AeroVironment Inc (AVAV) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to AeroVironment, Incorporated fourth quarter fiscal 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Sayeed. Welcome to AeroVironment fourth quarter and full fiscal year 2014 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, July 8, 2014. 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. I'll begin today's call with a short summary of our strong finish to fiscal 2014 and where we're headed in a dynamic fiscal 2015 and beyond. In fiscal [2014], our team successfully executed our strategy, adapted to DoD changes, maintained market leadership, advanced key growth opportunities, and outperformed with respect to our guidance. We ended fiscal 2014 with our core business in a strong and considerably more profitable position than fiscal 2013. And three of our key growth opportunities have advanced demonstrably in the adoption process.

Looking ahead to fiscal 2015, we see continued strengthen in our competitive position and our long-term growth potential in each of our core business areas. That said, we see compelling opportunities to advance maximum future returns on key growth initiatives through timely incremental investments this year.

And now let's review our 2014, Q4, and full fiscal year performance. I'll discuss our view of fiscal 2015, and then I'll go into further detail on investments in our growth initiatives, and then we'll take your questions.

We're very pleased with our strong Q4 performance which drove both revenue and fully diluted EPS above the high end of our guidance. Fourth-quarter revenue of $73 million rose 36% year-over-year, and fully diluted EPS on an adjusted basis, which excludes CybAero convertible notes, rose from a loss of $0.21 to a gain of $0.27.

We're equally pleased with our full-year results. Compared to fiscal 2013, full year 2014 revenue grew 5% to $252 million, and fully diluted adjusted EPS grew 87% to $0.56 excluding the $0.04 increase from CybAero convertible notes.

During the year, we achieved important financial and operating goals. From a financial perspective, we adjusted the organization to lower our break-even level from $60 million to $65 million a quarter to $50 million to $55 million allowing us to operate profitably at current procurement levels. We increased operating profit from $3.8 million to $12.4 million year-over-year.

We closed fiscal 2014 with about $66 million in backlog, and we have added an additional $76 million in new orders to date in the first quarter. We reduced year-end inventory by 18%, from $62.5 million in fiscal 2013 to $51 million in fiscal 2014, and we increased free cash flow by 72% to $21 million. In short, we finished fiscal 2014 a more efficient and profitable organization, and our prospects for long-term value creation are stronger than ever.

Now let's review our operating performance in fiscal 2014 starting with our Efficient Energy Systems segment. In FY14, we maintained leading market share in each of our three business areas within EES, namely EV test systems, industrial EV charging systems and passenger electric vehicle charging systems.

Here are some examples of our leadership in efficient electric energy systems. In the passenger EV charging area, in fiscal 2014, Ford, Kia and Chrysler-Fiat joined Nissan, Mitsubishi and BMW in selecting AeroVironment as the preferred supplier for charging infrastructure for the North American electric vehicle programs.

Reflecting our focus on delivering innovative solutions, we launched TurboCord in the third quarter. This is the smallest UL-level listed charger solution available and it easily converts to a 120 volt cord set. We've now deployed nearly 18000, 240 volt charging docks and more than 450 DC fast chargers in North America. We've also successfully transitioned our first-of-a-kind West Coast electric highway charging network to a subscription model, with a growing number of paying customers relying on our system to power their commutes.

Also, our EV charging solutions are increasingly supporting industrial robotic vehicles for Ford and Amazon. And now let's turn to our core UAS segment, which develops, sales, and supports unmanned airplane systems and Switchblade systems for the US Department of Defense, and where we have maintained the leading market share in DoD's small UAS. Here we also made progress on multiple fronts in fiscal 2014.

We shipped nearly 1,200 Raven gimbaled payloads in fiscal 2014 as customers continued to invest in retrofitting their large base of existing small UAS. We introduced a block upgrade to extend Puma AE performance and endurance, and we demonstrated a long endurance solar-powered Puma AE that can fly all day long.

We introduced the pocket digital radio to leverage the embedded networking capability of our small unmanned airplane systems. This is a small plug-in adapter for smartphones and tablets that provides ready access to secure radio networks for voice, video, data and text.

The Army and the Marine Corps each released new capability production documents, or CPDs, defining their next-generation small UAS requirements. The Army CPD defines a family of small UAS comprising Raven, Puma, and a yet to be determined micro UAV. Puma and WASP AE are the systems specified for the Marine CPD.

