AeroVironment Inc (AVAV) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to AeroVironment first quarter fiscal-2013 earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after management 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; 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.

Thank you, Tyrone. Welcome to AeroVironment's first quarter fiscal-2013 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 day 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, September 5, 2012. The Company undertakes no obligation to make any revision to the statements contained in our remarks, or to update them to reflect events or circumstances occurring after this conference call.

We will now begin with remarks from Tim Conver. Tim?

Thank you, Steve. On today's call, I'll review the quarter, our ongoing businesses, and new business opportunities, keeping my comments shorter to allow for more time for questions. Jikun will then review financial results, and I will return to discuss our view of the balance of the fiscal year.

The main message of today's call is this -- fiscal 2013 is unfolding consistent with our expectations. The risks we discussed in our last call remain, but our positive view of the future has not changed. On our Q4 fiscal '12 earnings call in June, I said that we expected Q1 fiscal '13 revenue to be about the same as it was in fiscal '12. And because we are staffed and operating for continued growth, we expected a net loss for the quarter. This is essentially what happened, although actual revenue of $58.7 million was $3 million less than last year. On the bottom line, we had a net loss per share of $0.06, backlog increased 6% quarter-over-quarter, and now we have visibility into about 70% of our revenue guidance midpoint for the fiscal year. The $3 million difference in Q1 revenue is attributable to timing, and does not affect our plan for the year.

Over the past several years, we have seen consistently low Q1 revenue as a result of customer order patterns. This has not indicated diminished demand for our products and services, nor has it reflected execution issues. We expect that a broadening of our customers, markets, and solutions over time will ultimately help to normalize quarterly performance, but until that happens, this dynamic will likely continue.

Now for a brief summary of our business. Our unmanned airplane system segment focuses on affordable and reliable solutions that use airborne platforms to provide customers with a high-value vantage point for obtaining critical information and communications relay. Our Switchblade will provide troops with a unique, high-precision, minimal collateral damage capability to strike back at threats. Our business benefits from five growth drivers, all of which continue to contribute to our results. Some of these growth drivers enable us to maintain leadership in our existing businesses, while others enable us to grow into new markets and to establish entirely new businesses in support of our long-term growth plans.

Let's look at activity in Q1, and opportunities beyond, to illustrate this growth model in action in our UAS business. The first driver is the sale of more products to existing customers. We see continued demand for our family of small unmanned aircraft systems like Raven, Puma, and Wasp AE. Wasp AE transitioned into the Air Force BATMAN program in Q1, and we expect adoption by other customers to broaden its role in our family of small UAS. We continue to receive promising feedback on Shrike, our new VTOL solution, and believe that it will become a more significant contributor to UAS revenue. In August, we received additional funding of $16.5 million from the government fiscal-year '12 Army Raven contract.

Second, providing services to support our growing installed base of products and customers. In July, we received a $6.8 million order from the Army for contractor logistics support services. The third growth driver -- developing and delivering enhancements to our products through upgrades. The $16.5 million Army Raven funding I just mentioned included procurement of the new Mantis gimbaled sensor payload. Like the previous digital upgrade to Raven, we expect continued procurement of this Mantis payload upgrade over time. The upgrade potential includes many of the more than 5,000 Ravens in the Army inventory, as well as those of other customers.

Fourth -- adjacent markets for our solutions. With UAS mission services, we provide customers the value of UAS situational awareness without their investment in owning and operating unmanned airplane systems. In this model, we own and operate the systems, and deliver information as a contracted service. A growing number of customers are likely to value the flexibility and the lack of infrastructure investment this service offers. Our vertical integration as a manufacturer and the service provider uniquely positions us to deliver value and to compete effectively in this growth segment.

In another adjacent market, the international area, we booked the previously announced $9.6 million Puma order from Denmark in Q1 -- one of our largest international orders to-date. And we expect most US allies will continue to adopt small unmanned airplane systems over time.

On the emerging domestic UAS front, FAA rule changes that will enable a broader adoption of small UAS for public safety and other missions are pending. We believe that these rule changes, when they take place, could initiate a large adjacent opportunity for domestic use of small UAS in the United States and globally. As an example, consider that an estimated 98% of the thousands of local police operations in the US cannot currently afford helicopters and airplanes, but many of them could afford small UAS.

The fifth growth driver is developing and delivering new solutions with the potential to create entirely new business opportunities for AeroVironment. In Q1, we booked more than $5 million in orders for Switchblade hardware and services, a new solution now transitioning into early adoption. Customer support for this loitering munition capability is strong. We expect Switchblade revenue to grow again this year, and believe Switchblade demand could ultimately lead to a very large business. We continue to believe that a Global Observer transition to production will change the scale of our UAS business in the future, although we cannot predict the timing of adoption.

