AeroVironment Inc (AVAV) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen.Welcome to the AeroVironment Incorporated third-quarter fiscal 2011 earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after management's remarks. As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Joe.Welcome to AV's third-quarter fiscal 2011 earnings call. Please note 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 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, March, 8, 2011. 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. Now it's my pleasure to turn the call over to Tim.

Thank you, Steve. Welcome to our third-quarter fiscal 2011 conference call. Three main points set the stage for today's discussion.First, our team executed exceptionally well, met important customer needs by accelerating some of our Q4 deliveries into Q3, and exceeded our revenue expectations. Our strong Q3 financial performance and sufficient backlog keep us on track for our fiscal year '11 growth plan. Second, we continue to hit key milestones in all of our major development programs, with positive customer response. And third, our long-term growth thesis is supported by growing demand for our current products and services, while at the same time, we see concrete indications that demand for our developing products and services continues to emerge.

Today's comments are organized as follows.First, I'll review our performance during the third quarter.Then I'll summarize progress in our two segments, unmanned airplane systems and efficient energy systems, and provide some general observations on the business. Jikun Kim will review our financial performance, and I'll close by addressing our financial-performance guidance for fiscal year '11 and my view of our longer-term growth drivers.

Third-quarter revenue was $84.4 million with an operating profit of 19%. Our team executed well on challenging demands in both segments. From our existing production programs, to programs just transitioning into production, and to those still in development. Notably, we ramped smoothly into full-rate production on digital Puma, and we began initial deliveries of electric vehicle charging systems.

Our R&D, SG&A, and overhead increased this quarter. This spending growth includes the incremental fiscal year '11 investments that we are making this year to address specific demand potential for some of our key development programs. In our Q1 call, I discussed this decision and said that I expected our fiscal year '11 operating profit to be 10% to 12% of revenue. We are getting the positive results and the customer reaction we expected, and we will continue these investments through Q4.

With that as an overview, I'll move on to our production and development programs, beginning with unmanned airplane systems. We've seen continued demand for both our existing and our new customers from our small UAS products and services. For example, the US Army recently increased its acquisition objectives for Raven by 8%. And judging from recent public comments, the Army is considering further increasing its long-term requirements for small unmanned airplane systems.

We recently received the remainder of the government fiscal year '10 Raven orders, and a $5 million order from Norway during Q3. The new digital Puma systems transitioned rapidly to full-rate production. Initial feedback from customers using these systems is all very positive, increasing our optimism about future demand potential.

Our UAS developments continued to make important progress towards adoption. We expect to demonstrate the new digital Wasp to customers this quarter. This new Wasp will join the Raven and Pumas to round out our initial family of digital small UAS in fiscal year '12.

We see growing signs of customer interest in the family of systems concept for small unmanned airplane systems.Our family of digital airplanes with the common GCS, proven performance, thousands of deployed airplanes, and the largest trained user base puts us in a strong position to support our customers as they consider the next phase of SUAS adoption.

Global Observer is our hybrid electric unmanned airplane system designed to be the first provide seamless, persistent communications, and surveillance at a fraction of the cost of the existing solutions. We have now completed three highly successful hydrogen-powered flights in the second phase of testing at Edwards Air Force Base in California.These flight tests are planned to systematically increase the altitude of each flight and increase the duration of each high-altitude flight. Global Observer is now carrying and demonstrating the tactical communications suite payload developed for the US Air Force. The most recent flight tests lasted 8.5 hours, reached 20,000 feet in altitude, and finished with a night landing.

Most of the more than $140 million in government contract options exercised for the Global Observer joint capability technology demonstration, or JCTD, have been funded and expended. New funding in Q3 and Q4 extended the program into next month. We are in ongoing discussions with customers regarding additional funding to continue the JCTD program.

Flight tests and payload results are effectively demonstrating the near-term value of Global Observer to our customers, supporting these funding discussions. We also continue to work to build a funding bridge from the current development and demonstration stage to a production program for Global Observer systems, independent of the JCTD program. We remain convinced of Global Observer's unique value and the recent flight performance, combined with favorable cost comparisons, support that view.

Switchblade is another key UAS development program. We have successfully demonstrated Switchblade in rigorous scenarios defined by customers, most recently two weeks ago, and continue to see customer activity suggesting interest in moving to initial adoption. During Q3, we were one of three companies to receive a $250,000 contract to fund live demonstrations for the Air Force Lethal Miniature Aerial Munition System, or LMAMS, technology evaluation.

Early this quarter, we received a $39 million, five-year, IDIQ contract for development, integration, and flight demonstration of small organic precision munitions, which included $114,000 of initial funding.I see these contracts as continued positive customer activity moving towards adoption of this unique and valuable solution.

Beyond the major development programs that we frequently discuss, we of course have earlier-stage programs working their way through our research-and-development process. One example is the Nano Hummingbird, which recently demonstrated a technological milestone never before achieved. Controlled precision flight and hovering of an aircraft that uses only its flapping wings for propulsion and control. This seemingly impossible vehicle, and the team that created it, have captured the imagination of people around the world. They reflect the leading-edge innovation and the human power behind that defines AV and drives our growth.

