quarter. We will gradually expand the flight envelope to culminate in flights in the stratosphere for durations never before achieved.

We have received more than $120 million to date for the Global Observer JCTD program. That funding currently runs through our Q3. Our customers are working to secure additional funding to extend the JCTD program into our fiscal year 2012. And we are encouraged by our dialogue with them, that they will be able to do so. We believe a Program of Record requirement for Global Observer is possible in government fiscal year 2012 to 2014. There are multiple possibilities to bridge from the current JCTD program to a future Program of Record, including extended development, integration and demonstration, transition of JCTD assets into military operations, and/or production of small quantities of new Global Observer systems to meet urgent needs. A future Program of Record for Global Observer could exceed the current revenue of AV if that comes about.

Switchblade, is another major development in our UAS segment. During the quarter, we successfully demonstrated Switchblade in new scenarios rigorously defined by customers. We believe these, that multiple sources of demand within the US Department of Defense may be developing for this unique capability. While we continue to believe this customer interest could translate into early adoption and small quantities yet this year, we are still not counting on that Switchblade revenue growth in our fiscal year 2011 outlook. We do think there could be a new Program of Record in government fiscal 2012, for which Switchblade could be a strong contender. A Program of Record for Switchblade could have a very high volume potential, with revenue that could be a significant contributor to AV's growth.

Beyond specific programs and products, we have to consider the broader and the evolving budget and procurement environment of the Department of Defense, when thinking about our UAS business. Depending on how long it lasts, the continuing resolution could it delay about $55 million of proposed Raven procurement in the government fiscal year 2011 budget. To reiterate my comment two calls ago, we have already planned to recognize the majority of that funding as revenue in our fiscal year 2012. Therefore, we don't foresee a significant FY 2011 revenue risk as a result of the current continuing resolution.

Beyond this year's budget, DOD is clearly moving to become more cost effective, in order to meet future mission environment and constrained budget environment, while at the same time supporting the urgent needs of current engagements. We believe the terror and insurgent threats of this decade will continue to drive demand for our UAS to deliver the innovative force multiplication and force protection solutions essential to countering those threats. Small UAS, Global Observer and Switchblade, all offer compelling capabilities at a fraction of the cost of legacy alternatives, making them much more attractive in an environment where more relevant solutions are needed now, while at the same time program plans need to be put into place to meet future needs at a lower cost.

Now, switching from unmanned airplane systems to our efficient energy systems business. Another key contributor to our fiscal year and long-term revenue outlook is the launch and the growth of our electric vehicle charging product line. The first production plug-in EVs are coming to market this year. And auto manufacturers will bring plug-in cars to market in a global wave of vehicle electrification. All of these electric vehicles will need a new plug-in infrastructure. Our EV charging product line is designed to provide a comprehensive infrastructure solution to enable the easy adoption and the practical use of electric vehicles. Our relationships to supply the residential charging solutions for the Nissan Leaf throughout the United States, and the broad charging solutions of the eVgo network in Houston, provide a first mover advantage towards our goal of market leadership.

During the second quarter, we began performing assessments for installation of home charging docks for people registered to buy a Nissan Leaf. Through our growing installation and service network, we also began installing charging systems at Nissan dealers in the initial roll out territory. There are more than 1,000 Nissan dealers in the United States, and we expect to have at least four charging systems installed at the first one hundred sites by January. The charging systems we're installing at dealers are commercial versions of the outdoor rated home charging docks that we will supply and install in the garages of Nissan Leaf customers. These charging docks are referred to as a level two charging, and they recharge the car in about twice as fast as the level one charge cords that are typically provided with an electric vehicle. Level two charging allows EV owners to fully recharge their vehicles overnight. We expect home charging installations to produce revenue starting this quarter, with revenue accelerating into our fourth quarter.

On November 18th, at the beginning of our Q3, we announced our participation in the first ever privately funded comprehensive electric vehicle charging ecosystem with NRG Energy in Houston. NRG selected AV as the exclusive provider of home charging docks, public level two, public fast charging systems, and their associated installation and support services. We'll also provide integrated data collection, communication, analysis, energy use monitoring, and payment systems to support the network. AV offers a uniquely comprehensive electric vehicle charging solution, and the eVgo network in Houston showcases a broad subset of our capabilities. NRG's well considered vision and commitment to launch their eVgo network in Houston, establishes them as an important leader in commercial EV networks.

