AeroVironment Inc (AVAV) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome on the AeroVironment Incorporated fourth-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 the Chairman and Chief Executive Officer, Mr. Tim Conver, Chief Financial Officer, Jikun Kim, and Vice President of 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.

Thanks very much, Sayid, and welcome to AV's fourth quarter and full 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 forecast 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 statement. 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 as of only today June 21, 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'll begin with remarks from Tim Conver, followed by Jikun Kim and then we'll move onto questions. And now it's my pleasure to turn the call over to Tim.

Thank you, Steve. Welcome to our fourth quarter and full fiscal 2011 conference call. Execution, transition and growth were our priorities throughout the year. Those priorities lead us to the three main points of our discussion today. First, we achieved our performance objectives for fiscal year 2011. Second, we transitioned two developmental programs into production with good growth prospects. Third, progress on our developmental programs combined with continued demand for our current products and services give us confidence in our long-term growth. Jikun and I will now try to add color to these three points. I'll review our fourth quarter and full-year performance and then summarize progress in our two segments in more detail. Jikun will review our financial performance and I'll discuss our plans for FY 2012.

We had record Q4 revenue of $106 million with an operating profit of $25.2 million. Full-year fiscal year 2011 revenue of $292.5 million grew 17% over fiscal year 2010. Operating profit for the year was $33.9 million representing 11.6% of revenue, at the high end of our guidance. Earnings per share were $1.17, an increase of 24% over fiscal year 2010. Growth in fiscal year 2011 was due to several factors expected at the beginning of the year. In our Efficient Energy Symptoms segment, or EES, we launched electric vehicle charger installations for the Nissan LEAF and public charging solutions across multiple states in Q3. Our Q4 rollout effectively transitioned our on road electrical vehicle, or EV Solutions, from development to a production business staged for rapid growth. EES also benefited from improved EV test system and PosiCharge sales. In our Unmanned Aircraft System segment, or UAS, we transitioned to digital Puma from development into production. We made sufficient Puma deliveries to more than offset the anticipated revenue declines in the Global Observer Joint Concept Technology Development, or JCTD, which was planned to wind down during fiscal year 2011.

In our Q1 call, I discussed our decision to invest in an incremental 2% of sales in development during FY 2011. We saw the opportunity to sharpen our focus on specific requirements that had emerged in some of our key development programs. These investments refined Switchblade, digital WASP and electric vehicle solution prototypes that were all successfully demonstrated to customers by Q4. These demonstrations meaningfully differentiated our solution within a critical time window and increased both the probability of near-term adoption and the growth potential of these developments. Our team executed well in FY 2011 and the year developed generally as planned. The digital Puma UAS was completed early and the systems now in use have exceeded customer expectations. Raven revenue was about the same as in FY 2010 with customers continuing to procure both new systems and system upgrades.

Our EES segment revenue grew 69%, in the high double digits we expected. We moved closer to initial Switchblade adoption. We developed an early prototype of our new digital WASP in Q4 that impressed customers. We rolled out our residential charging solution for the Nissan LEAF and began the Houston and Dallas public ecosystems in the second half of the year. The Global Observer accident pushed out our time line for transitioning that program, but we continue to pursue the market opportunity for affordable persistence which we believe remains unchanged and large.

Customer demand remains strong for small unmanned airplane systems and returned to the industrial electric vehicle markets as the economy recovered and EV development surged. Our market share remained strong in some unmanned airplane systems, industrial EV charging and EV test equipment. Our initial positioning in EV solutions was strengthened by new contracts with an automotive OEM, state governments, utilities and a distribution relationship. We enter FY '12 well positioned for continued growth in both the near and the long term.

Now I'll discuss each business segment in more detail starting with Unmanned Airplane Systems. The new digital Puma system rapidly transitioned to full rate production and quickly built a strong reputation with users, making us confident in continued adoption. We received $75 million in Puma orders in FY 2011 including orders to support route clearance patrol missions. Users have total us that Puma is making a huge difference in helping save lives and we are proud of its contribution. Demand for our Raven system remains strong both domestically and internationally.

Raven continues to protect US forces. A recent DoD article described a drop in enemy attacks at the base in Northern Iraq after Raven usage was increased. The article concluded with the following statement. The Raven is a modern revolution in military affairs in its infancy, which will continue to mature and play dividends in saving lives with time, technology and training. In our FY 2011 the US army increased its acquisition objectives for Raven by 8%. Based on public comments, it appears they are considering further increasing their long-term requirements for small UAS. We believe international adoption of our small UAS is likely to accelerate as current customers find success with Raven and other countries consider adoption. An increasing number of our employees have been deployed with our customers for both training and operation of unmanned airplane systems in support of their missions. Customer response has been positive and we expect this element of our service business will grow.