I will move now from the sublime to the defense budgeting process.The current continuing resolution is increasingly affecting our order flow and could delay numerous contracts, including about $55 million of proposed Raven procurement in the government fiscal year '11 budget. However, based on recent history, we had already planned to recognize the majority of that revenue in our fiscal year '12. And therefore, I do not see a significant risk to our fiscal year '11 revenue guidance as a result of the continuing resolution.

The President's fiscal year '12 budget requests submitted in mid-February included about $81 million in Raven and Wasp funding.We believe the GFY '12 budget request reflects accelerated procurement of Raven systems by the Army in response to increased demand. The DOD is clearly focused on balancing cost effectiveness, supportive urgent needs of deployed troops, and preparing for potential future threats.

Small UAS, Global Observer, and Switchblade all offer significant force multiplier capabilities in high-priority missions at a fraction of the cost of alternatives. We believe this makes them compelling options for both current and future needs, and all the more so on a budget constrained environment.We are well positioned to support continued demand for unmanned airplane systems in military as well as emerging nonmilitary applications.

Now moving on to our efficient energy segment. We expect electric vehicle solutions to be a growing contributor in our Q4 and to our long-term revenue outlook. We are committed to building a growing business supporting the adoption in the practical use of electrical vehicles.We have developed a unique, turnkey solution that includes hardware, installation, testing, and service tools, back-office capabilities integrated data collection, communication, analysis, energy-use monitoring, and payment systems to support the practical use of electric vehicles.

We continue to invest in products, people, and infrastructure to build out our strong early competitive position and to expand the breadth of our offering to adapt to customer needs and support long-term Company growth and profitability. Part of our EV charging strategy is to develop relationships across multiple channels that leverage our strengths and provide complementary pathways to market. We have announced three such agreements to date, with a leading auto manufacturer, utility, and electric component distributor.

We also announced that we have begun shipping and installing our UL-listed single-family and multi-unit residential smart charging dock.This grid-connected system was designed with an open architecture to ensure communication and inter-operability with the thousands of individual utilities nationwide. We are installing our charging solutions in homes, at businesses, and in the public, and they are in use today. In Q3, the first quarter of our electric vehicle charging rollout, we installed more than 1,000 charging docks for residential and business customers in more than 340 communities across 18 states.

Our vision of and electric vehicle charging ecosystem is becoming a reality. 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. By end of Q3, initial charging systems were already installed and operating in Houston.

Complementing our direct sales efforts, Milbank manufacturing selected AV to provide EV charging stations to its customers, including utilities, developers, contractors, businesses, and consumers through their nationwide distribution networkThis partnership expands the availability of our EV charging infrastructure throughout the United States. We believe our relationships with Nissan, NRG, and Milbank represent some of the most significant commercial electric vehicle solution contracts to date and demonstrate our ability to bring compelling value to a broad customer set across the market.

In just one quarter, we have built out one of, if the not the largest, installed base of level-two charging systems for passenger electric vehicles. Our comprehensive EV charging product line is transitioning from a development program to its initial adoption and production stage.

Our other EES products, electric vehicle tests and PosiCharge systems, remain leaders in their market segments and have grown in revenue this fiscal year. Strength in PosiCharge sales is likely a result of economic recovery and forklift sales growth driving demand.Our test systems remain in demand domestically and internationally, driven by growing research and development of electric vehicles and their energy storage systems.

We invested in the heavily in the technology innovation that drives our long-term growth strategy. This investment is built -- has built a strong and valuable intellectual property portfolio across our enterprise, which we defend in the interest of all of our stakeholders. Our most recent example of this is the action we took to protect and enforce our intellectual property rights against a competitor this month in the test systems market.

I also want to mention that 2011 is AeroVironment's 40th anniversary. In 1971, Paul MacCready formed AeroVironment to focus human power on creating solutions and pursuing opportunities at the nexus of technology and the environment. Human power refers to the power of the ideas, passion, and the persistence of the people who created all the success at AV. From the pilots whose paddled with the Gossamer Condor and Albatross to world records for human-powered flight, to the more than 800 employees who continue to lever decades of accumulated learning and experience to do important innovative work well.

Small UAS now help front-line war fighters see beyond human limits.EV charging solutions make it easier for people to choose cleaner, domestically generated electricity instead of imported gasoline to power their cars.Human power is what we're celebrating this 40th anniversary year. And with that as an overview of the quarter and our business, Jikun Kim, our Chief Financial Officer, will review the third-quarter financial performance.

Thank you, Tim, and good afternoon everyone. AeroVironment fiscal year '11 Q3 results are as follows.Revenue for the third quarter was $84.4 million, an increase of 39% over Q3 last year of $60.9 million.

Looking at revenue by segment, UAS revenue was $71.7 million, an increase of 30% over the prior year. The growth in UAS revenue was largely due to higher product deliveries of both digital Puma AE and Raven BDDL systems. Revenue on the services side was flat.

We realized higher services, logistics, and repair revenue, driven by Puma AE fielding activities and Raven BDDL retrofits.However, this was offset by lower customer-funded R&D work, largely driven by the Global Observer program. EES revenue was $12.7 million, an increase of 120% from Q3 last year, primarily due to higher electric vehicle test systems deliveries and the initial rollout of the electric vehicle charging docks for automotive dealerships and consumers.