We believe their selection of AV validates our vision and unique ability to offer complete, integrated solutions that will benefit all stakeholders in transportation electrification, from consumers, to automakers, utilities, businesses and governments. NRG plans to install a minimum of 50 of our public fast charging stations throughout Houston by mid 2011, to round out their comprehensive charging ecosystem. This, these fast chargers complement level two chargers, and deliver high power DC directly to the battery. They can recharge an electric car in minutes versus hours. The Houston electric vehicle network may serve as a model for practical integrated ecosystems in many other major cities. With respect to a prior Plug-In Carolina announcement, the award that they initially announced did not translate into a purchase order. Changing requirements and the late availability of our UL listed charger prompted the customer to move forward with another solution.

The Nissan and the NRG relationships are two of the most important significant commercial contracts in a highly competitive new market. We have won, when competing with specialized EV charging suppliers, as well as some of the largest industrial companies in the world. We believe we win because we are a technology leader, with innovative and comprehensive solutions that can uniquely help our customers win. We have developed a flexible and scalable supply chain, manufacturing system, and installation network designed to enable us to remain competitive in the face of increasing global competition. We continue to invest in products, people and infrastructure to reinforce our strong early competitive position, and we're building our offering to support long-term Company growth and profitability targets.

I believe that our innovative people and our enterprise agility will enable us to continue leading the market with product, services and supporting capabilities that are helping to define this nascent industry. In November, Frost and Sullivan awarded it's 2010 North American Customer Service Leadership Award of the Year for Electric Vehicle Charging Stations to AV. At this same time, or at least in the same month, we received the inaugural Patrick Soon-Shiong Innovation Award for the most innovative companies in the greater LA area. We appreciate these independent acknowledgements of our team's dedication to customer service and practical innovation. And with that, as an overview of our quarter and our business, Jikun Kim, our Chief Financial Officer will review our financial performance for Q2 FY 2011.

Thank you, Tim, and good afternoon, everyone. AeroVironment FY 2011 Q2 results are as follows. Revenue for the second quarter was $63.8 million, an increase of 24%, over Q2 last year of $51.4 million. Looking at revenue by segments, UAS revenue was $53.6 million an increase of 23% over the prior year. The growth in UAS revenue was largely due to higher product deliveries of $11.7 million driven by the Digital Puma AE Systems and higher logistics and repair revenues of $11.2 million, driven by the Raven B DDL retrofits kits. However this growth was offset by lower customer funded R&D work of $13 million, largely due the Global Observer program. EES revenue was $10.2 million, an increase of 32% from Q2 last year, primarily due to higher industrial electric vehicle charging systems deliveries.

Turning to gross margin, gross margin in the second quarter was $21.8 million, up 11% from the second quarter last year. Gross margin as a percent of revenue was 34%, versus 38% in the second quarter last year. By segment, UAS gross margin was $17.4 million, up 10% from the second quarter last year. As a percent of revenue, UAS gross margin was 33%, compared to 36% in the second quarter last year. The decrease in gross margin percentage was largely due to higher start-up costs, driven by the Puma AE system deliveries, and higher engineering overhead costs incurred in anticipation of an increase in support services for the Puma AE system fieldings. EES gross margin was $4.3 million up 13% from the second quarter last year, primarily due to higher sales volumes. As a percent of revenue, EES gross margin was 43% versus 50% in the second quarter last year. The decrease in gross margin percentage was largely due to higher manufacturing overhead support costs, driven by increased production capability and capacity.

SG&A investments for the quarter was $12.7 million or 20% of revenue, compared to $10.5 million or 20% of revenue in the prior year. SG&A investment was higher primarily due to higher marketing and business development in investments. R&D investments for the quarter was $8.7 million or 14% of revenue, compared to a prior year amount of $5.8 million or 11% of revenue. The growth in R&D was primarily driven by increased in development initiative at both UAS and EES. Operating income for the quarter was $0.4 million or 1% of revenue. Operating income was 88% lower than second quarter last year, primarily due to higher selling and R&D investments, which was partially offset by higher gross margins. The effective tax rate for the quarter was 41.3%, compared to 35.3% prior year period. The increase was driven by the expiration of the R&D tax credits. Net income for the quarter was $0.3 million or $0.01 per fully diluted share, compared to $2.2 million, or $0.10 per fully diluted share last year.

