AeroVironment Inc (AVAV) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the AeroVironment Incorporated fourth quarter fiscal year 2012 earnings conference call. At this time all participants are in a listen-only mode. We'll 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, Chief Operating Officer, Mr. Tom Herring, Vice President of Investor Relations, Mr. Steve Gitlin. Now at this time I'd like to turn the conference over to Mr. Gitlin. Please go ahead, sir.

Thank you, Huey. Welcome to AeroVironment's fourth quarter and full fiscal year 2012 earnings call. Please note that on this call certain information presented contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations, forecasts, and assumptions that involve risks and uncertainties including, but not limited to, economic, competitive, governmental, and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward-looking statements. For a list and description of such risks and uncertainties, see the reports we file with the Securities and Exchange Commission.

Investors are cautioned not to place undue reliance on any forward-looking statements which speak only as of the date on which they are made. We do not intend and undertake no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise. The content of this Conference Call contains time sensitive information that is accurate only as of today, June 26, 2012. 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 now begin with remarks from Tim Conver. Tim?

Thank you, Steve. Fiscal year '12 was another year of sustained growth for AeroVironment. We helped our customers win, expanded our capabilities and capacities, and advanced multiple developments to initial adoption. We again grew revenue and earnings within or above our guidance range. We begin FY '13 a stronger, more diversified Company with leadership in our current unmanned airplane system and electric vehicle served markets with technology leadership in multiple attractive development programs and well positioned for continued growth.

On today's call, I'll address three areas as I review our business summary -- the first quarter and the first fiscal 2012 results, an update on our positioning for fiscal '13 performance and long term growth, and a summary of our view of the micro and macro market forces most relevant to AV. Jikun Kim will take over for a deeper financial summary and then I'll provide our guidance for fiscal 2013. Our Chief Operating Officer, Tom Herring, has joined us on this call and he will be here for Q&A. Now on to Q4 and a strong set of fiscal 2012 results.

On our Q4 fiscal '11 earnings call, one year ago, we expected 10% to 15% growth in fiscal '12 with between $321 million and $336 million for revenue and between $1.28 and $1.35 in EPS fully diluted. We reaffirmed our guidance each quarter. I'm pleased to report that record Q4 revenues of $111 million contributed to full-year revenue performance of $325 million and that strong operating performance and favorable product mix delivered fully diluted EPS of $1.36. This equates to annual revenue growth of 11% and EPS growth of 16% and compounded annual growth since 2010 of 14% in revenue and 20% in EPS.

We projected three areas for our business to drive growth as we began fiscal 12 -- Small UAS, Switchblade, and our EV product line, and they delivered as we expected. We believe we expanded our market share leadership last year in every market we serve. And we see numerous opportunities to create value for all of our stakeholders through continued growth of our enterprise. We identified five growth drivers supporting our business. One, selling more existing solutions to existing customers; two, support services to a growing installed base of products; three, upgrades to make deployed systems more capable; four, new applications in markets for our existing solutions; and five, new solutions targeting large new market opportunities. I think you'll see that all five of these growth drivers combined to produce fiscal '12 results, and you will recognize all five again as I address our positioning for fiscal '13 and long-term growth in both segments of our business.

Now let's begin a review of our business segments with unmanned aircraft systems. Our UAS segment revenue grew by 10% from fiscal '11 to fiscal '12, driven by growth in small UAS products and services and by Switchblade, but all five growth drivers contributed. More specifically, we continue to sell more small unmanned airplane systems to existing customers with significant growth in digital Puma AE. Our product support services grew. We continued to deliver Raven DDL upgrades and began to deliver new software upgrades.

New international customers adopted, unmanned airplane system operating services were adopted, Switchblade development contracts grew, and we introduced three new small unmanned aircraft systems. Demand for our systems spans a broad range of customers, countries, and applications. Visibility into this demand through the DOD budget has been largely limited to the Army Raven line item. But our revenue history and the DOD inventory tells the story of sustained demand and execution effectiveness for our entire family of systems. In July 2011, the DOD published its latest unmanned systems road map and the data included in that document showed that AV's products represent 85% of the DOD unmanned aircraft inventory.

This 85% metric demonstrates the broad defense demand for small unmanned airplane systems. It also demonstrates the competitive effectiveness of our customer-oriented team at winning all DOD production programs for this class of technology. The life saving and the cost effective performance of our digital Puma system drove continued adoption across the Department of Defense, making it the largest contributor to our UAS segment revenue in fiscal '12. We introduced the digital Wasp AE early in fiscal 2012. This latest upgrade includes advanced capabilities such as the Digital Data Link, a new gimbal payload and like Puma, Wasp AE can now land on the water and on the ground.

Last month, we announced the transition of Wasp AE to production with the US Air Force selecting us for their BATMAV program requirement along with a $2.5 million order. We expect further adoption this year and beyond. We significantly extended our product line capabilities by introducing the Shrike VTOL or Vertical Take-Off and Landing. This market-ready small UAS is man-portable, lightweight, low acoustic, vertical take-off and landing, with hover, perch, and stare capability. Shrike is designed to meet longstanding customer requirements for these unique capabilities and we think it will contribute to our long-term growth.