Turning to gross margins, gross margin in the third quarter was $34.1 million, up 45% from the third quarter last year. Gross margin as a percent of revenue was 40%, versus 39% in the third quarter last year. By segment, UAS gross margin was $29 million, up 37% from the third quarter last year. As a percent of revenue, UAS gross margin was 40%, compared to 38% in the third quarter last year. The increase in gross margin percentage was driven by higher volumes and higher mix of fixed-price contracts.

EES gross margin was $5.1 million, up 118% from the third quarter last year, primarily due to higher sales volumes. As a percent of revenue, EES gross margin was 40% versus 41% in the third quarter last year.

SG&A investments for the quarter was $10.6 million, or 13% of revenue, compared to $9.8 million, or 16% of revenue in the prior year. SG&A investments were higher primarily due to higher marketing and business development investments. R&D investments for the quarter was $7.9 million, or 9% of revenue, compared to the prior year amount of $5.2 million, or 8% of revenue. The growth in R&D was primarily driven by increased development initiatives at both UAS and EES.

These incremental SG&A and R&D investments reflect the increased fiscal year '11 investments we discussed during our last few calls.These investments will sharpen the match between our solutions and the emerging demand, and strengthen our ability to capture the growth opportunities we see ahead of us.

Operating income for the quarter was $15.7 million, or 19% of revenue. Operating income was 85% higher than third quarter last year, primarily due to higher gross margins and partially offset by higher SG&A and R&D investments.

The effective tax rate for the quarter was 27.2%, compared to 23.5% in the prior year. Increase was driven by higher pretax profits, partially offset by the timing of the R&D tax credit extensions.Net income for the quarter was $11.5 million or $0.52 per fully diluted share, compared to $6.5 million or $0.30 per fully diluted share in the same quarter last year.

Now moving quickly through our year-to-date results.Revenue for the first nine months was $186.4 million, up 24% from the prior-year period of $150.2 million. By segment, UAS revenue was $158.8 million, up 20% from the prior year. The increase in revenue was largely due to the increase in product deliveries of $31.2 million, primarily driven by increased deliveries of both digital Puma AE and Raven BDDL systems.

Again, revenues on the services side was relatively flat.We realized an increase in services, logistics, and repair revenue of $28.7 million, primarily driven by Raven BDDL retrofits and Puma AE fielding support activities, but were offset by lower customer-funded R&D of $33.2 million, again, driven by the Global Observer program. EES revenue was $27.6 million, up 53% from the prior-year period, primarily due to increased product deliveries and installation services of AV's industrial electric vehicle charging systems, or PosiCharge, and electric vehicle test systems.

Gross margin for the first nine months was $67.9 million, compared to $53.8 million a year ago. Gross margin as a percent of revenue was 36%, unchanged from the prior year. By segment, UAS gross margin was $56.8 million, up 24%, primarily due to higher sales volumes.

EES gross margin was $11.1 million, up 41%, primarily due to increase sale volumes. As a percent of revenue, EES gross margin decreased from 44% to 40%. The decrease in gross margin percentage was due to higher manufacturing overhead and support costs, driven by increased production and service capability and capacity.

SG&A investments for the first nine months was $34.6 million, or 19% of revenue, compared to the prior-year period of $30.8 million, or 21% of revenue.R&D investments for the first nine months was $24.5 million, or 13% of revenue, compared to $116.6 million, or 11% of revenue, in the prior year.

Operating income for the first nine months was $8.8 million, or 5% of revenue, compared to an operating income of $6.4 million, or 4% of revenue, last year. The effective tax rate for the first nine months was 8%, a decline from the prior-year period of 21.4%. The effective tax rate was lower, primarily driven by the reduction in the liability for uncertain tax positions, higher levels of R&D tax credits, and the catch-up impact related to the timing of the R&D credit -- tax-credit extensions.

Net income for the first nine months was $8.3 million, or $0.38 per fully diluted share, compared to $5.1 million, or $0.23 per fully diluted share last year.Looking at backlog, funded backlog at the end of the third quarter was $103.8 million, up $42.5 million, or 44%, from April 30, 2010.

Turning to our balance sheet, cash equivalents and investments at the end of the third quarter totaled $168.1 million, up $4.5 million from the prior quarter.The positive cash flow was driven by higher income, partially offset by higher working-capital needs. Turning to receivables at the end of the third quarter, our accounts receivable, including unbilled receivables, totaled $64 million, up $14.2 million from the prior quarter.

Total days' sales outstanding were approximately 68 days, compared to 70 days at the end of the prior quarter. Taking a look at inventory, inventories were $28.9 million at the end of the quarter, unchanged from the prior quarter. Days in inventory were approximately 52 days, compared to 62 days at the end of the prior quarter.

Now turing to capital expenditures, in the quarter, we invested approximately $2.7 million, or 3% of revenue, in property improvements and capital equipment. During the quarter, AV recognized $2.6 million of depreciation. Now with that, I'd like to turn things back to Tim to discuss AV's expectations for the balance of fiscal year '11. Thank you.