Moving on to the UAS development programs, Global Observer is our hybrid electric unmanned airplane systems designed to provide seamless persistent communications and surveillance at a fraction of the cost of existing solutions. On April 1, we lost Global Observer Number 1 in a flight mishap, the industry term for an accident. Prior to the mishap, Global Observer flight testing was progressing extremely well. Global Observer incorporates half a dozen innovations required for extreme endurance at high altitude all of which work consistently well. We conducted 8 successful flights with Global Observer number 1, 3 of which were accomplished using the liquid hydrogen propulsion system. Flight test number 9 began with a morning takeoff on March 31. The next day, after about 18 hours of flying, the plane was at about 30,000 feet above sea level when the mishap occurred before dawn. We collected a large amount of data from the highly instrumented flight test aircraft. We believe we understand the cause of the mishap and have successfully tested and validated the corrective action. We will not be able to say more about the mishap until the Air Force completes their review.

The JCTD program has been the contract vehicle for the development, testing and demonstration of Global Observer. It was never a production contract. We had essentially reached the funding limit on the JCTD program prior to the mishap in Q3 and customers had been adding month to month incremental funding for Global Observer 1 flight testing. We received a stop work order in mid April that paused the JCTD pending additional funding and we have accounted for that impact on the business. Funding and mishap notwithstanding, the JCTD program was expected to wind down in our fiscal 2011 and close in fiscal year 2012. At that point we planned to seek funding for a transition to operational capabilities. This remains our intent and we are pursuing opportunities to proceed with Global Observer 2, which has remained nearly complete for some time while GO number 1 flight testing was being conducted. We believe the need for the affordable persistence of Global Observer has not changed.

Another important program in development is Switchblade. We have successfully demonstrated this system in a variety of increasingly rigorous customer-defined scenarios. During the year, we announced contracts for development, integration and flight demonstration of small organic precision munitions at a level of revenue that was consistent with our expectations. In our view these contracts represent positive customer activity moving towards the next step in adoption which we anticipate would be small volume preproduction procurement.

Now to the DoD budget process. The first thing to note is that only a minority of our annual contracts are identifiable in line items in the federal budget. And for the second year in a row, a continuing resolution affected our order flow and delayed several contracts. Continuing resolution delays this year included about $55 million of planned government fiscal year 2011 Raven procurement and we expect those contracts in Q1 of this fiscal year. Recent experience had taught us to expect delays in the budget approval process, however, and we had planned for delivering government fiscal year 2011 Raven orders in our fiscal year 2012. The House Appropriations Committee recently published its government fiscal year 2012 DoD bill and report. The committee fully funded the DoD request of $81 million for AV small unmanned airplane systems in government fiscal year 2012. We believe the high demand for C4ISR will only increase the need for more unmanned airplane systems in the future. Our UAS are significant force multiplier, force protection and communication capabilities at a fraction of the cost of alternatives. We believe this combination makes them compelling options for both current and future needs and all the more so in an increasingly budget constrained environment.

Moving on to our EES segment. The evolution of our Electric Vehicle Solutions business is a good example of our long-term growth model. Our initial EV charging technology emerged from our development of the GM Impact, the first modern electric car. Over two decades we optimized the technology, employed it in industrial markets and adapted it to a complete solution for the current generation of plug in electric vehicles. The result is an integrated business, product and service solution with the first mover advantage that uniquely supports the broad adoption of on road electric vehicles by multiple customer segments. Over the last two years, more large entrenched competitors have reacted to the emergence of plug in electric vehicles by introducing their own charging solutions. Even so, we have continued to win hard-fought competitions for important customer contracts. We think this mirrors our success in small Unmanned Airplane Systems, further validates the competitive effectiveness of our solution and positions us well to grow as the market grows. As long -- as part of our EV solution strategy, we are developing relationships across multiple channels that provide complementary pathways to market. We have announced some of the most significant contracts to date with OEMs, Nissan and BMW with utilities, TXU and NRG with Milbank as a distributor and with Hawaii and Oregon.

Our charging solutions are in use today in homes, at businesses and in the public. In addition to the thousands of industrial EV charges we've deployed over the last decade, we have now deployed over 2,000 level 2 charge docks in hundreds of communities across 21 states since we began in November of last year. This build out is already one of, if not the largest installed great base of level 2 charging systems in the world. We are also installing complete charging ecosystems that include level 2 and fast charging systems linked together by a data network. Other previously established products within our Efficient Energy Segment also grew in fiscal year 2001. PosiCharge revenue increased as the economy recovered and capital budgets increased for heavy manufacturing and distribution facilities. Our EV test equipment revenue also grew reflecting strong market share and demand from EV developers both within and without of the United States.