Mission services, domestic UAS, Switchblade and Global Observer, our adjacent market and new solution opportunities where we plan to replicate our previous success in the adoption and the growth of small UAS. The timing and the rate of adoption of each of these opportunities is uncertain, but the probability of adoption is high. And the size of each of these opportunities is very large, relative to the size of AV. Full-scale adoption of any one of these opportunities, combined with our current base business, could represent significant long-term growth for AV.

We are, of course, pursuing the adoption of all four new opportunities, in addition to sustaining growth in our current small UAS business. In each area we are a technology leader, a first mover, and we are actively engaged with significant lead customers. We are encouraged by what we see and hear from lead customers for these new opportunities, and we believe that our sustained investments are advancing us closer to the point where these will deliver significant growth.

With respect to the defense appropriations, we have seen no changes made to the approximately $48 million in funding for our products in the government fiscal-year '13 budget request. That request has passed through all congressional committees that have taken action. We do expect a continuing resolution. We also continue to see risk associated with sequestration, as well as the effects that risk may have on contract decision making and timing.

And now, let's move on to our Efficient Energy Systems segment. EES focuses on advanced technology and infrastructure to help design, produce, and charge electric vehicles. Our five growth drivers also apply to EES. First, we continue to sell our electric vehicle test systems, PosiCharge industrial EV charging systems, and passenger electric vehicle charging systems in existing markets. In Q1, we announced the largest contract we have received for airport industrial EV charging equipment -- the Seattle-Tacoma International Airport's order that has a potential value of $8.8 million.

We see sustained demand for our EV test systems globally, as more R&D and production facilities focus on developing new electric vehicles and powertrains. Those new EVs will make their way to customers over the next few years, and we continue to deploy our recently developed comprehensive set of products and services to support their adoption in the practical use as passenger and fleet electric vehicles. Our roll-out of Level 2 charge docks reached almost 10,000 deployed across North America as of Q1, which we believe ranks us as a leader in this market.

Second, we provide customer service and support for all of our EES products, including installation service and network management. We established a national network of electrical contractors to support EV charging solutions, and we built and operate the back office system that enables the eVgo subscription model in Texas, and the West Coast Green Highway in Washington state and Oregon.

Third, while not yet at the same scale of our UAS business, we do provide upgrades to existing EES products, including software and accessories. Customers have retrofitted upgraded systems in our EV products, and we plan to continue to offer more. We also have the ability to upgrade software in our network passenger electric vehicle charging systems remotely, making it easier and more cost-effective to introduce new capability over time.

Fourth, we have expanded into adjacent markets. From our original OEM relationship for passenger electric vehicle charge docks, we now provide solutions for other manufacturers, utilities, state agencies, Canada, and directly to consumers. We now have multiple products and pathways to growth as this market develops. Also, the potential for global adoption of EVs is real. So, continued experience and success in North America positions us to broaden our reach to other countries.

The fifth growth driver is developing new solutions with the potential to create entirely new business opportunities. Our on-road EV charging solutions were launched as a new development just 2.5 years ago. The initial adoption of this development was for our charge dock and installation service by Nissan to support there US roll-out of the Leaf electric vehicle. That initial adoption has grown to the multi-product and service production business described earlier [as filling] more existing products.

Our newest passenger EV products, DC Fast Charging Systems, can recharge a battery electric car in less than 30 minutes, and we have deployed 85 fast chargers as of the end of Q1. The market for our electric vehicle solutions will ultimately be sized by the adoption rate of plug-in electric cars. Even a small percentage of the auto market making a sustained conversion to plug-in electric will drive a large demand for our charging infrastructure.

In both segments, we are a leader in each of our markets, with strong and differentiated technology, operations, customer support, and key relationships. We also are a technology leader in high-potential, new growth developments. The combination positions us well with multiple options for sustained long-term growth.

And now I'll turn it over to Jikun for a review of the Q1 financial performance.

Thank you, Tim, and good afternoon, everyone. AeroVironment FY '13 Q1 results are as follows. Revenue for the first quarter was $58.7 million, a decrease of 5% over Q1 last year of $62 million. Looking at revenue by segment, UAS revenue was $48.8 million, a decrease of 7% over the prior year. This revenue decrease was primarily driven by lower service revenues. Logistics and repair revenues declined by $5 million, driven by the decline in Raven B DDL retrofit activities, but was offset by higher customer-funded R&D revenues of $1.5 million, driven by Switchblade Engineering Services. EES revenue was $9.9 million, an increase of 1% from Q1 last year, primarily due to higher revenues from our passenger and fleet electric vehicle charging systems, offset by lower revenues from our electric vehicle test systems and industrial fast charge systems.