Now quickly moving through our year-to-date results. Revenue for the six months was $102 million, up 14% from the prior year period of $89.3 million. By segment, UAS revenue was $87.1 million, up 13% from the prior year. The increase in revenue was largely due to increased product deliveries of $15.4 million, driven by increased deliveries of both Raven B DDL and Digital Puma AE systems. On the services side, we saw an increase in AV's logistics and repair revenue of $20.1 million, primarily driven by Raven B DDL retrofits, which was offset by lower customer funded R&D work of $25.5 million, again driven by the Global Observer program. EES revenue was $14.9 million, up 21% from the prior year period, primarily due to increased product deliveries of our industrial electric vehicle charging systems. Gross margin for the first six months, was $33.8 million, compared to $30.4 million a year ago. Gross margin as a percent of revenue was 33%, down one percentage point from the prior year.

By segment, UAS gross margin was $27.8 million, up 12%, primarily due to higher sales volumes. As a percent of revenue, UAS gross margin was flat at 32%. EES gross margin was $6 million, up 8% primarily due to increased sales volumes. As a percent of revenue, EES gross margin decreased from 45% to 40%, driven by higher manufacturing overhead support costs. SG&A investments for the six months was $24.1 million, or 24% of revenue, compared to a prior year period of $21 million, or 24% of revenue. R&D investments for the full-year was $16.7 million or 16% of revenue, compared to $11.4 million or 13% of revenue in the prior year.

Operating loss for the six months was $6.9 million or negative 7% of revenue, compared to an operating loss of $2.1 million or negative 2% of revenue last year. The effective tax rate for the six months was 52.8%, up from the prior year period of 30.4%. Net loss for the six months was $3.2 million or $0.15 per share, compared to a loss of $1.4 million or $0.06 per share last year. Looking at backlog, funded backlog at the end of the second quarter was $103.8 million dollars, up $42.5 million or 44% from April 30, 2010.

Turning to our balance sheet, cash equivalents and investments at the end of the second quarter totaled $163 million, down $0.4 million from the prior quarter. The negative cash flow was driven by higher working capital needs, partially offset by higher income. Turning to receivables, at the end of the second quarter, our accounts receivables, including unbilled receivables, totaled $49.9 million, up $17 million from the prior quarter. Total day sales outstanding were 70 days, compared to 77 days at the end of the prior quarter.

Taking a look the inventory, inventories were $28.9 million at the end of the quarter, compared to $28.1 million at the end of the prior quarter. Days in inventory are approximately 62 days, compared to 97 days at the end of the prior quarter. Now turning to capital expenditures and depreciation, in the second quarter, we invested approximately $1.7 million, or 3% of revenue in property improvements and capital equipment. During the quarter, AV recognized $2.8 million of depreciation. Now I'd like to turn it things back to Tim to discuss AV's expectations for the balance of our FY 2011.

Thank you, Jikun. Based on our progress year-to-date and our projections, we reiterate our expectations for 10% to 15% revenue growth in fiscal year 2011, with an operating profit margin of 10% to 12% of revenue. In our Q4 2010 call, I said that we anticipated FY 2011 growth to be driven mainly by new orders for Puma and EV charging solutions, both delivering the second half. Digital Puma and EV charging systems have already begun to generate revenue, supporting our expectations for the year. The increase in PosiCharge revenue in Q2 is clearly positive, but we are not yet counting on an overall pick up in that market. We continue to expect that the Global Observer JCTD program will represent less than half of last year's revenue. We also continue to plan for Switchblade, the balance of the EES segment, and other small UAS revenue to all hold about flat in FY 2011, as compared to FY 2010. We expect Q4 to again be our largest revenue quarter.

As noted, we have begun making the increased FY 2011 investments in selected development programs that we announced on our last call. And we're confident that these investments will increase the probability and the rate of adoption, and show a good return on investment. We are allocating our investments for long-term growth in both business segments, based on expected returns, balanced against our estimates of market adoption timing, and our targets for annual profitability.