Our customers supported our solutions with orders, our team executed at very high levels and our business prospered in fiscal 2011. We will recover and learn from the Global Observer setback. We're well positioned to grow long term by providing advanced efficient solutions that help our customers succeed. And with that as an overview of the quarter and our business, Jikun Kim, our Chief Financial Officer, will review our third quarter and full-year financial performance.

Thank you, Tim, and good afternoon, everyone. AeroVironment FY 2011 Q4 results are as follows. Revenue for the fourth quarter was $106.1 million, an increase of 7% from Q4 last year of $99.4 million. Looking at revenue by segment, UAS revenue was $91 million, a decrease of 1% from the fourth quarter last year. Although year-over-year revenues decreased slightly, we realized higher service revenues driven by Puma AE system logistics and support activities. However this increase was offset by lower Raven B DDL system deliveries and Global Observer customer-funded R&D work. EES revenue was $15.1 million, an increase of 108% from the fourth quarter last year. This increase was driven by solid performance across all product areas. Passenger electric vehicle charging system deliveries and installations, industrial electric vehicle charging system deliveries and electric vehicle test systems also known as power cycling and test system deliveries all contributed in a significant way.

Turning to gross margin. Gross margin in the fourth quarter was $49.2 million, up 14% from the fourth quarter last year. Gross margin as a percent of revenue was 46% versus 43% in the fourth quarter last year. By segment, UAS gross margin was $42.7 million, up 9% from the fourth quarter last year. As a percent of revenue, UAS gross margin was 47% compared to 43% in the fourth quarter last year. EES gross margin was $6.5 million, up 73% from the fourth quarter last year, primarily driven by higher sales volume. As a percent of revenue, EES gross margin was 43% versus 52% in the fourth quarter last year. The decrease in gross margin percentage was primarily due to higher manufacturing and engineering overhead support cost.

SG&A investment for the quarter was $12.8 million, or 12% of revenue, compared to $11.6 million, or 12% of revenue in the prior year. SG&A investment was higher, primarily due to higher marketing and business development investments. R&D investment for the quarter was $11.2 million, or 11% of revenue compared to the prior year amount of $7.9 million, or 8% of revenue. The growth in R&D was primarily driven by increased development initiatives at both UAS and EES.

Operating income for the quarter was $25.2 million, or 24% of revenue. These results include an impairment charge of $2 million for tooling, machinery and test equipment related to the Global Observer JCTD contract status and funding situation. Operating income was $1.7 million, or 7% higher than the fourth quarter last year. The increase was primarily driven by higher gross margins, partially offset by higher SG&A and R&D investments. Net income for the quarter was $17.6 million, or $0.79 per fully diluted share, compared to $15.6 million, or $0.71 per fully diluted share in the same quarter last year.

Now moving quickly through our full-year results. Revenue for the full year was $292.5 million, up 17% from the prior year period of $249.5 million. By segment, UAS revenue was $249.8 million, up 11% from the prior year. The increase in revenue was largely driven by increased product deliveries of $21.9 million, mostly attributable to the Puma AE system deliveries and increased logistics and support activities of $48.4 million driven by Puma AE system support and Raven B DDL retrofit kit. However, these increases were offset by lower customer funded R&D work of $45 million primarily driven by the Global Observer program. EES revenue was $42.7 million, up 69% from the prior year period. This increase was driven by higher product deliveries and installation services in all of our product areas. Industrial electric vehicle charging systems, electric vehicle test systems and passenger electrical vehicle charging systems all contributed in a significant way.

Gross margin for the full year was $117.2 million compared to $96.8 million a year ago. Gross margin as a percent of revenue was 40%, up 125 basis points from the prior year. By segment, UAS gross margin was $99.5 million, up 17% primarily due to higher sales volume. As a percent of revenue, UAS gross margin increased slightly from 38% to 40% primarily driven by [technical difficulties].

Ladies and gentlemen, please standby, we are experiencing technical difficulties. Once again, ladies and gentlemen, thank you for your patience. Please standby.

Apologies, our call seems to have been disconnected during Jikun's presentation. He'll back up a little bit and pick up on his comments.

Now moving quickly through our full-year results. Revenue for the full year was $292.5 million, up 17% from the prior year period of $249.5 million. By segment, UAS revenue was $249.8 million, up 11% from the prior year. The increase in revenue was largely driven by increased product deliveries of $21.9 million, mostly attributable to the Puma AE system deliveries, an increase in logistics and support activities of $48.4 million driven by Puma AE support and Raven B DDL retrofit kits. However, these increases were offset by lower customer-funded R&D work of $45 million, primarily driven by the Global Observer program. EES revenue was $42.7 million, up 69% from the prior year period. This increase was driven by higher product deliveries and installation services in all of our product areas. Industrial electric vehicle charging systems, electric vehicle test systems and passenger electric vehicle charging systems all contributed in a significant way.