We also introduced the Mantis line of miniature gimbaled payloads in fiscal '12 consisting of color and infrared video sensors integrated into a single high-reliability all-environment package for our small UAS and for other applications. The initial $15.8 million funding for the Army, government fiscal year '12 Raven contract that we received in May included Mantis-equipped Raven systems. We expect many customers to begin to procure this more capable configuration and over time, retrofit many existing Raven systems with the new payload. We introduced two new software upgrades in fiscal '12 to enhance our system solutions. The VAMPIRE system provides simulated technology for cost effective operator proficiency improvement; the Kestrel system provides realtime motion detection, graphically highlighting moving objects on our common ground control system.

Our portfolio of unmanned airplane systems services has also broadened. UAS mission services where our people operate systems and provide the information to our customers took off in fiscal '12 and grew rapidly from a low base. We see indicators of significant long-term market potential for mission services creating an opportunity that we could be well suited to satisfy. As we look beyond the current US DOD-driven market for our small UAS, we see evidence that small UAS adoption in the international military market is growing and opportunities in the national air space are emerging.

The recently announced awards from Sweden and Denmark are two of our largest international awards. We now have 18 allied military customers for our small UAS solutions. Most of our international orders to date have been for initial evaluation quantities and those evaluations have gone well. We expect these customers and others to procure in increasing volumes this year and beyond.

The domestic market for UAS appears to be moving closer to a reality as we see continued movement from the FAA. In May, the FAA released a streamlined process to speed the approval for public safety organizations to receive the certificate of authorization that is still required in order to employ small UAS legally within the national air space. Last Fall we introduced Qube as our public safety market small UAS solution. We believe the domestic market for small UAS will be large and global. The timing and the rate of adoption of this new market is uncertain but our solutions, experience, and preparation will enable us to assure customer success when they do adopt. Since a great deal of discussion about privacy and unmanned airplanes in the US is taking place, it's important to emphasize that our small UAS will be used by public safety personnel for situation-initiated short duration missions, consistent with their first responder role and the limited range in duration of small UAS. We expect existing privacy laws to apply to the use of small UAS and that anyone violating these laws would be held to account.

Now let's move from the emerging domestic market back to military systems and the Switchblade system that has now moved to the early adoption phase. Revenue from Switchblade engineering services and hardware more than tripled year-over-year as adoption began to take hold. We announced orders for Switchblade from both the US Army and the Air Force in fiscal '12. The Army definitized its latest letter contract in March, doubling the order size. We are optimistic that this innovative capability will deliver significant force protection for our customers and we expect Switchblade adoption to accelerate with revenue continuing to increase in fiscal year '13 and beyond.

We did not realize significant revenue on Global Observer during the year; however we did invest in production readiness. In a cost conscious market where affordable persistence for surveillance, communication, and other missions remains a sought-after capability, we believe that Global Observer will deliver tremendous value and we continue to pursue opportunities to move Global Observer to production applications.

I'll now move from the arena of products and customers where we have the ability to add value and influence outcomes to macro issues, the continued uncertainty of defense appropriations, sequestration, and the economy. We identified approximately $48 million of funding in the governments fiscal year '13 defense budget for our solutions. So far the House and Senate committees that have approved all of these items, only a minority of our revenue historically comes from identifiable line items in the budget, however. And we believe our customer acquisition plans this year as in prior years remain far larger than the budget line items we can see. Our baseline planning assumes a continuing resolution as well as contracting delays based on recent experience. It's clearly possible that some form of sequestration may be imposed; however if it is, its effect on us is unclear. We can easily calculate sequestration percentages of the $48 million in the FY '13 budget line items but the effect on other sources of funding is unknown. Beyond the potential budget effect of sequestration, the uncertainty must be extending procurement and contracting timing.

International budget reductions could affect international orders and local budget reductions could slow national airspace customer adoption. With all of that, we know that there is significant demand for unmanned airplane systems in general and for our solutions in particular because they save lives and are cost effective. DOD budget and global economics prevent known if not fully quantifiable risks which we have factored into our planning, in addition to the adoption, order timing uncertainties that are always part of our particular business strategy. Even in the face of these macro headwinds, our specific unmanned airplane system performance, market positioning, and demand for our solutions are strong.

Let's now turn our attention to our Efficient Energy Systems Segment, addressing our industrial and on-road electric vehicle infrastructure product lines. Our EES segment grew its revenue by 20% year-over-year, strongly influenced by our EV solution product lines consisting of passenger EV charging systems, installation services, network software, and supporting technologies. Revenue from this product line more than doubled from fiscal year '11. We've rolled out charging solutions across all 50 states and most Canadian provinces. Q4 EES gross margin of 31% demonstrated continued recovery from its Q1 low as we transitioned multiple new product rollouts from development.

We continued to support Nissan's aggressive electric vehicle rollout across the United States and Canada with charge docks, installation, and back office services. We are also supporting Nissan to develop a strategy for distributing their new lower cost, fast charger throughout the United States. We secured important new relationships in the emerging on-road EV market in fiscal '12. We were selected to supply home charging systems and installation by Mitsubishi and BMW and began charger, delivery, and installations for both customers. We significantly increased our public Fast and Opportunity charging system rollouts including inaugurating the Green Highway across Interstate 5 in Oregon and Washington, broadening applications in Hawaii, and expanding the number of charging stations supported by our data network in Dallas and Houston for NRG's eVgo business.