We view our healthy cash reserves as a strategic tool that will allow us to move quickly to capitalize on opportunities, when we see markets committing to adoption. We believe that the long-term interests of all of our stakeholders will be best served by continued execution of our strategy, careful stewardship of our resources, sustained investment in high growth potential developments, and effective capital deployment. This approach focuses on delivering long-term organic growth with a healthy return on investment. I'm confident in our plans of FY 2011, and the transition of our major developments into long term growth. Thank you again for your continued interest in AeroVironment, and Jikun and I will now take your questions.

Thank you, sir.

(Operator Instructions).

Okay. And we're going to take our first question coming from Eric Olbeter from Pacific Crest. Please go ahead, sir.

Hi, thanks for taking my question, and good quarter. Just wanted to confirm one thing you said, I think I heard you say you expected UAS revenue to be flat year-over-year for FY 2011. Is that correct?

I was, I was, Erik, imply -- referring to other UAS beyond Puma. So I think in general, we see Puma being the growth element of the UAS part of our business this year, and the balance of our UAS revenue about flat over last year.

And do you know what the reduction in Global Observer revenue that you mentioned earlier, I would assume that the balance within the other UAS is made up by Raven, would that be?

Well principally Raven, yes. We also have some lost revenue as you know, and a little bit of other R&D.

Okay. And then just one other quick question. As you look toward gross margins, how do you see the story playing out in the mix shift between products and services for the rest of the year?

Well, I think, again our guidance is previous indicated on operating income at 10% to 12%, but we do expect our gross margins to recover in the second half of the year.

Okay. Thank you. Our next question is coming from Jeremy Devaney from BB&T Capital Markets.

Good evening, gentlemen. Great quarter. Looking at a couple of financial numbers here, could we get unfunded backlog in cash flow from operations please?

Sure. Unfunded backlog was $205.6 million, and cash flow from operations is -- I'm sorry -- I'm just fumbling through my book here. Is $1.2 million positive.

Excellent. Thank you. And then could you explain to us a little bit more what you're seeing on the Raven systems? You commented about the CR putting some of that revenue at risk, but there's certain portion that you're looking out at moving out to 2012. Just some more clarification and more detail there would be appreciated?

Okay. Let's, from start with our current view of the likely request in the FY 2011 budget for Raven being something a little north of $55 million. There's currently a continuing resolution without a specifically approved budget for DOD. And my point was that, not knowing the extent of that continuing resolution, it's possible that that could effect the government's release of contracts under -- for items that are in the FY 2011 budget. And my primary point that I was trying to make Jeremy, was that while we, we expect about $55 million in the FY 2011 government budget for Raven, we expect that we have already planned that most of those shipments would happen in our fiscal year 2012, not our current fiscal year 2011. So as a result we see little risk to our current fiscal year, as a result of the continuing budget resolution in Congress right now.

Okay. Thank you. And we'll take our next question coming from Tim Quillin from Stephens Incorporated.

Good afternoon. Great bookings there, and I understand the $64 million coming from Puma. But there I guess, the computed bookings by looking at funded backlog would be something like $104 million. So there's another $40 million in bookings there. So may be if you can go there some of the other order flow that you had in the quarter?

Yes, I can try that. Basically, we did continue to get some Raven orders, and we did have some international orders, y not large numbers, but a series of smaller orders that added up to roughly the $40 million. We did have some bookings coming out of our EES units, so the backlog going into the third quarter is relatively strong.

Okay. And, and, and just to clarify, Tim, what you're talking about in terms of the Global Observer being down. I think previously you had said that Puma would fill that hole. And I think maybe if I interpret what you're saying this quarter, is based on the strength of bookings for Puma, that it will more than fill that hole, and be a driver of growth for that segment, as well as the growth that you expect in EES. Is that right?

That's more precise than I could have possibly said it, Tim.

Well, thank you. I'll step back in the queue, and ask another question later, thanks.

And thank you. We'll take our next question coming from Howard Rubel from Jefferies. Howard, please go ahead.

Well, thank you very much. Tim, for a moment could you update us a little bit more on Global Observer, what milestones you've accomplished on airplane one, and I guess on two and three also, please?