In FY14, we further expanded our target market within the Department of Defense beyond hand-launched small UAS to pursue opportunities for larger next-generation platform solutions. Our selection is one of five award winners for a Phase I contract for DARPA's TERN (T-E-R-N) program was a significant early success. The TERN program entails developing a cutting edge UAS solution with predator like flight characteristics, but capable of operating from naval vessels.

I will now update you on the progress we made a fiscal 2014 on five growth opportunities within our UAS segment. First, in our Tactical Missile Systems business area, our team executed well against our development contracts, and Switchblade is performing exceptionally well in both training and operational use. As a result, Switchblade revenue nearly doubled from fiscal 2013 to fiscal 2014.

Public statements from the Army suggested an upcoming LMAMS program of record. In the international small UAS market, we continue to grow our footprint by securing new customers and by expanding relationships with existing customers. More than 30 allied nations have now procured our small UAS, and revenue increased nominally in fiscal 2014.

In our mission services business area, the Department of State did not end up contracting for small UAS mission services in fiscal 2014. Their RFP was never released, and they made no public statement on status of the program. Accordingly, we have excluded any DoS services revenue from our fiscal 2015 plan. We continue to expect mission services growth opportunities with other customers as demonstrated by our recent contract with BP for advanced location analytics and geospatial information services.

Moving now to Global Observer, interest from potential customers expanded in fiscal 2014. Our MOU with Lockheed Martin to pursue international opportunities for Global Observer is active and progressing on a schedule of planned phases. In Turkey, we invested in a joint venture to pursue Global Observer among other opportunities in that country. We own 49% of the JV country ALTOY (A-L-T-O-Y) Defense Industry and Aviation, Inc. which is actively engaged with customers on multiple opportunities.

While adoption, timing, and rate remain uncertain, the joint venture demonstrates that interest in Global Observer is serious and has accelerated, and we have increased our resource commitment to these opportunities in response. Interest in the use of unmanned airplane systems in non-military applications grew significantly in fiscal 2014. Notwithstanding local flight prohibitions and other concerns, most customers for commercial applications are interested in small UAS, a category in which we are recognized as a world leader.

We believe that we are well-positioned to support many large customers that will want end-to-end professional solutions that deliver actionable information reliably, much as our military customers want actionable intelligence and operational availability. The recent announcement of our FAA-approved commercial UAS operations for BP in Alaska represents a milestone for AeroVironment and for the industry. Our service solution for BP combines Puma's vantage point and performance capabilities to capture a much richer data set than otherwise available.

We integrate these data sets with other geospatial data using large-scale back-office processing to give our customers unprecedented actionable information. In one data product, we are delivering 3D imagery that is orders of magnitude better than anything available to our customers from satellites. In another, we provide specific information to BP's road grading crews that tell them where to cut and fill, as well as the exact amount of gravel needed for the job.

This information allows the team to achieve significant savings by resolving specific trouble areas instead of focusing on the entire network of 200 miles of gravel roads spanning the North Slope operation. Our ability to process and provide on-site inspection of industrial infrastructure can help reduce costly shutdowns and detect some characteristics only measurable during operation.

We are moving squarely into the information services business, and we are the only FAA-approved provider of this type of solution. The time, rigor and resources we have invested to develop, test, and qualify military small UAS are allowing us to satisfy FAA requirements for reliability and safety certification, and facilitating approval of our systems for commercial operation. If it wasn't clear already, the successful deployment of our information systems solution for BP should demonstrate that we are at the forefront of commercial UAS, and that the comprehensive solution and compelling customer value that we are providing is applicable to large and broad customer sets.

All told, throughout FY14, our team focused effectively on serving our customers' important needs, executed well on our strategic priorities, and delivered solid financial performance. We also materially advanced multiple large, mid-, and long-range growth opportunities. And now I'll turn the call over to Jikun Kim for a more detailed discussion of our financial performance.

Thank you, Tim, and good afternoon, everyone. AeroVironment FY14 Q4 results are as follows. Revenue for the fourth quarter was $73.5 million, an increase of 36%, or $19.4 million over Q4 last year of $54.1 million.

Looking at revenue by segment, UAS revenue was $60 million, an increase of 42% over the prior year. The increase in UAS revenue was largely due to higher product deliveries of $22.4 million driven by higher Puma systems, related spares, and Switchblade systems. This increase was offset by lower customer-funded R&D revenues of $2.8 million and reduced logistics services for small UAS of $1.9 million.