Turning to gross margin -- gross margin in the first quarter was $19.5 million, down 10% from the first quarter last year. Gross margin as a percent of revenue was 33% versus 35% in the first quarter last year. By segment, UAS gross margin was $16.1 million, down 21% from the first quarter last year, driven primarily by incremental investments for new products transitioning into production, as well as lower overall sales volumes. As a percent of revenue, UAS gross margin was 33%, down 6 percentage points compared to the first quarter last year. EES gross margins recovered to $3.5 million, up 129% from the first quarter last year, largely due to lower program charges on an existing fixed-priced DoD development contract, and lower manufacturing and engineering overhead support costs to transition new products into production compared to the prior year. As a result, EES gross margin as a percent of sales recovered to 35% compared to 15% from the first quarter last year.

SG&A investments for the quarter was $13.6 million, or 23% of revenue, compared to $13.7 million, or 22% of revenue in the prior year. R&D investments for the quarter was $8.1 million, or 14% of revenue, compared to the prior year amount of $7.6 million, or 12% of revenue. Operating loss for the quarter was $2.3 million, or negative 4% of revenue, primarily due to lower gross margins and higher R&D investments.

Our effective income tax benefit for the first quarter was 33.4% compared to an income tax rate of 35.7% in the first quarter last year. Net loss for the quarter was $1.4 million, or $0.06 loss per share, compared to an income of $0.3 million, or $0.01 per fully diluted share in the same quarter last year. Looking at backlog -- funded backlog at the end of the first quarter was $98.4 million, up $5.2 million or 6% from April 30, 2012.

Turning to our balance sheet -- cash equivalents and investments at the end of the first quarter totaled $179.6 million, down $20.2 million from the prior quarter. The negative cash flow was driven primarily by higher working capital needs, and net loss for the quarter.

Turning to receivables -- at the end of the first quarter, our accounts receivables, including unbilled receivables, totaled $73.1 million, down $10.3 million from the prior quarter. Total days sales outstanding increased to 112 days compared to 68 days at the end of the prior quarter. This increase was driven primarily by lower revenues in the quarter.

Taking a look at inventory -- inventories were $44.5 million at the end of the quarter, up $1 million from the end of the prior quarter. Days in inventory increased to 102 days compared to 64 days at the end of the prior quarter. This increase was driven by lower revenues in the quarter.

Turning to capital expenditures -- in the first quarter, we invested approximately $2.5 million, or 4% of revenues, in property improvements and capital equipment. We recognized approximately $2.9 million of depreciation during the quarter.

Now I'd like to turn things back to Tim to discuss AV's expectations for the balance of our FY '13.

Thanks, Jikun. As we look at the balance of fiscal '13 and the external risk that we and others face in this volatile business environment, we still expect international small UAS, Switchblade Loitering Munitions, and electric vehicle products to contribute to fiscal '13 revenue growth over fiscal '12. As I said in our Q4 fiscal call, we considered three levels of risk in formulating our guidance for fiscal '13. First, the inherent risk in predicting the timing and the rate of adoption in our innovation strategies. Second, macro risk associated with budgets, funding, ops tempo, recession, sequestration and the like. And third, timing risks associated with government-ordered delays, probably exacerbated by the sequestration overhang.

Taking these risks and opportunities into consideration, we still expect our fiscal '13 revenue to be $348 million to $370 million. Fully diluted EPS of $1.41 to $1.51 per share, consistent with our previous fiscal '13 guidance. We plan to deliver $15 million of current small UAS backlog to international customers in the third month of our second quarter. There is some additional timing risk associated with the administrative process of concluding international deliveries that could slide these shipments planned for Q2 into Q3. If these shipments are delayed, that would shift about $15 million of revenue to Q3, putting Q2 revenue at about $70 million to $75 million. In that case, about 64% of our fiscal '13 revenue would be in the second half.

As usual, we're keeping a close watch on developments in Washington, DC, and with our customers, to discern any potential impact on our fiscal '13 plan. Our team is performing and supporting our customers well. I believe we have a growth strategy that works -- is particularly advantageous for the environment we are in. We are on track for the year, and investing to establish a strong foundation for long-term growth.

Thank you for your interest. And now Jikun, Tom, and I will take your questions.

(Operator Instructions)

We ask callers to limit inquiries to two questions a piece. If you have additional questions you are welcome to return to the queue.

(Operator Instructions)

Michael Lewis of Lazard Capital.

Hi, Tim. Okay. So we have about 70% of revenue at the midpoint. That's right now around $250 million, according to guidance. I was wondering if you could provide us with a little more detail into the proportion of the split between UAS and EES contained in that visibility that you have right now?

Mike, we have not made a practice of breaking down the revenue guidance between the two groups, although I think we have said that we expect growth this year in our EV product line, which is essentially represents the EES segment at this point.

Mike, I can provide a little more detail but it's not that business segment. It's by how we have categorized it in our Q4 call. It's $58.7 million of actual revenues, $98.4 million of backlog, $29.3 million of Q2 bookings to-date, $43.5 million of GFY '12 to go and EES running at flat over last year of $20.9 million, which adds up to about $251 million.