We also supported multiple utilities with our solutions as they began to provide EV infrastructure for their customers. We rolled out new products in fiscal '12 including AC cord sets, network charge docks, and DC fast chargers. As a technology solutions provider, we will continue to support all standards necessary to address customer requirements and enable market adoption, including the new SAE combined level 2 and Fast Charge connector and protocols announced recently. We have deployed more than 9,000 EVSE charge docks and more than 30 Fast Charge systems as of our Q4. We believe this represents the largest market share in North America.

Competition in this emerging EV infrastructure market includes small innovators, some of the largest global industrial conglomerates, and the Department of Energy's EV Project which gives away free chargers. This level of competition validates the perceived value of the market opportunity and the significance of our market leadership. At this early stage of market development, we believe we have the technology, the experience, proven comprehensive solutions, and warranted installation capability to make EV adoption practical and successful. So far, customers seem to agree.

Plug-in electric vehicle sales have been less than most forecasters predicted but supply has also been limited. The introduction of new battery EV models from multiple OEMs over the next year and Nissan's plan to more than triple the Leaf production capacity should resolve supply constraints and clarify market demand. We expect to continue to expand our solutions to optimize customer value as early EV adoption continues. We believe plug-in electric vehicle charging infrastructure is likely to be a large global business and we are well positioned in a leadership role.

Our EV charge industrial electric vehicle solutions and EV test systems maintained market leadership while our team secured new customers and introduced new products. In May the Port of Seattle announced our selection to supply charging infrastructure for Sea-Tac International Airport, our largest contract to date for airport PosiCharge applications. Economic factors could reduce demand for EV products, but on balance, we see a net probability of growth for our Efficient Energy Solutions Segment and we believe efficient electric energy technology solutions are likely to see long-term growing demand. Last year, we expanded our team, extended our product and application offerings, and built our leadership capabilities to execute as a larger enterprise.

Wahid Nawabi joined us in the General Management position of our EES segment. Roy Minson moved from Deputy to General Manager of our UAS segment. And Tom Herring moved to the new COO position where he will lead on execution and excellence in operations. As I mentioned before, Tom has joined us for the call today and he will be here as we take questions later, but that is an overview of our year. I'll now turn the call over to Jikun Kim for a more detailed financial discussion.

Thank you, Tim, and good afternoon, everyone. AeroVironment FY12 Q4 results are as follows. Revenue for the fourth quarter was $110.7 million, an increase of 4% over Q4 last year of $106.1 million. Looking at revenue by segment, UAS revenue was $97.3 million, an increase of 7% over the prior year. This growth was largely driven by increased product revenues of $19.8 million, driven by Puma AE system deliveries, and higher customer funded R&D work of $8.4 million. This growth was offset by lower logistics and repair activities of $21.8 million, driven by the ramp down in the DDL retrofits. EES revenue was $13.3 million, a decrease of 12% from Q4 last year primarily due to lower revenues from our industrial electric vehicle charging systems and power cycling and test systems, partially offset by increased revenues of our on-road electric vehicle charging system.

Turning to gross margin, gross margin in the fourth quarter was $49.6 million up 1% from the fourth quarter last year. Gross margin as a percent of revenue was 45% versus 46% in the fourth quarter last year. By segment, UAS gross margin was $45.5 million, up 7% from the fourth quarter last year, driven primarily by higher sales volume. As a percent of revenue, UAS gross margin was flat at 47%. EES gross margin was $4.1 million, down 37% from the fourth quarter last year largely due to a higher mix of new products and low rate production as well as higher manufacturing and engineering overhead support costs driven by increased production capability and capacity. Gross margin as a percent of sales dropped to 31% compared to 43% in the fourth quarter last year.

SG&A investments for the quarter was $16.5 million or 15% of revenue compared to $12.8 million or 12% of revenue in the prior year. SG&A investments were higher primarily due to higher bid and proposal activities. R&D investments for the quarter were $7.3 million or 7% of revenue compared to the prior year amount of $11.2 million or 11% of revenue. Operating income for the quarter was $25.7 million or 23% of revenue. Operating income was 2% higher than the fourth quarter last year primarily due to lower R&D investments offset by higher SG&A investments. Net income for the quarter was $17.8 million or $0.80 per fully diluted share compared to $17.6 million or $0.79 per fully diluted share in the same quarter last year.

Now moving quickly through our full year results. Revenue for the full year was $325 million, up 11% from the prior year period of $292.5 million. By segment, UAS revenue was $273.7 million, up 10% from the prior year. The increase in revenue was largely driven by increased product revenues of $33.9 million, driven by the Puma AE system deliveries, offset by lower customer-funded R&D work of $4.1 million and lower logistics and repair activities of $5.9 million.

EES revenue was $51.3 million, up 20% from the prior year period primarily due to an increase of our on-road electric vehicle charging system and power cycling and test systems, however offset by our industrial electric vehicle charging systems. Gross margin for the full year was $129.3 million compared to $117.2 million a year ago. Gross margin as a percent of revenues remained flat at 40%. By segment, UAS gross margin was $116.1 million, up 17% primarily due to higher sales volumes. As a percent of revenue, UAS gross margin increased slightly from 40% to 42% primarily driven by a higher mix of fixed-price contracts. EES gross margin was $13.3 million, down 25% from the prior year. As a percent of revenue, EES gross margin decreased from 41% to 26% driven by increase in sales of new products in low rate production as well as higher manufacturing, engineering, overhead support costs.