Sure, Howard. During the quarter we, we completed the -- well, let me go back a step further. The, the JCTD plans to culminate with flight testing of the airplane system, and followed by the military utility demonstration of the airplane system, and the integrated pay loads. So the flight testing system, or regime was initially broken down into two segments. One is initial low altitude flight tests that are conducted on battery power, as you know, it's an electric airplane.

Yes.

And a second set of flight tests that will, after we have installed the production energy generation system that would then expand the envelope to high altitude long endurance demonstration of the platform. So what we have completed in Q2, is the first half of that flight testing regime, and it went extraordinarily well. From the -- the time the first flight was gotten off, we ran a flight test a week, and put off five test flights over a period of five weeks. It almost got boring, which is probably the ideal description of a flight test program for a new airplane.

Yes.

In, in, throughout those tests, they typically operated for about an hour at a time, at about 4,000 feet, and consistently expanded the command and control demonstration of the -- the systems capability, expanded the envelope into different operating parameters, different wind conditions, and other characteristics of the platform. It performed as expected, with all of its performance characteristics mapping very close to the projected performance. So we're all happy with that. We have now installed the production energy system in both the airplane number one, which is under going flight test, and airplane number two, which is still in the development production facility. And we have gone along ways into readying airplane number one for its flight test. It's completed a lot of reviews, ground integration testing, fueling, engine run up tests. And, so we're -- we're close to moving into actual flight testing for that second segment.

Thank you. And then on the EES business for a moment, you made a statement that the PosiCharge business has turned around. Could you discuss the kind of customers, is it automotive that's come back to life? And, and is it some other markets and is there a backlog again for the first time in a while?

Go ahead, Jikun.

Okay. So we saw some increased activity actually on the PosiCharge side. It's been mostly warehouses for large consumer products companies, as well as some airports.

In addition to the forklift operations in manufacturing and distribution facilities, that product line also serves electric tugs in airports. Howard, I don't know if we've been explicit about that in the past.

Okay. Thank you. We'll take our next question coming from Brian Gesuale from Raymond James. Brian, please go ahead.

Hi, this is Matt speaking in for Brian. I guess my first question is with regards to, I guess, the delay into, I guess in the Raven order, I guess going into January. And with what that perhaps means to, maybe your prior comments with regards to the first half, second half split, or the variance of $20 million of revenue into the, I guess, third and fourth quarter? And how that shakes out, if that changes the timing, and how you guys were thinking about that?

I think you're asking for a calendarization of Q3 and Q4? Is that what I'm hearing?

Yes, I guess more or less what the impact of the -- I guess the Raven order moving to January does to your third and fourth quarter timing of revenue with regards to that?

Well, I, I think when we -- I don't -- I guess the reason we're hesitating here, is I'm trying -- I don't think we actually talked about Q3 versus Q4 timing of revenue in the past. So when we were trying to provide -- what, what we have done, tried to go beyond where we traditionally have been, in providing information about how we see the shape of the year evolving, because we have such a high back end loaded plan this year, as we did last year. So knowing that that's, that's different than a linear projection, we tried to be as -- provide as much insight into how that, what that shape looks like as we could. I -- I think at this point we, we, obviously, we still see the year-ending up in total about as we had guided in the -- when we started the year. Probably at this point, Q3 looks more like $75 million, $80 million I would say. And then the largest quarter showing up in Q4.

Okay. No, that detail's helpful. I guess the next question I have is, in regards to under the context of the Army US program manager referencing more UAS in the field there, and with regards to what the schedule is looking like for digital WASP, and how that's moving forward, and with what the Army is thinking and what the DOD is thinking in general?

Well, let's see, I think the, the comments from the -- the UAS project manager, though were public comments. And I interpreted those to, to say in general, small UAS are in growing demand in Afghanistan. Obviously, because of their great effectiveness in both force protection and force multiplication. I think that in -- in different venues the Army has said that the Ravens have been in growing demand, more in the south. And the Puma's have turned out to be of significant value in the north. Different geographical and climate conditions, I would suspect accounting for that. We, we have seen some small increase in the Army acquisition objective for Raven.

We think there's more activity going on there to -- to consider the supply of those growing demands. And in general, I think that's just indicative of -- of more operators finding more and more valuable uses for these small systems, and their relatively cost effectiveness. As to digital WASP, we continue to have success in that development program, as we've said in the past. We still expect to have those first units available for demonstration by the end of this fiscal year. And that would round out the full digitization of our family of small UAS that -- that use different platforms that have different capabilities for different mission applications, but common communication control and ground control systems.