Okay. That's actually very helpful. I appreciate that detail. One more question. Did I read the press release correctly when -- it looks like -- was it a $3 million actual revenue slip that you saw in the quarter as a result of the contract timing? And if so, did you already recoup that revenue? Has it already been delivered or are we still waiting for it to ship out in Q2?

Let me put a little more color on what I intended to say there, Mike. We expected when we went into the quarter that we would have revenue about the same as our first quarter of last year and we ended up with revenue that was about $3 million less than the first quarter of last year. And the principal difference between what we expected and what we ended up with came down to a contract that we expected to have in place and deliver on in Q1 that slid out. That has not actually closed yet but we still are comfortable that it's within the year and won't affect our total revenue.

Okay. That's helpful. Thank you, Tim.

Jeremy Devaney of BB&T Capital Markets.

Good evening guys. Thanks for taking my question. I wanted to quickly touch on cash. Free cash flow is the largest single quarter decline since you guys became public and ARs are running extremely high versus prior Q1s. I was wondering it gives you could give us a little bit of detail and what's going on on the collection side of the business and if you are seeing anything in particular that we should be aware of.

Yes. So our free cash flow was down roughly $20 million driven primarily by working capital. Actually, the impact was more on the liability side. We had two large accruals that we did at the end of the year, one for taxes and one for bonuses, that would drive the accounts payable or the current liability side down. Now on the AR side, we did bring our receivables down roughly about $10 million. So that would put our collections in the quarter at $70 million, which is pretty good. But due to the billing and the timing of the shipments, our accounts receivable balance at the end of the quarter is at roughly $73 million.

Alright. That's really helpful. During the discussion, you guys mentioned that the Switchblade was going to grow year over year. Looking at Q1 $5 million booking, do expect to see bookings of similar size in each of the remaining three Qs? Do think $15 million to $20 million in Switchblade annual run rate is achievable this year?

Well we do continue to expect that Switchblade revenue will grow this year over last as it did last year the prior-year. That's -- and everything that we see from our customer community that's interested in this capability continues to support that expectation. We do expect to continue to see more bookings and to ship many of those within this fiscal year. I don't want to get into predicting particular quarterly revenues but we are still very bullish on the potential of this new capability.

Alright. Thank you very much.

Greg Konrad of Jefferies.

Just a quick question. When looking at the proxy and the goals that were set in terms of revenues, there's quite a big divergence with the guidance and the numbers in fiscal year 2012. I was just kind of curious about what that divergence was from and if you guys have set similar lofty goals for 2013.

Okay. You're talking about the internal performance goals that we set. Internally, we -- the entire organization is really focused on sustained long-term growth. And as you know, our core strategy is based on innovations that produce new solutions that then become adopted and essentially create new niche market opportunities that we can grow with. The -- we set our goals internally before the year starts. And we go through a process that is -- goes bottom's up and top down and iterates. It's a reflection of the growth objectives of the business and the intent is to end up with a plan that is a stretch but considered achievable by the people that are executing the plan. And that's the basis of our internal goal setting and, in essence, we would rather aim high and miss than aim low and hit.

We provide guidance in our fourth quarter call. By that time we are already into executing our plan. We have a little more visibility. What we do at that point is -- I try to set guidance where we have stripped out the upside opportunities that we are pursuing but aren't in the most likely part of the plan. And we try to risk-adjust the plan for those areas where there is more schedule or capture risk so that we can provide guidance that we believe we'll have a high level of confidence in executing throughout the year. Because at that point we're discussing guidance with investors, we would rather be conservative and make sure we don't have to change that in a negative way than take a more aggressive posture.

That results in what you saw in the prospectus, which is achieving our guidance -- I think last year at the high-end on revenue and still under achieving our internal goals. So long answer. I know. I think the question was, did we do that again? Of course, we will disclose retrospectively in next year's prospectus what the internal goals were. But I think I've described the philosophy of the organization and I don't think we have indicated any change in our strategy or our philosophy.

That's very helpful. And then just second question. For EES margins, it seemed to recover quite quickly from Q4. And I know you've talked about kind of progression of those margins getting back up. Is what we saw in Q1 kind of the new run rate? And is that sustainable for the rest of the year?

Well I don't think, again, we want to predict gross margin. We try to limit our guidance at this point to revenue and EPS. But it is -- what we saw in Q1 is consistent with what we have been expecting ever since Q1 of last year, which was a recovery of the gross margin of that business, which was initially very low in Q1 of last year as a function of the introduction of multiple new products as well as a specific fixed-price development contract we had with a government customer. So we have seen that continued improvement. We are back, I believe, in the range that's similar to what we had previously been expecting. And I think we are well through the introduction of that surge of new products we saw last year.

Thank you -- very helpful.

Tim Quillin of Stephens.