SG&A investments for the full year was $55.3 million or 17% of revenue compared to the prior year period of $47.4 million or 16% of revenue. R&D investments for the full year was $31 million or 10% of revenue compared to $35.8 million or 12% of revenue in the prior year. Operating income for the full year was $43.1 million or 13% of revenue compared to an operating income of $34 million or 12% of revenue last year. The effective tax rate for the full year was 30.1% up from the prior year period of 24.3%. The effective tax rate was higher primarily due to lower R&D tax credits and higher [nets in 48] tax reserves.

Net income for the full year was $30.5 million or earnings of $1.36 per fully diluted share compared to an income of $25.9 million or earnings of $1.17 per fully diluted share last year. Looking at backlog, funded backlog at the end of the fourth quarter totaled $93.2 million up $10.3 million or 12% from April 30, 2011. Turning to our balance sheet, cash equivalents and investments at the end of the fourth quarter totaled $199.8 million, up $8.9 million from the prior quarter. The positive cash flow was driven primarily by higher income, partially offset by higher working capital needs. Turning to receivables. At the end of the fourth quarter, our accounts receivables including unbilled receivables totaled $83.5 million, up $34.8 million from the prior quarter. Total day sales outstanding were approximately 68 days compared to 61 days at the end of the prior quarter.

Taking a look at inventory. Inventories were $43.5 million at the end of the quarter down $4.9 million from the end of the prior quarter. Days in inventory were approximately 64 days compared to 98 days at the end of the prior quarter. Turning to capital expenditures, in the fourth quarter we invested approximately $5.1 million or 5% of revenue in property improvements and capital equipment. We recognized approximately $2.6 million of depreciation in the quarter. Now, I'd like to turn things back to Tim to discuss AV's expectations for our FY '13.

Thank you, Jikun. We expect the following areas to contribute to our fiscal year 2013 growth -- international small UAS sales, Switchblade Loitering Munition Systems, and electric vehicle products. In formulating our guidance for fiscal 2013 we considered three levels of risk -- first, the inherent risk in predicting the timing and the rate of adoption in our innovation strategy; second macro risks associated with budgets, funding, ops, tempo, recessions, sequestration, and the like; and third, timing risks associated with government order delays, probably exacerbated by sequestration overhang.

We're optimistic about the many specific growth opportunities for fiscal '13 that I have outlined today and we are aggressively pursuing their capture. Nevertheless, we've tempered our outlook for the overarching market uncertainties discussed earlier resulting in a more conservative plan and a wider guidance range. Our fiscal 2013 anticipated revenue is between $348 million and $370 million with diluted EPS of between $1.41 and $1.51. We again expect about a 40%-60% split between the first half and the second half of the year. We anticipate customer delivery schedules will define our Q1 revenue this year at about the same level as last year which was $62 million. Because we are staffed and operating for continued growth, I expect a flat year-over-year Q1 revenue should produce a net loss for the first quarter.

There are practical limits to providing greater visibility when we are often creating new opportunities for which few or no baselines exist and where greater disclosure would be helpful to competitors. So we'll continue to balance forecasting transparency with caution for the long-term benefit of our stakeholders. At a high level, however, here is a way to think about our fiscal '13 revenue plan. Starting with beginning backlog of $93 million, add our Q1 to-date bookings of $45 million plus the balance of the government fiscal year '12 Raven orders that we expect to book and ship in our fiscal '13 of $60 million, plus the balance of the EES segment revenue of $30 million necessary to match its fiscal '12 revenue, for a total of $228 million.

This represents about 63% visibility leaving 37% left to reach the midpoint of our revenue guidance range, a percentage that is consistent with our visibility in prior years. We expect the combination of identified high probability unmanned airplane system orders and EES growth opportunities to provide this revenue. Overall, I'm more confident than ever in our products and market positioning, our team, our ability to deliver uniquely valuable solutions to our customers and our ability to sustain long-term growth. Thank you for your continued interest in AeroVironment and now Jikun, Tom, and I will take your questions.

Thank you, sir. (Operator Instructions) Jeremy Devaney, BB&T Capital Markets.

Good afternoon guys. Congratulations on the quarter considering the tough environment here.

Thanks, Jeremy.

First question -- I wanted to talk a little bit about profitability as it related to the quarter and then out through '13. I was wondering if you could talk a little bit around what you saw with the services gross margin. We saw some expansion there through the year and it was surprisingly strong in the quarter and then we also had a $3 million pop in the SG&A run rate in the quarter. But I was wondering more particularly, could we talk about the trajectory profitability as we move through FY '13, especially that Q1.

Well I'll take an initial whack at that Jeremy and then pass it off to Jikun. I think as to looking forward to fiscal '13, I think we saw particularly good profit performance in fiscal '12. The product mix and the specific performance on programs that we were working on was produced what I think was probably a little higher than our expected margins. Of course we're always trying to do that but I'm not planning on replicating that same level. So if we look at the guidance on EPS for '13, you'll probably see a slightly smaller drop down to the bottom line, but pretty consistent with our historic operating model that we plan on.

So Jeremy, going back to FY '11 and FY '12, in general, the fixed-price percentage of the revenues was higher, meaning that some of our services business actually came in in a fixed-price form, so that explains some of the margin shift. Moving into '13, I think from a guidance standpoint, our EPS, if you make the following assumptions about share count as well as our tax rate, it's consistent with our historical numbers. The share count that we are making a guidance of 22.6 million shares at this point fully diluted and our tax rate would be about 30%. Now the particular information about tax rate that you should be aware of is our tax rate depends highly on the R&D tax credit, the federal program that continues. At this point in time, that program has stopped. We are assuming for our fiscal year purposes that the R&D tax credit program gets reinstated retroactively back to January this year. And then so 30% tax rate was what we're assuming. If we don't get the R&D tax credit, it will be higher and closer to 34%.