Okay. Thank you. We're taking our next question from Jeff Evanson from Dougherty & Company.

Good afternoon, gentlemen. Two sets of questions here. First of all, it's always interesting to look at maybe what we can infer about what you're saying about the back half of the year for guidance. And I guess what I'm looking at here is, that you either must expect -- I guess what I'm looking at here is that you either must expect that expenses are not going to grow much more in the back half, or you're going to have record gross margins, or frankly your being conservative on the revenue. So I guess, Tim, what I'd like to know is, kind of how are you thinking about those three segments of the income statement, as we look into the back half in comparison to the second quarter here?

Well, I, I would go back to last year for, at least a, a reference point, Jeff, where we had a similar shape of heavily weighted back half revenue. And I think we saw then, as revenues grew significantly in Q3 and Q4, operating profit percentages grew significantly with that revenue growth. And we ended up with the, I think result that we had expected, so --

Right. You were able to deliver record gross margins in the back half of last year, I guess you're saying further operating leverage this year could drive those margins even higher? Is that a correct statement?

Well, I think it's correct to say that we continue to believe that our, our year will end up with 10% to 15% revenue growth, and operating profits at 10% to 12% of revenue, and that the bulk of that revenue will be delivered in Q3 and Q4.

All right. Well those will be impressive gross margins, so. And then moving onto this quarter. I guess what I'm inferring from what I'm seeing here, is that you had both very strong demand for Puma and very strong deliveries of Puma. So I'm wondering, did you have Q2 Puma requests that you couldn't deliver on in the quarter? And thus, can I infer some strong backlog going into the back half, just from an immediate unfilled demand perspective?

I, we -- we had, had announced orders of $64 million to date for Puma and systems and their support. We had -- we were very, the team that was working on Puma was extraordinarily effective, completed the development and, and all of their validation testing sooner than we or they had expected. And that allowed us to begin shipping those systems in Q2, earlier than we had expected we would be able to. These -- the mission applications that these systems are being delivered for are of extremely high priority to our customer that's operating in the field. And I think they would be glad to take those systems as soon as they could get them. And I think they were glad that they got them somewhat earlier than -- than they might have expected.

Okay. Thank you. Our next question is from Tyler Hojo from Sidoti & Company.

I -- I was wondering if you could fill us in terms of how far along the Army, is in terms of their updated objectives to purchase Ravens?

Sure. So last quarter, the objective was 2,182 systems, and this quarter it is 2,358 systems. This is the 8% increase that we discussed, and against the higher objective, we are at 69%.

Okay. Great. And the other thing I just wanted to touch on was, you guys -- well I guess you guys started touching on to Howard's question, but in terms of the PosiCharge business, I'm just kind of wondering how to think about that. It seems like a fairly cyclical business, how far -- how far off is it from kind of the prior peak? And do you kind of view the increase that we've seen I guess sequentially, you said in the prepared remarks as something that's encouraging, as you look into the latter half of fiscal 2011 and fiscal 2012?

Yes, the peak was probably back in the 2008 and 2007 time frame. And we're probably -- probably less than 60% of that peak at this point in time.

Tyler, I'd also say that one of the -- one of the elements that we believe drives PosiCharge market demand is the delivery of new electric vehicle forklifts. And with the onset of the recession, forklift deliveries took a dramatic nose dive. I think maybe a reduction of approximately 60% of their peak in 2008 or --

Yes, our fiscal 2008.

Yes. So -- so, and we saw a significant reduction in PosiCharge revenue that was concurrent with that reduction in truck deliveries. Truck deliveries have moved back up again recently. And we are seeing this increase that we just recorded in this last quarter in PosiCharge revenue. So we're -- we're watching this market closely to, to determine signs of some sustained and sustainable recovery. We're not quite ready to declare victory on that at this point, and we haven't adjusted our outlook, but it's certainly encouraging to date. But it's one quarter.

Okay. Thank you.

If that's helpful.

Our next question is coming from Peter Arment from Gleacher.