Tim, how do you think about our plan for bookings in the third quarter and fourth quarter of your year, given the CR and the talks of sequestration? Does your guidance range allow for enough variability in the outcome of what bookings might look like? Or are there scenarios where -- just because of the risks you mentioned -- that you fall shy that guidance range because the way bookings shakeout?

Well we think we have captured the reasonable range of risk that we can anticipate. And I haven't seen anything in the last quarter that changes that. So certainly we are not looking at the statistical tales of distribution that's possible. But I think in any reasonable way that we can anticipate the effects of sequestration, I think we are within -- we are still within our guidance range.

And then specifically on Puma, I guess by my count adding it up and your fiscal '12, the Puma product line may have been around $100 million revenue contribution. It's a big year for Puma, regardless. Do you anticipate -- and I know you don't like to get into product level guidance -- but is that something you're thinking about as a whole to fill in fiscal '13 with other products? Or do you think that that can stay relatively flat? Thank you.

Well as you anticipate, we try to avoid getting into product lines specific projections. However, you will notice that when we talk about the areas we expected growth this fiscal year, they are international small UAS, Switchblade and our EV products. So I think you certainly can infer from that that we are not planning on Puma driving growth in this year. Nevertheless, it continues to be a very productive tool in relatively high demand and with a growing interest in with multiple customers. So a key part of our family of small UAS.

Thank you.

Noah Poponak of Goldman Sachs.

So the -- within the context of the items you've identified that you still have to capture -- the slightly less than $50 million from the fiscal '12 budget, I'm assuming that's the remainder of Raven. Can you maybe just talk about the risks around that one, specifically? Because that's one that took a while to come through in terms of the -- just the initial contract and the initial task order. It took significantly longer to come through than you originally expected. So what's the risk that as we move into another CR, in addition to the sequestration overhang period, that that one slips out of the year?

I -- at the risk of prognosticating here, I don't see that as a significant risk.

Okay.

We are in the contracting process. There have been significant amounts already put against that contract and nothing is going on in that process that is unusual or would suggest to me that it's at any risk of sliding out (inaudible).

Okay. That's good. Back to the free cash discussion. What is the -- or where do you think total free cash flow will shakeout for the full year?

Again, historically, we have seen about 90% conversion on a typical year. Now obviously, it depends on the fourth quarter revenues and the billing associated with it and when we collect against that. But at this point in time, that's probably a good assumption of this.

I feel like I'm -- if I'm reading my notes correctly here from the last call, the discussion was that there was some abnormalities in the full year fiscal '12 that caused free cash flow in full year fiscal '12 to be just above breakeven and that you thought full year fiscal '13 would be in the ballpark of your normal conversion rate plus the accumulation of what you came up -- of the degree to which you came up short in fiscal '12. Did I hear that incorrectly? Or has that changed? Or why would you not experience that catch-up?

I think you heard that correctly. What you are seeing is the timing affect of the revenues within the quarter and the shipments of the products in the quarter. Again, if we have a backend loaded fourth quarter, you might see that kind of cash flow replicating itself in FY '13. But at this point in time, we don't expect that.

Okay. And then just last one on Global Observer. Is there any difference at all in the way you are thinking about the program now than you have over the past, I don't know, 6, 9, 12 months? Any new thoughts on partnering with others that are working on similar product? Or any incremental discussions with potential international customers? Anything you can tell us there at all? Thanks.

We are pretty much with the same story on Global Observer as has existed for the last number of months. And I -- that doesn't mean to say that any or all of the areas you suggest aren't in the mix. We are actively engaged with multiple potential customers pursuing the production adoption of Global Observer. And we continue to believe that that will happen and we continue to be reluctant to predict the timing.

Okay. Thank you.

Patrick McCarthy of FBR.

A quick one on the EES business, first. I was wondering if you could just give us some kind of flavor on what the quarter looked like by breaking it up via industrial, the on-road and kind of almost everything else? If that's possible.

Well, again, we are continuing to avoid getting into breaking out revenues by product line.

I know. I'm sorry. I don't want what the revenues were, but I think last quarter you were talking about the industrial business being relatively weak -- thinking about a pickup in on-road. And is that kind of still what's happening in the marketplace?

Yes, we did see -- okay, this is the year over year comparison of Q1. So we did see EV solutions, which would be the passenger fleet electrical vehicle charging system, remain a little stronger. And industrial and electric vehicle test systems being a little weaker in the quarter.

Okay. Great. And then more from a macro perspective --

Patrick, I just say that that's a quarter over quarter comparison. And I don't know our quarter over quarter, year over year by quarter and not necessarily a projection of how we think the mix would end up over the year.

Sure. Fair enough.

Keep in mind the -- like I think Tim mentioned in his prepared remarks -- the Seattle-Tacoma Airport GSC -- the ground support equipment. That is considered a part of the PosiCharge product line family. And so we do expect that too contribute significantly in FY '13.

Okay. Can you give us a sense as to whether there's other opportunities like the Port of Seattle out there that you are either bidding on or close to being bidding on?