Thank you, Jikun.Based on results to date and our view of the remainder of our fourth quarter, we can tighten our guidance range. With our execution through Q3 and our current backlog, we now expect fiscal '11 revenue to grow 12.5% to 15.5% over fiscal year '10. We plan to continue our incremental investments in the new developments through Q4 and still expect our full-year operating profit to be in the range of 10% to 12% of sales.

As I look ahead at fiscal year '12 and beyond, I expect that we will realize opportunities for growth from both our existing and our new products and markets. Small unmanned airplane systems, electric vehicle charging systems, and Switchblade all represent probable growth opportunities for us in fiscal year '12 and beyond, with the rate of growth in any given period subject to some timing uncertainty. Global Observer continues to represent very significant growth potential when it is adopted, but it also carries a high level of timing uncertainty.

I'm very optimistic about our long-term growth potential. We will provide fiscal year '12 guidance on our Q4 call as usual. At this point, I can tell you we expect fiscal year '12 will deliver continued growth, with revenue weighted to the second half, much like fiscal year '10 and fiscal year '11.

To reiterate the three points I began with today, our team's ability to execute effectively continues to improve.We continue to make progress on all of our major development programs, and the demand for our existing solutions is growing, while the demand for our developing solutions continues to emerge. Together, they provide a strong, long-term growth platform. Thank you for your continued interest in AeroVironment and Jikun and I will now take your questions.

Thank you, sir. The question-and-answer session will be conducted electronically.

(Operator Instructions)

We ask callers to limit inquiries to two questions.If you have additional questions, you're welcome to return to the queue afterwards.

(Operator Instructions)

Mike Lewis, Lazard Capital Markets.

Hey, guys, thanks for taking my questions here. Hey, Tim, I just want to circle back with your initial comments from today.You talked a little bit about some acceleration in Q4 expected deliveries into Q3.Can you quantify that for us how much that was in revenue?

Mike, I don't -- I can't give you a specific number, but we had some Puma deliveries and a couple of others that -- where our customers were anxious to get more hardware sooner, and we were able to accommodate that.And that contributed to exceeding the revenue that we had expected in Q3 but it -- just pulled it out of what we had planned for Q4.If I could interject a comment here before even if you have another question, Mike.

Apparently, when I was finishing up my script, I was referring to the -- our guidance for the balance of the year, and I said 12.5% to 15.5% growth over last year, and I intended to say 12.5% to 15% growth, which is the top half of our original guidance at the beginning of the year.

Okay, got that.And then Tim, if I could ask you, on the electric vehicle charging business, could you provide us with the actual revenue off that EV portion of EES?And could you also break out what proportion was actual residential versus businesses?

Well, I think I'm not going to be able to specifically answer your question, Mike.We have not in the past, and I think we'll continue the policy, of not breaking out revenues by product line. But, I was trying to provide some sense of a pretty good start with the quantity of installation.

That installation included, as you suggest, residential installations plus business and public installations. There -- we did install a number of outside charge docks at Nissan dealerships through the quarter, as the dealership network began to prepare for the initial deliveries of Nissan LEAFs. And as you may be aware, that's -- Nissan has planned that rollout in a staged way across the country.And so, the initial dealerships that are preparing for that would presumably be the ones in the first states, the states involved in the initial rollout.

Okay.I will jump back in the queue in courtesy of everyone else.Thank you.

Thank you, Mike.

Noah Poponak, Goldman Sachs.

You alluded to this -- what's been discussed in terms of the potential to double the acquisition target for small UAS. It seems like that's migrated from Raven only to all small UAS.Can you just elaborate on how you see the breakdown in terms of types of aircraft there?And maybe the speed at which we can see these procured given this new objective?

Okay, Noah.I would like to phrase my response in the context of public comments that the Army has made in the last number of months. And what they've said is they have been engaging in a systematic review of their requirements and their forestructure and their tactics and procedures, and in particular, as to they relate to -- how that relates to the use of small unmanned airplane systems.

And there have been a few public comments in the last few months that have indicated that while no decision has been made, and that -- but recommendations appear to have been forwarded and are being reviewed at the Pentagon, with consideration of not only increasing the basis of issue of small UAS systems at the forestructure, but to expand the capabilities beyond the existing Raven to include a larger unmanned airplane that would still be hand launched, and a smaller version, at a minimum, in addition to the existing Ravens.

And the number of units in a system of the various mix have apparently have not been settled on, but by all indications, at least there are large numbers under consideration that may -- I think I've seen numbers that essentially doubled the existing basis of issue.

Okay. So, hard to say exactly what product they'll want and what the mix will be, but clearly a lot of opportunity for what you manufacture.

Well, I believe so. As we talked about in the past, a few months ago, or maybe a little more than a few months ago, the Army acquired Pumas and Wasps and issued them in conjunction with Ravens to a combat brigade team for field evaluation.And I would suspect that that was part of this overall assessment of what the best use of this technology is for today and tomorrow's Army.

Okay. Then, just lastly, you mentioned the $55 million of Raven in the fiscal year '11 request you always largely expected to follow in your fiscal '12.And then you talked about the $81 million of Raven and Wasp that's in the fiscal '12 request.How much of that are you guys thinking falls in your fiscal '12 as well?