Yes, good afternoon, Tim and Jikun. Tim, it was mentioned outside of the Puma order and your bookings there was some additional international orders. Could you just give us a little color on, on what exactly that was? What, what type of you know potential customer that is, and in the related systems, because I think there's a lot of larger defense peers continuing to point to international markets of where they're looking for growth? And, is this a -- continues to be an opportunity for you or is it just smaller, given what's going on? Could you give us a little color there? And Jikun, if you could just give us the tax rate your expecting for the year that would be great.

Sure. Let me talk about international for a bit. We do see that as a continuing opportunity for, for increased revenue, Peter. To date, the, the recent orders that Jikun was referring to are not large. They, and they are all with US allies. In many cases, those are, those are early acquisitions of small UAS that, that might be seen as trial and evaluation procurements, that we believe could lead to larger program revenues over time. However, there are, there are significant opportunities in my opinion for -- for sustained growth in export of UAVs for AV. And in larger market opportunities, the period of business development is extended considerably. In many cases we've been engaged for some time. It's also difficult to predict the timing of those contracts. So we tend to be pretty conservative about our, our timing estimates, but we remain optimistic that it's a -- will continue to be a -- a non-trivial growth opportunity in the future.

In terms of the tax rate, until last night, I was contemplating and passing 35%, but with the potential passage of the new tax negotiations here with Congress and the President, if the R&D tax rate goes through, we can see 31% for the full-year.

31. Okay. Great. Thank you very much.

Okay. Thank you. Our next question is from Josephine Millward from Benchmark.

Good afternoon.

Hi Josephine, how are you?

I'm doing well, how are you Tim?

Very well.

Tim, a question for you. Since you're going to be running out of the government funded R&D on the Global Observer JCTD, how much more money do you need to complete flight testing? And I understand you have commitments from key military customers, when do you need to get that money?

Well, as we've said earlier in the call, we've received over $120 million to date. And -- and I think the amount of additional funding can flex with the scope of the testing and demonstration desired by the customer in the balance of the program. So I don't think I want to stick a particular number on that, that because the -- the goal can move around based on what customers want to see. I believe we have a high level of customer interest in continuing the testing beyond this quarter. And I think there is a -- from everything I can judge from dialogue with our customers, there's a good chance that they will -- that they will execute that additional funding. But as to how much, I think, we'll have to wait to see what they decide.

It sounds like you may be comfortable with this additional R&D support will come in sometime before Q4 to -- to provide continuity on the JCTD?

Well, I -- I tend to characterize myself as more paranoid than comfortable in most situations. So I don't know that I'd leap into a high level of comfort in anything in the future. But, but there is no question that a significant number of our current customers have expressed a strong support for the program, are particularly encouraged by the success of the flight testing, and the potential capability and cost effectiveness that this system could deliver for them, both in the near term and in their long-term objectives. So, so I think we're in a very good position here, but we still will need to make, have customers make decisions in this quarter, if that funding's going to continue seamlessly.

Okay. Thank you. And our next question comes from Kevin Ciabattoni from KeyBanc Capital Markets.

Good afternoon, guys. Nice quarter. Just following up on Josephine's question there, can you give us a little more color on what's occurring with those conversations with the customers on Global Observer, and whether, does it look like they're waiting for you guys to hit specific milestones, in terms of flight testing before they're going to commit additional funding, and what's -- maybe some direction there?

I think it's, that's not the -- the issue does not appear to be one of wanting to see more milestones before more funding comes in. I think it's more a matter of who has what lead, and who has available, current funding available, and what the amount and timing of those decisions would be. So if that's at all helpful, it's less a matter of wanting to see specific milestones at this point, before additional funding. Clearly, the second phase of the flight testing is the next objective. And then the demonstration of the effectiveness of integrated pay loads operating from Global Observer at altitude would be the third phase of the evaluation.

Okay. That's helpful. And then looking at --as it relates to kind of service -- spares and repairs revenue, what kind of feedback are you getting from the Army in terms of, where flight hours have gone in Iraq now with the reduced force there? Are you seeing -- there was some talk that you might see increased flight hours, kind of to act as a force multiplier. And then also looking at Afghani theatre, as to whether you're seeing a strong correlation with the increase operational tempo there and service revenues?