Well there's -- that aspect of the PosiCharge product line, or that segment of our PosiCharge product market, has -- is one that we have been involved in from very early on in our entry with that capability. So we are installed in multiple airports across the United States. We have some footholds in international airports. And there is an active business development process that's ongoing in that as well as the other product lines there and with numerous customers in various stages of making procurement decisions. So it's an active, robust area that we expect to continue to grow.

Okay. Great. And then just one more quick one Mantis. Is there any data you can provide to us to just give us a feel as to how the pull-through has been so far on that product or where you kind of feel like you are maybe relative to what's in the backlog? Or any data that you can provide would be helpful.

Well all of the customer evaluations that had gone on with this new capability, prior to its acquisition, produced very positive feedback. It has since -- it dramatically improves the degrees of freedom that an operator has to collect information and to use the system in multiple scenarios. They are not in the field yet. We just have begun to get the contracts and get ready to start shipping these. So we don't have field -- they are not deployed. So we don't have information or pull coming from the field yet. But as these systems get distributed and users begin to get that experience, I would be surprised if they -- if they aren't delighted with the improvement in the safety and force protection that can provide as well as their efficiency. And in the past, that has generated considerable demand.

Great. Thanks for the help.

Andrea James of Dougherty & Co.

Did mission services grow in Q1? And also on mission services -- do you think the intelligence community will continue to broaden your addressable market from a services standpoint?

Well we -- as we mentioned on our last call, Andrea, we saw significant growth last year in mission services and we believe that that is a long-term significant growth opportunity for us. I want to get away from identifying specific revenues by product line, particularly by quarter. But we see growing opportunities there, not only with our conventional defense customers but multiple other customers, both in the US government and internationally. It has this -- the characteristic that I described in my earlier remarks of enabling customers that aren't structured and don't want to structure themselves in ways to support large scale hardware acquisitions and complex support and training operations and sustainment and still get the advantage of the situational awareness with the flexibility of services contracts. So, it's -- I believe we will be a broad market with multiple customers overtime.

Thank you. And then congratulations on the positive press on the Mola Robot (Laughter). Is that proof of concept -- is that developed in response to a customer request or just something that you guys always have -- I know you have a lot of pokers in the fire developing new stuff.

I think it's in the category of -- there's always something interesting going on in the R&D labs around here. And every once in a while, something pops out on us that gathers surprise and interest from the public.

What was it that kind of got that people talking about that one in particular?

Well, it's the -- I think what drove the initial development was the potential of long endurance, autonomous data-gathering in what turns out to be a large part of the planet that doesn't have a lot of data available to it. As to what generated the interest, I think there is some argument that it might be the Grateful Dead background music (Laughter).

Thank you.

Luckily they have opened their -- the intellectual property portals to their music and so our engineers apparently took advantage of that.

Thanks.

Mike Ciarmoli of KeyBanc Capital Markets.

Tim, so just refresh my memory on EES -- the fall off from -- on a sequential basis -- from 4Q to this quarter -- 26%. I think you're targeting flat. What are sort of the puts and takes to get those revenues up on a -- going forward on a sequential basis? Are there risks involved with some of the shorter cycle PosiCharge businesses? Just trying to get to the degree of confidence there in your visibility in those EES revenues, I guess.

Overall, we continue to expect that business to grow year over year in FY '13. And I think that (inaudible) a minuscule growth this quarter as well -- year over year.

I think is talking about --

Mike's talking about Q4, yes. I think that's just back to our cyclical timing. And, no, I don't think there's anything more to the Q1 issue than that, Mike.

Okay. That's fair. And then from a strategic standpoint, I guess, the budgets are getting tight, funding's getting tight. What are you seeing on the competitive front out there? Are you seeing new entrants? It seems like every defense contractor these days has some variant -- multiple variants of unmanned aircraft. Just, if you can, maybe just give us a sense of how these new competitions as you are going about trying to get new business, especially on the international front, what you're seeing maybe now verses 12 months ago.

Well I think one basic driver is unmanned airplane systems have been a high-growth segment of the defense community for a number of years. I think the general conventional wisdom is going forward, even in a highly constrained budget environment, unmanned airplane systems will remain a defense budget priority. So it would be unusual if that did not attract increased attention. But even with that, in the [fuller] competitions that have been held in our particular space for small UAS over the past number of years, there have been up to 24 competitors in those competitions, many of whom are still active competitors. Others have come and gone. But I think it's mostly a reflection of the sustained demand and the projected sustaining of that demand for the UAS capability that attracts people.

Okay. Fair enough. And if I can, can I just sneak one more in here. You mentioned the Denmark order. Is there any way you can help us get an understanding of the magnitude or size of some of these international opportunities that you are targeting out there? We obviously -- you've obviously kicked off the biggest market with the US but I think its under appreciated how large some of these other customer orders can be. Is then any way you can help us with that?