Gross margin for the full year was $117.2 million compared to $96.8 million a year ago. Gross margin as a percent of revenue was 40%, up 125 basis points from the prior year. By segment, UAS gross margin was $99.5 million, up 17% primarily due to higher sales volumes. As a percent of revenue, UAS gross margin increased slightly from 38% to 40% primarily driven by higher mix of fixed price contracts. EES gross margin was $17.6 million, up 51% primarily due to higher sales. As a percent of revenue, EES gross margin decreased from 46% to 41% driven by higher manufacturing and engineering overhead support costs. These results reflect the higher levels of investments in support of the passenger electric vehicle charging system rollout.

SG&A investment for the full year was $47.4 million, or 16% of revenue, compared to the prior year period of $42.4 million, or 17% of revenue. R&D investment for the full year was $35.8 million, or 12% of revenue, compared to $24.5 million, or 10% of revenue in the prior year. These results reflect the higher levels of R&D investment we discussed at our Q1 FY 2011 earnings announcement. Operating income for the full year was $33.9 million, or 12% of revenue, compared to an operating income of $29.9 million, or 12% of revenue last year.

The effective tax rate for the full year was 24.3%, down from the prior year period of 31.1%. The effective tax rate was lower, primarily due to the cumulative catch-up impact and higher overall R&D tax credits. Net income for the full year was $25.9 million, or $1.17 per fully diluted share, compared to an income of $20.7 million, or $0.94 per fully diluted share last year. Looking at backlog. Funded backlog at the end of the fourth quarter totaled $82.9 million, up $10.5 million or 15% from April 30, 2010.

Turning to our balance sheet. Cash equivalent and investments at the end of the fourth quarter totaled $195.2 million, an increase of $27.1 million from the prior quarter. The positive cash flow was driven by lower working capital needs and higher net income. Turning to receivables. At the end of the fourth quarter our accounts receivable, including unbilled receivables, totaled $66.3 million, an increase of $2.4 million from the prior quarter. Total day sales outstanding were approximately 56 days compared to 68 days at the end of the prior quarter. Taking a look at inventory. Inventories were $38.1 million at the end of the quarter, an increase of $95.3 million from the prior quarter. Days in inventory were approximately 60 days compared to 52 days at the end of the prior quarter.

Turning to capital expenditures. In the fourth quarter, we invested approximately $4 million, or 4% of the revenue, in property improvements and capital equipment. We recognized approximately $2.5 million of depreciation during the quarter. We also recognized $2 million of Global Observer impairment charges to reflect fair market value adjustments. Now I would like to turn things back to Tim to discuss AV's expectation for our FY 2012.

Thank you, Jikun. In order to be more helpful to our investors, we decided to modify the way we guide the next fiscal year. We will continue to provide annual revenue guidance and we will add earnings per share guidance in lieu of operating margin because we believe EPS to be a more useful metric.

Looking ahead to fiscal year 2012, we expect revenue between $321 million and $336 million for the year. We expect earnings per share of $1.28 to $1.35 on a fully diluted basis. We expect our fiscal year 2012 revenue to be more heavily weighted to the second half of the year similar to the pattern that we saw in fiscal years 2010 and 2011. We anticipate first quarter revenue of $60 million to $65 million. Small unmanned airplane systems, Switchblade and EV product lines should account for most of our growth in fiscal 2012.

To reiterate the three points I began with today. We achieved our performance objective for fiscal year 2011, exceeding revenue guidance with 17% growth and EPS grew by 24%. We made progress across the business, including transitioning our passenger electric vehicle charging solutions and digital Puma from development into production. And the demand for our current products and services, combined with the progress of the potential for our development programs gives us confidence in our long-term growth. Thank you for your interest in AeroVironment. Jikun and I will now take your questions.

(Operator Instructions) Michael Lewis from Lazard Capital Markets.

Thanks for offering the EPS guidance by the way. First question is, Tim, there's a networking integration evaluation going on at White Sands right now, I think the Puma is known to be tested in this scenario. Can you give us any feedback that you expect to receive from the customers out there?

Well as I mentioned in the call, Mike, we've had very positive feedback from all customers that have been using the new digital Puma, and all of our initial feedback from the initial trials that you're discussing seem to be quite optimistic. So we think there's a-- we're well positioned there.

Okay. And just a second question, if we look at your fiscal year 2012 guidance, could you break out your energies versus UAS revenue? Essentially what I'm looking for, if you take the mid-point of your guidance what proportion or percentage of your total revenue would be derived by the energy business as a whole next year?