Well, to a large extent, Kevin, we -- we and our customer in the program office anticipate what those levels of use and the levels of support might be. But we, we have a relatively small amount of real time information from the field. Unlike most all other airplane programs where, where operations and maintenance are rigorously controlled and recorded by -- by professional maintenance crews and large organizations, in the case of small UAS, these are controlled and operated by squads of -- of individuals on the ground. And those guys are often getting shot at, and -- and these are tools that they use in that operational environment. And, and for a myriad of reasons, do not keep rigorous records of their use, and make rigorous reports. And so our customers have to anticipate and fill-in the blanks, and be prepared to provide the support when the demand shows up, rather than having it well predicted. So having said that, I think we are seeing a -- an ongoing interest in the use of small UAS in Iraq. And we are seeing a growing demand for the use of small UAS in Afghanistan.

Thank you. And our next questions are coming from Tim Quillin from Stephens Incorporated.

Thank you for taking my follow-up. I just wanted to follow up on the question of margins, and maybe get a sense of whether you're operating expenses R&D and SG&A will be similar to the levels that we saw in 2Q, in 3Q and 4Q?

You mean the first half of this year, or last year?

So -- so fiscal 2Q operating expenses, operating expenses you just reported in aggregate, I think $21.4 million, is that the kind of level of quarterly operating expenses you would expect in both in 3Q and 4Q?

Yes, with probably a slight uptick in Q4.

Okay. Okay. So really is the margin a lot of the strong margin performance year-over-year would be in the gross margin side, maybe being a little bit higher than you saw in the back half of last year?

I mean, yes, I mean, gross margin is a function of many things, right, the contract mix, fixed parts versus cost plus, but yes, we should see you a skew of that a little bit.

And then just also, Tim if you could talk about the Puma outlook for next year. So this was a great year in terms of Puma order flow, and it has this new mission, do you have any visibility of what government fiscal 2011 demand might bring for you there?

Well, nothing specific at this point, Tim. I can say that, that if we look at this initial tranche of orders we received year-to-date, the bulk of that revenue to date has been Puma systems, with some contract logistics support. Overall, I think we're, we can expect to see about, a total amount of contract logistics support that would flow in this year, and probably into next year, that would be about equivalent to the original hardware procurement.

Okay.

And I think beyond that, we are getting a very positive feedback from customers on the on the value of this system, and in particular the cost effectiveness of this system versus alternatives. So I'm optimistic that we have another substantial leg in the revenue stool in our family of small UAS here.

Okay. Thank you. Our next question is coming from Jeremy Devaney from BB&T Capital Markets.

Thank you for taking the follow-up, gentlemen. I just wanted to make a look at the NRG work that you're doing down in Houston, and possibly could you tell us if you're looking at putting any, any other proposals on RFPS for other private charging station roll outs?

I guess I would start with the relationship with NRG in Houston. We're committed to supporting the success of that roll out for NRG, the city of Houston, and their many partners there. I think that NRG may very well find other opportunities to extend that eVgo model. And we would be delighted to support that extension. I think there's been a lot of attention paid to the way this has been structured. We've worked with NRG for over a year in -- in adapting with them what the, the optimal solution would look like. And I think that, that has, as I said, garnered a lot of attention, and may very well prove to be a model that other cities may want to adopt. And so I --

But as of right now, you're not bidding any other RFPs or --

Well, we're actively engaged in pursuing market opportunities across the spectrum for EV charging infrastructure. That -- that, and that spectrum? Includes OEMs and utilities and cities and governments.

All right. Great. And then, with the charging stations, how, how's that business working? Is that a book and ship business, or do you anticipate building some backlog in the business?

For the residential chargers, we do have some visibility but I wouldn't call it really backlog. We work with our customers to do assessments, and then eventually, they get released do an installation. The DC fast charger, that might become a little more higher visibility product. The lead times are a little longer and the value -- the dollar points are a little higher.

Okay. Thank you. Our next question is coming from Cory Armand from Rice Voelker.

I'm sorry. Somebody just asked my question. Thank you.

Okay. Thank you, Cory. And that is all the time we have for questions today. We'd like at this time to return the call to Mr. Gitlin for any additional or closing comments.

Thank you very much for all your attention and your interest in AeroVironment. And we 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.

And that concludes today's conference call. Thank you for your participation.