And the $3 million pop in SG&A in the quarter?

I believe that's just a true up of some of our accruals that we had as well as some of the warranty expenses. And the higher [B&P] rates that we had.

That's very helpful. The additional detail on the guidance was really insightful. Was wondering if you could flush out a little bit more of the customer behavior side of the guidance. What are you seeing customer behavior today, what kind of trends in action to demand orders, what kind of delays are you seeing? Any sort of granularity you might be able to provide?

I think in general, Jeremy, we see sustained demand and pull through for our solutions and we see probably an increasing amount of delay in friction in the contracting process.

Michael Ciarmoli, KeyBanc Capital Markets.

Congrats on a real nice quarter again in this tough environment. Jikun, maybe if I could just follow-up on that so I'm clear on the tax rate, you are assuming that the R&D credit gets applied retroactively, so if that doesn't happen, I mean that seems maybe $0.08 to $0.10 is that kind of what we should -- I think you said it was 34%?

That's correct.

Okay, and then Tim, maybe could you help us a little bit, that was extremely helpful laying out the $228 million of revenues. It seems like you guys have a good amount of pretty active revenue sources now, if you just look at Switchblade, Raven, Puma, Wasp, and based on the Mantis Gimbal, it looks like that could actually be a standalone product, you have got some ongoing service in spares. Could you help us maybe understand or help us out just how big the services model or the service spares can be in the coming year as again you take after that existing customer base and install product, like you said 85% of the DOD inventory is yours basically?

Well, I think when we went back to reiterate the five growth drivers that we've talked about I believe since we went public, the intent was to get back to the point that we've been pursuing and I think are succeeding in, which is getting each one of those drivers contributing at a significant level to our long term growth. And the point that the continued expansion of the installed base of the existing platforms in and of itself builds a demand for the ongoing support of those products is reflected in the operating services component of the business. And the mission services part of our business which took off significantly last year, and we believe will offer significant long term growth potential, really is less a matter of the services to support the installed base and more a matter of a new product area that we think has significant growth across multiple customer sets. I don't know if that gets to the level of specificity you were looking for but I think it's important to differentiate between the two and to be aware that both of them are strong contributors to our potential future growth.

Yes, no that's helpful, and then just last one, Global Observer. You know, absent from this equation. Can you give us an update on where things stand maybe with trying to secure other customers, what maybe the back and forth is with SOCOM and the customer right now in terms of where the prior program stood and what sort of road maps or decisions you have regarding that platform?

Well, we continue to be actively engaged in pursuing opportunities with multiple customers to transition Global Observer into a production program. The JCTD program that was funded by multiple government sources over the prior four years and was managed by Special Operations Command was completed. We were virtually through the funding on that program over a year ago and we were approaching the end of that formal program which was to develop and demonstrate the airplane, so I think the next growth opportunity for Global Observer will most likely be through a new contracting relationship. We do have, as we've mentioned before, the second airplane that was built in the JCTD program at about a 90% or a little over a 90% completion level and we continue to invest in production readiness to move that program forward.

Michael Lewis, Lazard Capital.

Tim, I know you really don't want to go into specific details with regard to Puma, Raven, Wasp, or Switchblade, how it drops into the forward guidance but as we look at a product-to-services mix in the UAS business, my back of the envelope number for the UAS based on the guidance is somewhere between 280 and 290. How should we think about services versus products in that number if I'm close?

Well there's two big buckets of services that I was discussing a little earlier, Mike, and that's the operating services that largely support the installed base of platforms and mission services that is a growing part of our services business. And in that area, our people operate the systems for customers and deliver information on a contract basis as opposed to selling hardware and then supporting that hardware. We lump all of those into the services line on the income statement so I understand why it is important for you to be able to split that out and we haven't come up with a what I think is a good method to give you enough, give you more fidelity there without -- in some cases, we're concerned especially in new emerging markets with getting, with too much disclosure on specificity because of competitive issues, but we do expect both elements to continue to grow.

Okay, yes, I understand your hesitance there. I'll ask an easier question I guess. Jikun, actually two questions for Jikun. What's your actual implied margin range on this guidance and also do you have an unfunded backlog number? Thank you.

Sure. Let me try to get the unfunded backlog information first. Unfunded backlog at this time is $96 million and the -- again I think you can do the roll up from EPS to pre-tax and op income pretty easily. If you range it around the min/max that Tim discussed on the revenue, you'll see that it's roughly 13% which is our historical average. Now if you do something a little more interesting which is you take the midpoint and you put the high and low EPS on that you'll see that we range at 12.5% to 13.5% so that's roughly the math.

Noah Poponak, Goldman Sachs.

I wanted to ask about the civil opportunity and the civil market. There's been, the press on that topic has been accelerating here as these initiatives are coming out, so it sounds like it's picking up steam but then when you look at the actual timeline, it sounds like it is still a few years away from being really material. So I wondered if you, Tim could just talk to the timeline you see and presumably or maybe not, you'll start to see order flow come in there before everything is fully settled from the FAA. So is that something you could start to see at the tail end of this year or are we still a little further away from this being big for you guys?