Let me take a crack at that, Mike. And it ties back to the original question in terms of the level of competition that we are seeing in the market place. In the US you would argue that because of our position with the US Army and our reputation in the marketplace, that competition -- competitors would have a more difficult time to take us on head-to-head. In the international community, that advantage doesn't necessarily translate. And we do see greater competition in the international arena on a regular basis. Having said that, I think we have been pretty successful in competing against international and domestic competitors on -- in the international front on a regular basis. In all cases, we try to go back to our customers and get their support for releasing that we've won an order and try to frame the size and the -- and qualify that order as best we can. In the case of Sweden, recently, we won an order that we -- I think we announced somewhat north of $9 million. In Denmark order, we can tell you that it's related to a small family of systems but I can't -- for customer reasons -- can't disclose the size of that order to you.

Okay.

I would -- I'd go -- in terms of the size of the market, Mike, I have seen -- and you probably have as well -- multiple studies of the potential size of the international demand for UAS. And most of those that I have seen, at least, seem to point to international demand that at over 50% of the total -- and probably even a growing percentage going forward. Whatever that percentages is, the fact that that could be a growing percentage going forward does seem to make sense to me because the US was such an early adopter. And most of the acquisition patterns and adoption patterns we have seen outside of the US are following a similar pattern, a similar process of evaluation and then determination of requirements and then budgeting and then acquisition process. All similar to the initial process in the US, just five plus years later. So it would make sense that overtime that percentage of adoption would shift from the dominance in the US to a greater and greater percentage internationally.

Okay. Perfect. That's extremely helpful. Thank you guys very much.

Mike Greene of The Benchmark Company.

In the senate appropriators FY '13 budget mark off it looks like the Army Raven was fully funded but was moved to [OKO]. Do you have any color on why this might have been move?

No. I think we are all shaking our heads without a good answer for your.

Okay. Just wanted to be sure. I am as well. On the EV side, Tim, you mentioned in your prepared remarks that you build and operate at the back end of the eVgo network. Would it be fair to say that a sizable portion of your revenue from an eVgo network come from this backend operation in addition to the actual install charges?

Well we anticipate backend revenue potential on these networks. But I think, to date, the bulk of our revenues come from the hardware, software and installation upfront.

Okay. Thanks. That's helpful.

Tyler Hojo of Sidoti & Company.

Good evening, everyone. Just going back to the Global Observer program. Just wondering -- if you are currently internally funding that program to any degree? And if so, if you could maybe talk about it a little bit? Maybe what the expense was in the quarter?

We do continue to support Global Observer with internal funding. A lot of our effort has been focused on adapting solutions to potential customers as well as optimizing our production systems so that we are in a position to translate the development into a production capability. Our -- we have funded that program for years, initially through internally funded development of the technology and the capabilities. And then we co-funded -- continued to co-funded along with our customer funding in the JCTD program. So I would expect that our internal funding would continue to wax and wane, consistent with customer funding. But we will continue to pursue the adoption as long as we are convinced that it is likely to translate into significant growth in the future.

Got it. Okay thanks for that. And then just a clarification -- I think you said Q2 sales were targeted in the $70 million to $75 million range. And I'm just curious, is that inclusive or exclusive of the $15 million international UAS shipman you kind of spoke to in your prepared remarks?

We think that revenue range would be the result of that $15 million or so of international revenue sliding out of our plan for Q2.

Got it.

So that if we didn't realize that delivery risk, it would be about $15 million higher.

Got it. Okay. And just a couple of cleanup items. I was looking for the unfunded backlog number. How far along we are on the Army's planned buy of Ravens and the customer funded R&D number? Thanks a lot.

Sure. Unfunded backlog is $82.1 million. Sorry -- shuffling through my books here. Project R&D was $6.6 million and the Army acquisition objectives -- we are 76% at 1,802 systems.

Great. Thanks a lot.

Michael Lewis of Lazard Capital Markets.

I wanted to follow-up on Patrick's question on the Mantis. Would you expect to production to fall in similar to how the DDL upgrades came in during the past when we were seeing that flow through?

It's -- I don't want to say it would be similar to that pattern, Mike, only because I don't have insight into our customers budgets. And until -- that probably gets affected by what happens with their available funding. But I do expect is as that capability gets into the field, I would be surprised if there wasn't significant pull through from operators for more of that capability. And that's what we saw with the Digital Data Link. And so to that degree, I think it's very similar. It's just hard to predict how fast they -- assuming that demand accelerated as I am suggesting -- it's hard to predict how fast the Army could react to it.

Okay. And then shifting gears back to the international order, what are the milestones that you have to meet to deliver that $15 million during the second quarter versus seeing it slide out to the third?