I think we'll have a sharper focus of that by next quarter, Noah, and -- when we are prepared to talk about our fiscal year '12 guidance. And we'll probably be looking closely at the next few months of the budget process to make a determination of when we think we can expect that to flow through as contracts. So, probably a little right now for me to give you an answer on that.

Fair enough. Thanks a lot.

Thank you.

Brian Gesuale, Raymond James.

Hey, guys.Nice job on the quarter.

Thank you, Brian.

First question is for Jikun here.I don't think I've seen your backlog up over $100 million with so much product revenue associated with it.Can you give us the mix of fixed-price work, which I think is a fairly dominant portion of the backlog at this point?

Not so much on the backlog, but I can give you a little guidance, I mean performance, on the Q3, and hold on a second. In Q3, about 70% of the revenues were fixed price, and you could probably extrapolate that into the backlog.

But I would imagine that the backlog content is even a little bit heavier, given that you don't have Global Observer in the mix nearly as much, and Global Observer had been such a dominant piece of a $60 million, $70 million, $80 million backlog number over the last several quarters.

You're probably accurate.

Okay, terrific. And then, Tim, just as we look at the electric vehicle business, can you maybe talk a little bit about how you expect the two of the major new, emerging markets to develop in terms of the home market and the public infrastructure market?Maybe rates of development, maybe opportunity sets, and just really how you see that happening and rolling out over the next couple of years?

Well, I think there's a -- the clear distinction is that the home market I believe is and will be driven by automobiles, so as manufacturers begin to deliver plug-in electric vehicles at delivery rate, that adoption rate will drive and correlate with the residential acquisition of chargers in their installation. The public currently is -- there's a -- there are government sponsors that are subsidizing some public infrastructure rollout.

There are initial private public structure -- infrastructure initiatives, like the one we're participating with in Houston with, led by NRG Energy. That's a more of a emerging market with multiple business models being evaluated and tested out, and probably a lot more change in that segment of the market over the next -- I don't guess I want to even say how many -- the period of time -- but for the next -- for the foreseeable future, as that business model settles down to a few that will dominate. So, it's hard to for me to predict the timing, but I think the -- what is clear is that the OEM rollout of electric vehicles and the residential adoption will probably lead.

Okay. Terrific, guys.Thanks for taking my questions.

Thank you.

Jeremy Devaney, BB&T capital markets.

Thanks for taking my call.Could you update us on where we stand right now on percentage completion against the current Army target of 2385 systems?

Sure.Let me -- sorry, I'm fidgeting around with my book here.It is at 69%. It has not changed from last quarter. We did ship quite a few Raven systems.However, they were not against the Army objectives.

All right.Great.And then, also, recently, we've seen a lot of headlines talking about compatibility of the charging systems, looking specifically at the electric vehicle charging systems. And I know you guys have been heavily involved in the standard setting. Could you talk a little bit around the issues that we're seeing?Mitigating compatibility issues?What financial impact might be, i.e. upgrades to new standards, providing adapters, lobbying, et cetera, et cetera?

Sure. There is an existing standard that applies to level one and level two charging. So, level one would be 110, and level two being 220, residential and public chargers.That -- they use the same connector.It's a standard connector, and to my knowledge, all of the new electric vehicles that are coming to market now will comply with that standard.

So, one should be able to use the charge cord that comes with the car.That'll have that cable, that connector, on it, or the electric vehicle charging dock like we and others currently provide with a common connector that interfaces with all future electric vehicles in the United States. That's my expectation, and I think that's -- it's unlikely to change.

The -- what's open is level three charging, which is a term that refers to an array of faster-charging schemes, most of which are using DC power that goes directly into the battery. The standards committee in the United States has still not agreed on that configuration, and the protocol of that connector.And current vehicles -- many of the current vehicles that are about to rollout will use a protocol was standardized in Japan.The acronym is [CHATAMO].And we'll -- that does have the -- we'll see what happens over time on that standard.

It gets a little more complicated when you get outside of the United States because there are different standards in Japan.There are different standards still being developed in Europe that aren't finalized, and other countries around the world are also in the process of setting their own standards. So, still early in the wild west here, I'm afraid.

Excellent.Thank you very much for the response. I'll hop back in queue.

Thank you.

Peter Arment, Gleacher & Company.

Tim, nice quarter. You answered a lot of questions.Mine are more just housekeeping.What do you -- are you expecting R&D for the remainder of the year to be?

I think it's probably consistent with -- if you average out the last three quarters, I think that's probably a good number to use.

Average out the last three.Okay. And Jikun, what about the tax rate, because you came in lower with the R&D tax credit this past quarter.What are you expecting for the year?

Correct.For the whole year, about 26%.For the fourth quarter, about 33%.

33%.Okay, great. Wonderful, thank you.I'll jump back into queue.

Tim Quillin, Stevens incorporated.

Good afternoon. Tim, I think you went into this a little bit in terms of the growth drivers as you are looking forward into fiscal '12, but if you can talk about that in a little more detail, and specifically what you see in terms of Puma demand after a relatively strong fiscal '11 for you?

I think, as I suggested in my comments, Tim, we're optimistic, primarily because of the capabilities that new digital Puma system brings and the response that the initial users of that system have had. Having said that, there aren't a lot of definitive quantity requirements out there that I can point to.