Well, Mike, we've tried to avoid breaking down revenue and earnings, either by segment or by products in the past. I will say that we expect growth in both segments as I indicated in the comments previously primarily coming from small unmanned airplane systems, Switchblade and the EV solutions. Why we expect all of our electric vehicle business elements to grow during the year in the EES segment, I think our expectation clearly is that the highest rate of growth will be within the on-road electric vehicle charging infrastructure that we just began rolling out in the second half of this year.

Jeremy Devaney from BB&T.

Good afternoon, gentlemen, thanks for taking the call. Tim, tomorrow the President is going to announce draw down scenarios for Afghanistan and I was wondering if you could specifically address the [rich] to your UAS employment, should we see a rapid draw down there in Iraq with operational slowdowns?

We have-- I think my view of the impact of forced reductions in either Iraq or Afghanistan is largely unchanged, Jeremy, and that is that while deployed forces might be reduced in either of those areas, certainly have been in Iraq already, the adoption of these tools, these small unmanned airplane systems, appears to have been systemic across all US forces with ground troops. And it has -- it's been adopted as part of the tactics and procedures that they operate with and I don't expect that the requirements that have been defined would be materially changed whether we are fighting a hot war or not. We-- to the degree that fewer troops are using these systems in combat we expect we would over the long haul see fewer spares and repairs because they would presumably be using systems in training and not be producing quite as much damage. One other factor that we've seen to date is that even though the numbers of troops are drawn down, activity in the area continues and if anything the value of situational awareness, whether for stationary sites or for mobile transit in the area, is increased if anything and we see increased use of our systems in those applications.

All right, great, that's very helpful. And then secondly, I was wondering if we could just clarify on the GO for your 2012 guidance, there's no piece in there for the GO and also I was wondering if you could discuss what the opportunities are for funding looking like in 2012 for that program?

Well we're in dialog with our customers regarding various options to move forward with the Global Observer program. As I mentioned previously, Global Observer number 2 is substantially complete in our facility and we're in a position to complete that and move that into flight tests yet this year if we can arrange the appropriate agreements with our customers. So we're optimistic about concluding some go-forward plan here with our customers but we have been conservative in planning our revenues for the year and we have not included Global Observer revenue in our plan.

Brian Gesuale from Raymond James.

Hello, guys, nice job on the execution this quarter. It seems like you have a lot of confidence in Switchblade growth and I know there's been a bunch of activity around LMAMS, can you give us an update on what you're seeing in terms of the RFP and whether that's actually something that could be a piece of the numbers as you look out at fiscal 2012?

Well we do expect to see growth in our revenue in fiscal 2012 over fiscal 2011 coming from Switchblade, Brian. There-- I-- we have had numerous customers involved in supporting the development and the demonstration of Switchblade through FY 2011. I expect that will continue in FY 2012. And as I noted in the call probably the next step in adoption would be small quantities of operational hardware, preproduction hardware that might be procured and the combination of those we think could produce revenue growth in FY 2012.

LMAMS specifically was a program that had 2 demonstrations. I believe the second live demonstration was completed in Q4 and not -- so both of those happened in FY 2011 and late in Q4 I think we finished the second one and I think we performed very well with our system there. We're waiting to see what our customers do in a go-forward plan with that requirement but there are multiple customers and multiple opportunities in this space and we are optimistic that we'll continue to make material headway this year.

Okay, great. That's very helpful, Tim, thank you. If I could just have a couple of quick follow ups. Tim, would you be able to qualitatively or quantitatively kind of give us some color around the EV pipeline this year versus a year ago? And then also you guys have been hoarding cash on the balance sheet and you have created a new high class problem in terms of what to do with the cash, can you maybe give us a little bit of insight into your thought process there?

Okay, that's a great second question, Brian. So as to the EV pipeline, probably at least as active as it was last year. We had both Nissan and General Motors with early introductions of plug-in electric vehicles last December and multiple other OEMs planning to introduce products later this year and early next year and well maybe not limited to just early next year but throughout next year. So the-- from the OEM basis, those programs are active. There are multiple utilities engaged, multiple governments at local and state level throughout the country. So we're very actively engaged in product development, business development and execution on existing contracts as well as developing and expanding our capacity and capability in that area.

As to the cash, it clearly has been building. We continue to see cash as a significant asset to support our planned growth and especially with the nature of the growth that we envisioned which is based on the adoption of innovative new solutions, which we have continued to point out is difficult to predict in terms of timing and rate of adoption, but one of the advantages of cash is the ability -- the agility that gives us in balancing the timing of investments to both accelerate adoption and to optimize our position as adoption grows when we have the insight to decide that the timing is right. So both to support our organic growth and with the potential of potentially buying assets that could accelerate or reduce the cost of that organic growth.

Michael Ciarmoli from Keybanc Capital.