Well, I start off with our standard disclaimer that it's difficult to predict the timing and rate of adoption of innovation and I think that's precisely the situation we're looking at here. We have been involved closely, I think, with the work to enable a safe introduction of unmanned airplane systems into the national air space for many years. So I think we're familiar with the process and the issues and the timing constraints associated with that. And that's led us to be relatively conservative about our timing expectations as we've discussed this market in the past. I would be surprised if a significant revenue market developed this year. Certainly possible but I think it's more likely to evolve more slowly and I do think that we're likely to see an inflection point at some period as we have seen as other customer markets adopted but I'm not predicting that this calendar year.

Okay.

Does that help?

It does. I guess I'm more wondering just the gap between whenever the FAA finalizes what they are going to finalize, I'm wondering what the lead time is that you would start to see order flow ahead of that or if there just isn't any lead time and everything needs to be finalized before customers are going to start having more serious conversations with you.

I think that we are engaged in conversations with multiple customers and I think there will be some initial adoption. When I'm talking about saying things like I'm not expecting a large revenue inflection point this year, I meant in terms of material changes of revenue in our business or for that matter in anyone's business.

Yes.

But I do think there will be initial adoption. I expect to see multiple trials and evaluations. Certainly that would be consistent with our different markets and other customers in the past as they've become familiarized with this capability. So that would, if you project that prior experience onto this market, you would see a growing number of customers in a trial and evaluation phase and evaluating how that affects their operation, their mission, and their roles and then evaluating what the best solutions are for them and then going through a budgetary process to decide how much of their resources they would want to allocate to this capability. And then the next step of that budgetary process is putting those allocations into place. So none of that suggests an immediate gigantic move, but if it evolves as other markets have and as our current dialogue indicates it is likely to, I think it probably produces a very large market opportunity and I think although we expect it is leading here, I think it ultimately is likely to be a global opportunity.

Got it. That's very helpful. And then I just also wanted to ask about Switchblade. It sounds like, if you're listing just a few main growth drivers in 2013 and that's one of them, it sounds like you're counting on good growth here. Can you quantify how big it is now and just how much you expect it to accelerate this year? And maybe if you could talk a little bit about what the conversation is like with the customer on this now just because it feels like the type of thing that has the potential to get traction a little bit slower then you expect in this type of environment.

Well, I do not want to get into specific numbers. I think I mentioned in the prepared comments that our revenue from Switchblade grew about 3X in fiscal '12 over fiscal '11. And I think that is -- we A, expected that growth as we began the year and B, it supports our view that we are in the initial stages of adoption of this capability. We think we will continue to grow that revenue from that product line this year if the business opportunities rollout as we expect and as we currently foresee. I also think that the potential for Switchblade to turn into a very significant piece of our long-term growth story is high. It's a unique capability and it appears to offer very significant advantages in force protection that I think will likely turn out to be desirable and adopted in a significant way. To get in -- to go beyond that in terms of revenue projections I think is probably not wise for multiple reasons on our part even though I know it would be helpful. And in terms of going any farther with discussion on customer perspective, I think we take the position that we'll let our customers lead on their opinions and their intents and we'll follow, but we'll let them take the lead on communication there.

Tyler Hojo, Sidoti & Company.

Just was hoping that you could talk a little bit about -- I think in your prepared remarks you mentioned some weakness in the industrial vehicle charging market. If you could just maybe go into a little bit more detail in regards to what's going on there, that would be helpful.

Okay, Tyler, thank you. I think what we have seen is very high level of expectations in adoption rates driven by most of the prognosticators that put out market forecasts over the last few years. I think most of those forecasts have turned out to not reflect the lower actual adoption rates. So that -- I was just acknowledging that. It's not completely clear to me that the relatively lower adoption rates are -- how much of that is lower than they might otherwise have been or how much of it is they're just lower than irrational exuberance in forecasting. There has been quite a bit of supply constraint on the part of battery electric vehicles available in North America. And I think it's possible that that's affected the adoption rate as much as any demand change. So my comments were focused on the increase of availability of battery electric vehicles from multiple suppliers and from Nissan's new production capacity that would clarify that. And having gone through this long answer, I see a note from Steve here that says you asked about industrial EVs and not on-road EVs, so --

I was going to stop you but I was curious what you were going to say, so yes, if you wouldn't mind answering the industrial part of that question that would be helpful.

So if anybody is actually interested the on-road EVs, I already dealt with that. (laughter) So, I think the industrial EV business as you know for us is comprised of our PosiCharge business which charges industrial electric vehicles like fork lifts and utility tugs at airports. We also supply advanced testing equipment that's used in laboratories around the world by electric vehicle OEM developers and battery manufacturers and the like. That business can be affected by the general economy, so to the extent the economy backs off and capital spending in industrial organizations is significantly reduced, that tends to reduce the acquisition level of industrial electric vehicles and that tends to reduce the acquisition level of charging systems. So we can find a reasonably good predictor of our PosiCharge revenue by looking at fork lift sales, particularly electric fork lift sales. Now that's been strong. Its grown, it's recovered significantly from the initial recession and my comment there was just to anticipate the possible recurrence of that demand challenge if we see another slide back into recession and that drives lower capital spending.