So, we are optimistic.We have some ongoing discussions with customers that seem to be -- to have a significant appreciation for that capability, but I don't think I can give you much in the way of specifics that I can point to, to support that.

Okay. You had talked about other growth drivers, though, for fiscal '12.You had rattled off two or three that you were confident would grow.

If we look at small UAS in general, we have this optimistic look at Puma that I just described.Raven continues to attract demand, both with existing customers and from new customers. And we have yet to introduce the digital version of our third production, small UAS Wasp.

As I mentioned, we expect to be demonstrating that yet this quarter.And what we have seen in the past is significant initial adoption once we have brought out the new digital version of the prior analog product. So, I'm a bit optimistic as well about the early adoption of that capability.

If we -- we continue to see this activity and interest around Switchblade.But as you know, we've seen that for a year now, and I have to be a little careful about my optimism.But everything looks like there is a continued level of high interest there that could materialize by next year.

We do have significant contract relationships around the electric vehicle charging solutions that imply continued growth, not only next quarter, but through next year. As you probably are aware, there's -- the current capacity for producing Nissan LEAFs is 50,000 a year, I think, is the existing factory in Japan.

By the latter part of 2012, Nissan has said they expect to open their second plant in Tennessee, which would quadruple their capacity.And in and of itself, that would suggest an opportunity for continued growth in that business.And of course, we are pursuing many other growth opportunities in that total solution set.

That's good color. Thank you. I just had a quick follow-up question regarding expenses and R&D was down quarter-to-quarter, and SG&A was down quarter-to-quarter as well. I think if I recall from last conference call, we were all scratching our heads in terms of -- your guidance seemed to imply that operating expenses would stay at Q2 levels for the remainder of the year.And we thought maybe gross margins would have to go up to get you there.

But it looks like operating expenses have pulled back a little bit.You guided where R&D would be.How about SG&A for 4Q?

So, I think you guys can kind of plug the fourth quarter and see where we have to be. And I think that's about as good as we can do right now. I think Tim provided extra color on to 10% to 12% operating profit range. Let's go with that, if we can.

Okay. All right, thank you.

Thanks, Tim.

Erik Olbeter, Pacific Crest Securities.

Hi, this is Eric Leeper in for Erik Olbeter.Just hoping to get a little more clarity on the EES segment revenue.Last quarter, we talked about some increase in the PosiCharge.Just wondering if that's still there and what -- would it be safe to assume that the charging system buildout was responsible for the year-over-year increase this quarter?

Well, I think we've seen revenue growth in both the EV test product line and in our PosiCharge business throughout the year, as I indicated again in the comments. It looks like that's market driven. We have maintained our leading market share, we believe, in both of those segments. And we're seeing the advantage of growth in the market. And I -- so that -- barring a change in those market dynamics, that's what we seen so far this year is probably what we expect to see going forward for the balance of the year. Jikun, do you have any more specific comments?

Yes. So, I think we have couple of products, one power processing, which is the EV test systems, if you will.We'll refer to it synonymously, and that has shown good, solid growth, as well as our fast charge or PosiCharge.And EV solutions also contributed.So, all three product lines did very well this quarter.

Okay. Great, thanks for the color.

Tyler Hojo, Sidoti & Company.

Just wondering if you could go into a little bit more detail in terms of the Global Observer funding. Just trying to understand -- what exactly is that stake?If you don't get the funding here in next month or two, what does that mean to fiscal '11, if anything?

I think we are -- our updated guidance for the balance of the year anticipates the complete spectrum of what we think are possible outcomes in Global Observer, as well as our other major programs. The -- we're clearly on a month-to-month basis for the last few months with Global Observer funding. Part of that, I think, is exacerbated by the continuing resolution and the high level of uncertainty that DOD has around budget levels.

There's -- that's balanced against a clearly growing interest, with a broad number of customers generated by the really great results from the flight testing and now the demonstration of payloads during flight tests. So, we're certainly -- we're in an area that's maybe not unusual for innovative development programs, but it's certainly not one for the faint of heart.

I get that.But hypothetically speaking, if you're not to get the funding, would you continue funding the program out of our own pocket or how do you look at that?

Right now, we are totally focused on working with customers.We're working at actually three different levels.One is incremental funding opportunities for the existing JCTD program.

The other is working with multiple customers, identifying multiple requirements where Global Observer has the potential to uniquely fit a requirement need, which we would be then looking to generate support for a program of record. And thirdly, we're working on a various sets of opportunities that could bridge funding opportunities that could bridge from the current development stage to a future production stage. And all of those are focused on customers and customer funding.

Okay. All right. Great. Just couple of cleanups here. Just looking for the customer-funded R&D number in the quarter and the unfunded backlog.Thanks a lot.

Sure. I'll go with the unfunded backlog first, and that is at $170.5 million.And in terms of the customer-funded R&D, in the quarter was $8.7 million.

Thanks a lot.

Andrea James, Dougherty & Company.

The question is -- the LMAMS requirement, I know AeroVironment's well positioned there to offer the Switchblade.Do you think there's chance that they would split that requirement among several systems, or do you think it'll be an all-or-nothing type contract?