Hello, good afternoon, guys. Thanks for taking my questions, nice quarter. Tim, on the fiscal 2012 guidance, what are the assumptions for your tax rate and can you give us a sense, are operating margins going to be up or down compared to 2011?

Yes, so from a, this is Jikun, from a tax rate standpoint, 30% is probably a good operating assumption. And if you're looking for operating margin performance I think we'll shy away from that but our share count should be about 22.5 million shares weighted average for the year, so you can kind of back into an operating profit margin.

Okay. Perfect. And then just on the Global Observer, are there going to be any unexpected expenses or charges that come out as a result of the Air Force investigation? What sort of scenarios that could arise here that may be you guys are planning for or not planning for?

We don't anticipate unexpected costs associated with the JCTD, Michael. As we commented previously, we believe we've accounted for that in-- as of FY 2011 and we're focused as we go forward on GO number 2 and customer interest in pursuing the program from that platform base.

Erik Olbeter from Pacific Crest Securities.

Hi, this is Eric Leeper in for Erik Olbeter today. Just looking for a little more color on Global Observer, how much additional testing is required? Where did we kind of leave off there and how do you see the time line pushing out from April's mishap?

Well the Global Observer test plan was proceeding extraordinary well up until the mishap. We probably had another couple of flight tests on the book that we would have -- we would have continued with to achieve the multi-day flight at altitude and we had already been flying 1 of the 2 primary payloads that were intended to be demonstrated. And we would have then, after achieving the high altitude long endurance flight, we would have added the second payload and done military utility assessments with that. So those are-- that's still the 2 main objectives that we would want to pursue with Global Observer number 2, that is the multi-day high altitude flight and the demonstration of both of the ISR and communication payloads that we had planned to operate with.

So do you expect to kind of just pickup where you left off with Global Observer number 1 with the second aircraft?

That's certainly one of the primary options going forward that we are discussing with customers.

Okay, and then just one quick last one, have you noticed any observable change in demand given the mishap?

I think we see demand primarily in the view of the need for affordable persistence and we can at least remotely measure that by looking at the hundreds of millions of dollars that DOD is spending for gap-filler solutions to persist at ISR as we speak and I have not seen any of that demand abate.

Andrea James from Dougherty & Company.

Good evening. You had indicated before that the Global Observer program of record could come at any time from FY 2012 to FY 2014, has that changed?

Well, Josephine certainly --

No, Andrea, sorry.

Andrea, excuse me.

That's okay.

The -- I don't believe the demand has changed. Certainly the time line has pushed out at least by the amount of time that goes by from April 1 until we get back to the same position presumably in the flight test program using Global Observer number 2. So-- and while that's not a-- we can't put a fine point on that time line until we reach agreement with customers, that certainly could be executed yet this year with the right agreement. At least we could be back flying this year. So I don't know if that answers your question.

Yes, it does, thank you. And today I believe one of your employees had told a reporter at the Paris Air Show that the GO would fly by the end of this year. Is that-- but I understand that there's no funding right now from the customer, are you guys considering just sort of doing that yourselves or did the employee speak out of turn?

Well, I saw that and I-- what I understand happened was the -- we said that we hope to be flying yet this year and it got reported as would be. So, certainly we do not have a committed plan to be flying this year and at the same time it's completely doable and it's subject to our pending agreements that are -- or not pending but potential agreements with customers.

Josephine Millward from Benchmark.

Good afternoon, Tim, hi, Jikun.

Hi, Andrea. (laughter)

It's actually Josephine.

Hello, Josephine, sorry about that.

I'm just kidding. Can you walk us through your assumptions in your guidance? Do you expect Raven to be roughly flat again from last year? And what about Puma? I believe you shipped about $50 million in Puma last year, if you can give us a little more color around your assumptions?

I'll try to get a little closer to answering your question in maybe my second half of my answer, Andrea. To begin with, though, increasingly I'm looking at small UAS as an integrated product line more so than as individual programs of Raven, WASP and Puma. And I think given the completion now, or virtual completion, of digitizing each of those platforms in each one of those cases we substantially upgraded and further refined the performance characteristics of each of those airplane platforms and their payloads, they all now operate seamlessly with a common operating system, common support system, and we are now expanding the availability of our operating services where we deliver information and intelligence using the platforms when customers would prefer that over purchasing.

So, if we look at all of that wrapped up together the airplane platforms themselves are likely to become more interchangeable in a way that can be mixed and matched to optimize services and all of that combines to, at least in my mind, to make it helpful to think about small UAS as a product line in general. So having said that, we think that product line will grow in 2012, probably within that Raven maybe stays around the same level as it was in 2011. Puma maybe continues to grow and we are hopeful that we'll see a lot of interest in the adoption of the new digital WASP.