Okay, and I think I've asked you this on one of the past conference calls but when you look at that PosiCharge product line, where are we just relative to where that business troughed out a few years ago? I mean how much downside is there if you're looking at a recession sort of scenario?

Well let me see. Jikun, do you have those numbers at the top of your head?

Sure.

If we just look at the EES revenue in maybe what was it, 2009?

Yes.

Where we had the significant reduction that was in fact driven by that economic factor.

If not, I can circle around later. Just the last thing I wanted to touch on was again you mentioned foreign military sales or international small UASs being a growth driver next year. Just curious if that was really based on orders you already have in hand or you were kind of looking for some other items to hit to kind of drive that growth.

I think it's both. I think it's both. You'll probably recall I've been optimistic about international UAS adoption for the last two years so I'm going for, the third time is the charm in fiscal 2012. But we do have already announced the two orders that I mentioned before, so we've got a little more under our belt as we get into the year.

So Tyler, I can elaborate if you'd like.

Please. Jikun drummed up some numbers here on EES.

So FY '10 was our fiscal '10 which ends in April 30, 2010 is kind of the worst of the bottom that we saw and so we are above that but we're half way between low and high so there's upside and downside to this.

Okay, great. Thanks a lot.

Thank you, Tyler.

Andrea James, Dougherty & Company.

Hi. Thanks for taking my questions. My question is already asked so I can get into a couple of nuances here. The first one on mission services, you'd said before it doubles in FY '12 over FY '11 and so my question is do you expect that to continue? And also you talked about being sensitive on this because of competition and forgive me but I'm not sure I fully understand what competition looks like in mission services since you're the dominant maker of the small aerial systems.

Let me see. How do I frame this. There was a significant multiple of growth in revenue in '12 over '11 but we were coming from a very low base. So this was -- I would consider from our perspective initial adoption actually kicked in in '12 although we'd been prototyping and delivering these services in the past. We've seen multiple customers put out significantly large contracts for operating services of different classes of ISR capability. They include manned platforms and unmanned platforms and platforms of various sizes, durations, and altitudes and capabilities.

I think the structure of that segment of the market is continuing to evolve and it's my sense that it's likely to continue to grow. And it's also my sense that multiple new customers that have potential opportunities to use this capability are more likely than the Defense Department to access that capability through services rather than hardware which requires operator training and sophisticated logistics support and R&D development to sustain the capabilities. So I think its got good growth potential. We're excited about our opportunity to participate in a segment of that market. Although we are the dominant supplier of hardware to the Department of Defense as we mentioned before, we've gotten to that position through full and open competitions that have had anywhere from half a dozen to two dozen competitors at any given time.

Those competitors are still out there. They're still working and developing and supplying products and solutions, albeit at smaller volumes than we've been lucky enough to earn the business for. If you go beyond those existing competitors and look at a global basis, there are any number of other suppliers out there. So there's no lack of competition in our space and, as a service provider, one doesn't need to be a manufacturer. One can acquire multiple sets of hardware and operate them for customers. So I think it's, if anything, it's a more robust competitive environment than we've been involved in in the past.

And just to add to that a little bit, Andrea. It's a service, not a product. So to the extent that you buy an ISR capability, it's not dependent upon being a small system or a large system, so long as the user gets the information they are looking for. So the competitive landscape can be tailored for the need and can be solved with multiple hardware solutions.

Okay, I thought that might have been it and I appreciate -- that's really great nuance there, thank you. The second one is, when I look at what you were able to do with Switchblade this year, it's impressive and it grew according to how I thought it would, but from two different customers than I had been tracking as potential customers, so clearly I was tracking the wrong branches. So, my question is whether you see Switchblade growth by adding additional customers, as well as the Army and the Air Force upsizing, or do you see an international market as well, so just more color there, thanks.

Well we're focusing on Department of Defense customers currently and we are focusing on our existing customers currently. We think that it is likely that they will continue to adopt and to the degree that this capability delivers the kinds of characteristics, force protection, and benefits that we expect those customers will realize, I would assume it becomes more attractive to other customers in the future. But right now our focus is on delivering to, as expected, to existing customers and we'll take the next step after that.

Brian Ruttenbur, CRT.

This has been hit on a little bit but I'm just trying to flesh it out. There's going to be $20 million to $40 million additional according to your guidance and I'm just trying to figure out the break down between UAS and EES year-over-year. Do you see EES growing 20%,30%? They grew 20%, you guys grew that 20%, can you continue on that growth rate? Is it going to be higher? I'm just trying to figure out the break down of revenue between UAS and EES on the year. Can you help me out a little bit on that?

I don't think I'm going to be much help, Brian. We've consistently tried to limit our guidance to revenue at the enterprise level and EPS at the enterprise level and not break it down to specific growth numbers in either segment, or for that matter, in any given product line. In general though, we expect the segment to keep growing and in general, we think that EES business opportunity has very large long-term growth potential. The critical driver initially in terms of market demand is going to be the, how sustainable is the adoption rate of plug-in electric vehicles and at what rate does that accelerate. Probably at a secondary level, what percentage of that adoption is for pure battery EVs versus plug-in hybrid EVs. And then of course it gets to our competitive effectiveness in the market and what market share we're able to sustain over time. But we think the potential is very large. In terms of getting to a particular percentage prospectively of growth next year, I'd like to just leave it at the guidance level for the enterprise.

Okay, and then just one follow-up. You talked about I think 18 international customers. What percentage of your revenue in 2013 do you anticipate from international on the UAS side?