Well, I don't -- I'm not -- I think the -- I'm not sure that there is a clear contract mechanism identified at this point. And as a result, it'd be -- I can't really comment on what would happen when there and if there is one. But having said that, I think there's a -- Switchblade appears to offer a unique capability at this point.And we're optimistic that customers are considering adoption of that capability.And to the degree they have options, of course they would evaluate those, but I think at this point we have a unique solution.

Okay, thank you. The NRG contract seems like it could be pretty substantial.Can you give more color on the timing and when that would be material, and if there's an opportunity to add more cities?

Yes, that -- NRG announced that initial ecosystem to be established in Houston, and I think at the time, they indicated that they might consider expanding that beyond Houston.And I don't think they've made public announcements about that expansion since then. We would certainly be ready, willing, and able to support them if they decided to do that.

The Houston program is in the process of rolling out right now.I believe they announced initially that it would include at least 50 fast chargers installed in public applications and another 150 or so EVSE or 220 charge docks in public applications that would available to people in the network.And then of course, everyone that participates in that network would have at least one charge dock installed at a residence.

Thank you.

Thank you Andrea.

Michael Ciarmoli, Keybanc Capital Markets.

Good evening, guys.Thanks for taking my questions. Tim, I guess there has been a lot of talk on this call about the R&D expense level and running at this rate through Q4, which is hampering the operating margins into that 10% to 12% level. How do we think about that in fiscal '12?Do you keep the pedal down on investing or margins potentially expanding back up to where they had been, in that 12% to 14% range?

Let me give you a few levels of answer to that, Mike. To begin with, we aren't ready to provide guidance for '12 until next quarter. But then, if we go back to the specific issue now, we made that decision in Q1 of this year because of specific issues and opportunities for us to capitalize, we thought, with an attractive return on incremental investments this year. So those were specific investments that were planned and are being executed in this fiscal year.

Now, the nature of any development program is such that it could possibly end sooner.More likely, if it doesn't end on time, it runs little longer.But in no way did we intend to change our business model with this decision. So, it's not -- it shouldn't be construed and it's not intended to change our long-term operating model or operating profit.

So, structurally, then, you guys can still do that 12% to 14%.It's just when these development programs wind off.

Yes. And I -- rather than just come to that conclusion, I'd go back to my first statement, which is, I don't want to provide '12 guidance on this call.

Sure.

Short of that, this incremental investment this year is designed and being executed this year and not planned to continue beyond that, with the possible caveat that we might -- some particular program might slide over a few months, but --.

Okay. That's fair. Just back on Global Observer, what should we be looking for or what milestones are you guys looking to achieve over the next couple of weeks?Is it basically increasing the duration and the altitude?Are those basically the major milestones you are seeking to achieve and just working towards that seven-day flight?

That's right. And I was trying to suggest that in the brief comments I had in my earlier statement that --We have a very formal plan that's been developed over the last year by our team, the flight test team at Edwards, and our customer at SOCOM.

So, the intent is to systematically expand what's referred to as the flight envelope of how the airplane operates and what kind of environments, and particularly, in this case, we are now systematically going to higher and higher altitudes.And once we reach the operating altitudes and the stratosphere, then we will systematically extend the duration, ultimately to the extreme altitude, extreme duration objectives of the Global Observer, which, as you know, exceed other airplanes that have -- that exist now.

How should we think about that?Are you conducting multiple tests per week?How many weeks or months would it take to get there?

Well, we ran the -- there were two phases of this test, this flight test.The first were a series of tests on battery power that were focused on the airplane structure itself and its control systems.That series of tests ran five tests over five weeks. Then we stood down for a while, while we installed the hydrogen system in the airplane, and we have subsequently run three tests there.

It's hard to put a specific time frame on because most of the timing on the testing is not a function of the airplane or the crew readiness.It's a function of the flight-test facility or weather and the constraints that we have on the kind of weather we can fly in, or what other things are going on at Edwards that preclude us flying. So, a lot of caveats there.Having said that, we would expect that we would in a -- without funding constraints, we would complete all of the anticipated flight tests and payload demonstrations for customers this calendar year, and if we had good scheduling luck, earlier rather than later.

That's helpful. Just one more. I know we're probably running over here. You didn't really comment about the international markets, what you are seeing there from customers.Does this uncertainty in the Middle East now.Does that create more near-term opportunities? Does that slide some things to the right?How are you viewing international markets right now?

In general, we continue to see strong interest internationally. I continue to believe that that has significant long-term growth opportunity, because I think most military will adopt small UAS capabilities over time. We have seen and we expect to continue to see more delays in the procurement process internationally than we see domestically.

And, so, but as you see, we had an initial contract with a new customer announced last quarter.To the degree that our customers will allow it, we announce all material contracts.But in a number of cases, customers prefer that they aren't announced.And so those you will not see in press releases.

Okay, great.Thanks for asking my question -- answering my questions, guys.

Thank you.

Josephine Millward, The Benchmark Company.

Can you give us update on the Army's ISR reprogramming request?I understand they have requested for additional funding for the Puma.Do you have that baked into your '11 outlook, or do you think this is a '12 event?