Tim, a follow-up to that, the Army has been testing this family of small UAS concepts for some time, when do you think they're going to make a decision to formalize the program and potentially double their acquisition objectives?

Well, you've probably seen similar published announcements from different sources within the Army throughout the year and to my knowledge all of those comments have continued to suggest that the Army's positively considering both the expansion of their definition of small UAS to larger and smaller platforms or airplanes to complement Raven, and the -- also the potential of expanding the total requirement of Ravens that would be deployed to the field, and as you say that looks like that same numbers that are as high as doubling that. So, I don't have a good feel for when they might act or how certain that action might be, but it does appear to be consistently positive as they continue to review and evaluate and test these options.

Howard Rubel from Jefferies.

I just wanted to follow up on something. Of the $2 million impairment charge, was that charged against gross margin or against R&D, Jikun?

That was against gross margin.

And so the R&D level that you're spending at, Tim, you sort of referred to this past year as being a-- an acceleration year? Is the upcoming year going to be at maybe a more manageable or lower level?

Yes, Howard, I think we-- that 2% that we added in development last year was for specific opportunities that we thought were very time sensitive and important to capture and while we'll continue to grow our R&D with our revenues we-- I think you can see with our earnings guidance we're expecting to be back at a more traditional level that we've operated on in the past.

And then finally related to the EV systems that you're putting out on the road, I think the last data we saw was around 2,000 of those units. Could you give us a sense of where the install base is today and where you might see it at the end of the next fiscal year?

Well we're-- in terms of the level 2 charging docks or the on-road electric vehicles that we began installing last November, we're now well over 2,000 in I think 21 states and hundreds of different communities. That-- we expect that will accelerate and we'll roll that out over a growing number of states and regions as the year progresses.

Tim Quillin from Stephens Inc.

Hi, how are you?

Hi, Tim, how are you?

Good. Just with regards to your comments about small UAS and Puma growing year over year, would the funding source for that be another urgent needs requirements, is that what you're expecting here? And what level of growth might that entail? Thank you.

Yes, I think the Puma requirements last year came from that type of source, Tim, and it's-- if we were to see the continued adoption that we anticipate, much of that was likely to come from the same kind of JUON requirement, or joint urgent needs statement. Did that-- did I get your question answered there or did I cut it off halfway?

I'm sorry and what kind of growth do you expect? What level of revenue roughly would you expect versus fiscal 2011? And I may have missed this from earlier, I just got on the call late, but do you have kind of a rough breakdown of growth in UAS versus growth in EES as well?

No, we had not broken out the percentage of growth. I think we've said we expect growth in both segments. We expect the growth in UAS -- in the UAS segment to come from small unmanned airplane systems and from Switchblade and while we expect growth across the EES segment, we think the highest percentage of growth will come from the on-road electric vehicle infrastructure continuing to rollout at an increasing rate. I think we'll prefer to leave the-- leave it at that without getting into specific percentages of the different platforms within small UAS.

Michael Ciarmoli from Keybanc Capital.

Hello, thanks for taking a follow up. Tim, just on the competitive front, first in regards to Global Observer it looks like Boeing's Phantom Eye is going to be test flown here in August. They seem to be the closest competition. From your comments it doesn't sound like you're interested in self-funding GO to get it across the finish line. So maybe if you could complement on that competitive front. And on the charging side, it looks like a range of companies from Column Technology, ECOtality starting to creep into this charging marketplace. I guess ECOtality giving away chargers. How do you deal with these kind of competitive threats out there?

Well, I guess it's always a challenge to compete with free. But so far that seems to be working out adequately from our prospective. I did make some comments that were directed to the area of the competitiveness of the EV charging infrastructure market, Michael. And so we have seen continued growth of competitors in that market for 2 years and they range from smaller companies that are tightly focused on electric vehicle charging solutions to huge global industrials that have reacted to the emergence of plug-in electric vehicles with the introduction of their own charging solutions. Across the board, I would suspect we have competed with everyone, although it's rare that our customers publicize who the competitors were that they consider. I-- we continue to win many of these very difficult, or not difficult but tough, hard-fought competitions. I think our model is successful. I think we're offering a unique one-stop full solution that is -- offers a compelling value proposition to many customers and will continue to do so. It's not-- to me this market evaluation in its competitive environment is not unlike the small UAS market. When it emerged a number of years ago and I think we find ourselves working on multiple fronts simultaneously both to capture new business opportunities, to execute at a very high level on those opportunities that we have captured and to position ourselves to compete effectively as the market continues to grow. So I hope that addresses that point.