Well, we expect it to grow, and what did we have in the percentage was in '12 was 7%?

No, 5%.

5%. So 5% international sales in fiscal 2012 and an expectation that we'll grow in fiscal '13.

And that's at the enterprise level.

Correct.

Josephine Millward, The Benchmark Company.

Well congratulations. Great quarter. Now, are you assuming any funding from the government's fiscal year '13 budget in your guidance?

Right now, we're assuming that the probability of continuation and budget delays and uncertainty and contracting delays will not put the government's fiscal 13 revenue in the government fiscal, what?

Government fiscal year '13.

It's '13. Government fiscal '13, we do not expect we'll get that in our fiscal '13 annual revenue for the Company.

That's very good news, because that's great. Can you talk about, can you give us an update on the Army's plan to extend into a family of small UAS? Is this something we can see in the President's fiscal year '14 budget and the same question of Switchblade, if we can see it in the '14 comp?

No, I don't think we've seen anything of either one of those in the fiscal '13 budget.

No, I was talking about '14.

Oh. Will we see it in '14?

Yes.

That was your question?

Yes.

I don't want to predict it. I know that there's a high level of interest in both of those areas and I also know that there's a lot of friction in the system right now, so I think it's certainly possible but it's probably premature to predict timing.

That's fair. Final question. Can you comment on the NRG's plan to invest $100 million to install an electric vehicle charging network in California? How do you see, what happens now with ECOtality, the lawsuit to drop the investment. How do you see this? What's next?

Good question. I don't think -- I certainly can't predict anything on the lawsuit. I think NRG has very aggressive business plans on rolling out their eVgo business in general and I think there's a potential that the program that they've announced with the State of California and the CEC could significantly improve or expand the infrastructure for electric vehicles in California. How and when that gets implemented and what effect this lawsuit has, I really don't have any insight that you probably don't already have, Josephine.

Jeremy Devaney, BB&T Capital Markets.

Thanks for taking the follow-up guys. First wanted to address a specific program, and maybe Tom is the best to answer this. Recently, there was a Department of State program that was looking to procure some SUAS Tier 1 unmanned capabilities and the RFP period closed during the quarter. I was wondering if you could give us some idea on the program size and whether or not you're looking to participate or any details around that.

So any ongoing competitions, RFPs, it's probably inappropriate for us to discuss where we think it's going to go or where we think our probability of success is so I'd actually prefer not to answer that question directly, Jeremy.

All right, that's fair. Moving on to the other follow-up that I had. It hasn't been often that you guys have run up against competitor disruptors to your business and I was wondering if you could talk around some puts and takes for two issues that have come onto our radar screen. One is QinetiQ's Tactical Robotic Controller that you're participating in and the other is this issue of the DLA coming into used inventory of unmanned aerial systems and the possibility of distribution to domestic law enforcement agencies of those vehicles possibly disrupting your sales channel to the law enforcement network. Just comments, color around either of those issues.

I don't know that there's a lot of comment on the QinetiQ program. There has been and continues to be a significant number of common controller programs floating around. I think to-date the de facto small UAS common controller is ours because of its preemptive position. There is an opportunity and multiple customers have and are exploring ways to integrate small UAS and small UGS system controllers but I don't think there's any flash of blinding insight I can provide at this time for any immediate or near-term changes. I'm not too sure about the implication of the DLA idea but I think it's most likely that the optimal products for domestic use will not be the same as the optimal products for military use.

I'd add a little bit of color to that in that our experience has been that the mission defines the product and the mission set that first responders, at least those first responders that we've been most intimate with, is significantly different than those missions that our traditional military applications have seen. So as you've seen our solution, the product that we've presented to the public has been our Qube which is a remarkably different product than that we've seen deployed such as our Raven, Wasp, and Puma. Do I see what DLA is being is disruptive? No. I see it more as progressive. The more people familiar with the capabilities of UAS, probably the better, but I don't see, at least from my perspective I don't see a match.

Michael Lewis. Lazard Capital.

Josephine stole my thunder on the government fiscal year '13 budget question but three other very easy questions. First on GO. How much investment have you put into the program since the funding was paused?

We haven't identified that funding, Mike, nor have we identified -- I don't think we've ever identified funding in any given program. We do break out total R&D in the notes in our statements but our investment has been less, considerably less over the last year than it was during the period of time that the JCTD was being funded by the six different customers. So we have modulated our internal investment in conjunction with the external investment from customers even though we continue to invest on our own while we're rebuilding our customer relationships for that program's production transition.

Okay, that's great news and on the Puma, recently received the R2 designation. Will that make it a program of record in the next budget?

Well, I think we can anticipate that the Army's family of systems idea, if that ever translates into a formal program, would have a larger size vehicle that's in the Puma class if not the Puma itself. But I believe the original contract that was driven by competition out of Special Operations Command for which we won with the Puma program, the Puma platform, is a program of record and has been since that point.

Thank you. That is all the time we have for questions. I'd like to now turn the program back over to Mr. Gitlin for any additional or closing remarks.

Thank you, Huey, and thank you all for your attention and your interest in AeroVironment. An archived version of this call, all SEC filings, and relevant Company and industry news can be found on our website www.AEVinc.com. We look forward to speaking with you again following next quarter's results.

That does conclude today's conference. Thank you for your participation. Attendees, you may disconnect at this time.