Well it's typical with -- to a large degree, the delivery requirements are typical with -- to our US government customers that require acceptance tests, processes and flight tests of the equipment. But there are export issues associated with international that's not associated with US government. And it's a little easier for our US customers to observe the flight tests and meet those -- get those buy-off requirements by having personnel available, physically, at the flight test facility. So that -- the combination of the export issues, letters of credit and the physical observation of flight tests all add a little more risk when we are dealing with international customers.

And then just a final question for you, Tim. There's been a number of [aerostat] programs that have been either reduced or canceled. Do think that this will actually improve the prospects for GO? Has the customer come back to you in discussions as a result of this cancellations in usually high altitude aerostats?

We internally concluded long ago that fixed wing solutions for high altitude, long endurance applications would dominate lighter than air solutions. Now, that's our technical evaluation. And I guess in the vernacular, that's our story and we're sticking with it. In most of the actual test results that I have been able to observe from afar, seem to support that initial assessment. To what degree customers will ultimately come to that same conclusion and to what degree that translates into increased interest in fixed wing solutions like Global Observer, is something that we have been counting on, based on our internal technical assessment. But I am back to the difficulty of predicting the timing of adoption.

Yes, Sir. Thank you, Sir.

Jeremy Devaney of BB&T Capital Markets.

Tim, I want to continue down this line on the Global Observer. Have you guys made any progress in gaining control of Airframe 2? It's my understanding that the customer continues to own the assets at the end of JCTD. Also, you've applied for an Airframe, Airworthiness Certificate for the second Airframe. Does this imply that you are trying to fly it in the near future? And are there going to be any [IRAD] dollars spent in bringing it to full completion?

Well a couple of questions there. In terms of the connection between the FAA and near-term flight tests, I don't think there's a direct link to be made there. I -- we are -- we do intend to put airplane number two back in flight tests. But I think the timing is associated with our pursuit of production adoption. We are continuing a dialogue with our customers on airplane number two. We expect that to be resolved, quote, as soon as we can manage it, unquote. Again, I am not able to give you a specific prediction of timing. But I -- that's where we are headed.

Alright. If we could go to the Raven for a second. Have you made any significant progress since the Raven [UKA] contract to bring that -- the full contract to definitization? The reason I ask -- I know we discussed it a little bit earlier -- is under sequestration, unobligated funds are going to be swept up at the end of this calendar year. And so if you are not under contract within the next four months, those funds are at risk of being swept up and going away. Can you give us a little bit more clarity as to where exactly you stand in the contract process and how much urgency you are getting from the customer to come to completion on definitization?

First, and the past, we have taken a number of contracts via the UKA process with our customers. In all cases, and in this case, we are under contract for the entire order. It's a matter of definitizing the contract and gaining full funding. To the extent that there's some risk associated with that, I could guess that we would associate that risk. But I don't -- from our perspective -- I think Tim said it earlier, we don't view GFY '12 -- if the finalization of the GFY '12 order is being a significant risk to the plan for the year.

Alright. Very helpful. I appreciate you taking the second questions.

Tim Quillin of Stephens.

Thank you for going into overtime here. I am trying to figure out where your -- or maybe you can tell me where you're break even point is. And I am thinking relative to your revenue guidance for the second quarter at the $15 million order is pushed out, that is $70 million to $75 million. Is your break even point $65 million in revenue or $70 million in revenue? Where exactly is it?

Well I don't know that. I will let Jikun decide whether he wants to make a forecast. But retrospectively, I would say our breakeven point in the first quarter was about $0.06 below our revenue.

Alright. Right.

Historically, it's been in the $60 million to $65 million revenue range. Obvious it's a function of many things, gross profits achieved, G&A and R&D investments -- I'm letting that out. I think we are probably going to stay away from guiding EPS in the second quarter and we'll leave it with $75 million with potential upside to -- my apologies -- $70 million to $75 million range with $15 million upside to that.

And then just lastly, Jikun, I missed it when you went through the components of visibility. I got the revenue in 1Q and the backlog of $98 million and the $29 million of bookings to date. But I missed the last couple of items -- the remaining Raven expected orders and the EES orders to get to flat.

Sure. So it's not just the Raven. It's all of GFY '12 balance.

Okay.

So that's roughly $43.5 million. And then EES to run flat would be $20.9 million.

Okay. And I'm not -- does that -- maybe I just wasn't adding it up right but I'm not getting -- I'm getting $246 million.

Okay. So let's try one more time. $58.7 million actual. $98.4 million backlog at the end of Q1. $29.3 million Q2 bookings to date. $43.5 million and $20.9 million. That should add up to --

I'm sorry. I got it now. I apologize for taking everybody's time. Thanks.

Thank you. That's all the time we have for questions. We'd like at this time to return the call to Mr. Gitlin for any additional or closing remarks.

Thank you, Tyrone. Thank you all very much for your time and for your interested in AeroVironment. 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 results. Bye.

Thank you. That concludes today's conference call. Thank you for your participation. Good day.