As to Global Observer and -- you mentioned the Boeing Phantom Eye, that's been a potentially competitive platform since we first began to propose the Global Observer as a joint concept development years ago, and certainly that's a competitive opportunity -- or a competitor that we would take very seriously. You can't get much more of a brand name than Boeing in the airplane business. Having said that, we have many successful test flights under our belt with Global Observer. I mentioned that there's over half a dozen innovations on that platform, specifically initiated to enable extreme duration at high altitude, all of those are now proven reliable technologies on our Global Observer and I think we continue to be very well positioned to maintain technology leadership in high altitude and long endurance capabilities.

Okay. Okay. But you still sound content that you might not test fly your Global Observer towards the end of the year if you even get it done and that seems like it might open up a door for Boeing to get in there and -- rather than you guys maybe acting a little more urgently to kind of cross the finish line.

I'd say that door's been open for 5 years. So when anybody wants to walk through it, I'm sure they will and I think the market is looking for an affordable persistent solution -- and I don't know what more I can say from our part in that timing scenario.

Jeremy Devaney from BB&T Capital.

Thanks for taking the follow up, gentlemen. I was just wondering if we could get an update on the percentage of completion on the current Raven requirement and also get an update as to what you're hearing on the expansion of the potential requirement that you mentioned it last quarter and this quarter again?

Okay, so relative to the Army acquisition objective of 2,358 systems, we are at 70%.

And I think in terms of the potential for the Army expanding their requirements, we continue to see comments that the Army from various sources has made in public that suggests that their mix analysis and their family of systems evaluations continue to support a suggestion from [trade doc] on the potential of significantly expanding the number of systems to be issued and the different platforms in those systems but I don't think we have any specific time frame that we've seen from the Army for executing on that idea.

All right. And then lastly, regarding the plug-in electric infrastructures that you're deploying with NRG down in Texas and some of the other utilities that you're working with, you've mentioned several times the network services that you're providing and the data services that you're providing there. Who owns that data and what kind of revenue potential could that data and the networking services provide?

Well we have developed the network capability and so in terms of the IP and the software on the network that belongs to us. In terms of the data, I think that changes from situation to situation. In some cases the information belongs to consumers and there's some information associated with the network operator. Some information associated with our relationship. So I think the answer to that question was situational and changes in each application. Certainly, we believe the potential for the long-term value of operating a system and providing information to and from that is not trivial and that's part of the future potential of this market.

Andrea James from Dougherty & Company.

Hi, thanks, my question's been answered, thanks so much.

Michael Lewis from Lazard Capital Markets.

Thank you. Quick question for actually Jikun. The last 2 July quarters we experienced losses. Now I'm assuming on the $60 million to $65 million revenue expectation if I compare it to the prior 2 quarters and the prior 2 years you're running in the $30 million. So I'm assuming that we're going to be above the $0, is that a safe assumption?

Well I would ask you to look at Q2 last year and you'll see that the revenue was right in the range of what we're guiding for Q1. And you can see that we kind of broke even and so most likely scenario was break even to slightly negative for the quarter.

Is that because of the continued investment in R&D?

If you're trying to compare R&D investments in Q4 to Q1, they are much lower, but in general I think the overall -- it's been 4 quarters since Q2 performance last year and so we have built in some more additional infrastructure to support several growth opportunities and so overall cost basis is a little higher.

Okay, that's fair, thanks so much.

Josephine Millward from Benchmark.

Hi, Tim. I was wondering if you can give us an update on the LEAF. Nissan has come out recently and say they expect to deliver all 20,000 LEAF vehicles by the end of September, is that your expectation at this point?

Well, I'm leaving the public discussion of LEAF deliveries to Nissan, and of course, they've had a real challenge on their hands with the Tsunami and the earthquakes in Japan earlier. So I think it's doubly important that I let them speak for themselves in terms of when they're delivering how many units. Having said that, we are aggressively rolling out our capabilities and building our capacity to support a full-scale ramp up across the country over the next year or so. We intend to be ready, willing and able to support the LEAF customers as they adopt.

Can you give us a sense and of how many charges do you expect to install by the end of your fiscal year 2012, and what's baked into your assumption? Or a rough breakdown of what passenger EV charging contributed in Q4?

Well again, I'm going to dodge the specific product line question, Josephine, and go back to the segment. Clearly as I've said before, the highest rate of growth last year in the EES segment and we expect in this coming year will be from the on-road electric vehicle charging infrastructure portion, although that's starting from almost nothing. So that high rate of growth will presumably continue for a long time. The general tenure in that market I think is very positive and we're looking forward to success and continued growth as we build on our-- with our existing customers and pursue new customer relationships.

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

Thank you, Siede, and before we sign off one housekeeping note. We've changed the structure of the business description in our 10-K which will be filed shortly in order to provide a clearer narrative of each of our 2 business segments, we've hope this helps investors and prospective investors understand our Company and our investment thesis better and please do let us know what you think. Thank you for your attention and for your interest in AeroVironment's. 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.

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