Yes, I'm not sure. You have to be a little more specific, I guess, with me. I'm not sure what the ISR request is.

They've requested to reprogram over $1 billion dollars from the current budget to pay for urgent priorities, and there is a line item in this reprogramming request for $11.5 million for small UAS, for route clearance. It looks like it's for the Puma.

Well, route clearance is the -- one of the applications that drove the contracts that we received for Puma earlier this year. And it's completely consistent with our expectations or not -- I shouldn't say expectations, but it's consistent with our view of the success of that operation that the customer might want to expand it. But I don't have any specific feedback on contracts or timing.

Okay. That's fair. And Tim, can you provide clarification on the Army's Raven acquisition objective, because the '12 budget request actually shows a much higher number than the 2358 systems you refer to. I think they have 2868 in their '12 budget request. Is that the higher number that you think is under evaluation for an increase?

I don't think so. I don't think that connects with the intent that I had in my other comments, Josephine. So, right now, I think the formal number is, let's see, 2385?

2358.

2358. Right digits, wrong order.

Why do they have 2868 in the budget request as their total ?I think their number -- the number they're looking for over the long term.

I don't have a good answer for you there. If we've seen the -- the comments that have been made about the expansion of the basis of issue being considered is -- are much larger than that.

Right.

But those are still under consideration, and I don't think they've shown up.I've not seen them those larger numbers in any budget document, so --.

Okay, I'd be happy to send it to you.

Yes.

Just one final question.If you can provide a little more color on the two Switchblade contracts, especially the Army IDIQ with the $39 million ceiling?Do you still expect LMAMS or Switchblade to become a program of record in '12 or '13?And do you still anticipate a production order in the coming year?

Well, I think there's a good reason to think that a number of customers are actively considering some level of early adoption of Switchblade. And we clearly see these recent contracts, which support both the evaluation of LMAMS technology, applicable to the LMAMS requirement, and the contract support for additional development and demonstration of similar capabilities. Whether there's a formal program of record in any time specific is hard to predict, but we know there is a lot of activity, and that activity appears to be growing.And I don't know that I can add a lot more color than that.

That's helpful, Tim.Thank you.

Our next question comes from Pete [Kastiak], with Morgan Keegan.

Yes, hi. I just wanted to get a little more color on Global Observer.Assuming you are able to get the funding, continue to flight testing.What would be next step we should look from here on to possibly getting to full production?

Well, go back maybe to these three different elements that I referred to when I was talking about our dialogue with customers about near-term and longer-term funding. If we think about the JCTD, the current development program, then our objective would be to continue flight testing and demonstration of payloads at multiple day flights in the stratosphere. They're -- longer term, there are multiple programs in development throughout DOD that address both ISR and communication relay missions that appear to have -- offer the opportunity for a cost-effective, persistent, high-altitude platform as part of their solution. And that would be a likely basis to ultimately end up in a program-of-record requirement [form].

And in between those two, there are multiple opportunities that, we believe, to fund what we refer to as a bridge, from the current JCTD development to a future production program. And that bridge might take the form of additional payload integration and testing, possibly deployment of the existing JCTD assets in operational applications, potentially the procurement of another system beyond that. These would be relatively limited, smaller funding amounts that would bridge this program and it's development from development to full-rate production.

Okay. I appreciate the color. Just briefly, you had a bit of a big ramp-up in your receivables and inventory.I'm just wondering how we -- have any thought on how that should be trending over the next quarter, just the next year, the growth year, that's going to have to keep growing, or any color you can provide?

So, I mean couple of things.Last quarter, we did have a sequentially ramping month during the quarter. So what you're seeing is on the AR side, there's basically the activities associated with the last month of the quarter. However, this quarter we will continue to have that level of pace. So, at the end of the year, you should expect similar level of AR. Inventory-wise, that should probably stabilize and probably trend down into next year.But, again, it really depends on the planning that we have to go through for fiscal year '12.

All right. Thank you.

Mike Lewis, Lazard Capital Markets.

Tim, thank you for take taking my follow up. Time line to completion in Houston?Do you have one yet?

We are working to a timeline, and I think we expect to see most of the public infrastructure installed in calendar year '11, Mike. And probably a nontrivial part of that by mid-year.

Okay. Just to shoot over to Global Observer for a second. On the tactical communications payload that they're working on, does also have a full-motion video-type application on that, that they're testing on that system?

Yes. There are at least two payloads that have been initially identified for GO and have been integrated with the GO system. One is the communications relay package.That's the TCS or tactical communication system, and another is an ISR payload that addresses imagery. Currently they are -- the ISR payload is installed on airplane number two and the communications payload is installed on airplane number one.

Got you.Okay. Thank you so much. Great quarter.

You bet.Thank you.

And that is all the time we have for questions. We would like to at this time return the call to Mr. Michael Gitlin for any additional or closing remarks.

Thank you, Joe. With that as your final question, we'd like to thank everyone for your attention and interest in AeroVironment and let you know that an archived version of the call, along with all SEC filings and relevant Company and industry news, can be found on our website at www.avinc.com. We look forward to speaking with you again following next quarter's results.Have a good day.

That concludes today's conference call. Thank you for your participation.You may now disconnect.