EES revenue was $13.5 million, an increase of 15% from Q4 last year, primarily due to higher hardware deliveries of our industrial electric vehicle charging systems, offset by lower deliveries of our electric vehicle test systems and passenger electric vehicle charging systems.

Turning to gross margin, gross margin in the fourth quarter was $30.1 million, up 70% from the fourth quarter last year of $17.7 million. Gross margin as a percent of revenue was 41% versus 33% in the fourth quarter last year. By segment, UAS gross margin was $25.5 million, up 61% from the fourth quarter last year, primarily due to higher sales volumes. As a percent of revenue, UAS gross margin was 42% compared to 37% in the fourth quarter last year. The increase in gross margin percentage was primarily due to higher volumes generating higher overhead absorption, as well as higher mix of fixed price contracts.

EES gross margin was $4.7 million, up 142% from last year, primarily due to higher sales volumes and favorable product mix. As a percent of revenue, EES gross margin was 35% versus 16% in the fourth quarter last year. Keep in mind, prior year results were impacted by higher inventory reserves on our fast chargers.

SG&A expense for the quarter was $17 million, or 23% of revenue, compared to $143 million, or 26% of revenue in the prior year. The increase was driven primarily by the impairment of Tier 2 vertical take-off and landing related demonstration capital assets as market adoption continues to be delayed.

R&D expense for the quarter was $6.2 million, or 8% of revenue, compared to the prior year amount of $9.4 million, or 17% of revenue. Operating income for the quarter was $6.9 million, or 9% of revenue, compared to an operating loss of $6 million, or negative 11% of revenue. Operating income was higher primarily due to higher sales volumes and lower R&D investments.

Other income for the quarter was $2.6 million compared to the prior year Other income of $6.2 million. Other income in the fourth quarter primarily represents the increase in the unrealized gain of the CybAero convertible notes compared to our third quarter.

The effective tax rate for the quarter was 18.2%, a decrease from the prior year effective tax rate of 269.1%. The variance was primarily driven by higher income and federal R&D tax credits. Net income for the quarter was a $8.1 million, or $0.35 per fully diluted share, compared to a net loss of $0.8 million, or $0.04 loss per share, in the same quarter last year.

On an adjusted basis, which excludes the impact of the CybAero convertible notes, FY14 Q4 EPS would have been $0.27 per fully diluted share. We have provided an EPS reconciliation table in the press release.

Now moving quickly through our FY14 results, revenue for the full year was $251.7 million, up 5% from the prior year period of $240.2 million. By segment, UAS revenue was $208.8 million, up 7% from the prior year. The increase in revenue was largely due to higher product deliveries of $57 million driven by higher Puma systems, related spares, and Switchblade systems. This was offset by lower SUAS logistics services of $33.2 million and lower customer-funded R&D revenues of $9.3 million, as we have transitioned Switchblade to low rate production.

EES revenue was $42.9 million, down 7% from the prior year period, primarily due to decreased product deliveries of our electric vehicle test systems, offset by increased product deliveries of our industrial electric vehicle charging systems and passenger electric vehicle charging systems.

Gross margin for the full year was $93.6 million compared to $92.5 million a year ago. Gross margin as a percent of revenue was 37%, 200 basis points lower than the prior year. By segment, UAS gross margin was $80.8 million, up 2% primarily due to higher sales volumes. EES gross margin was $12.8 million, down 5%, primarily due to lower sales volumes.

SG&A expense for the full year was $55.7 million, or 22% of revenue, compared to the prior year period of $51.5 million, or 21% of revenue. The increase was primarily due to the impairment of the Tier 2-related demo capital assets and Company-wide higher incentive compensation as a result of achieving certain financial performance. R&D expense for the full year was $25.5 million, or 10% of revenue, compared to $37.2 million, or 15% of revenue in the prior year.

Operating income for the full year was $12.4 million, or 5% of revenue, compared to an operating income of $3.8 million, or 2% of revenue last year. Other income for the full year was $1.6 million compared to the prior year Other income of $6.2 million. The Other income represents the change in the fair value of the CybAero convertible notes. The effective tax rate for the full year was 7.9% compared to the effective tax rate for the prior year 3.2%. This increase was primarily due to higher pre-tax income.

Net income for the full year was $13.7 million, or $0.60 per diluted share, compared to a net income of $10.6 million, or $0.47 per diluted share last year. On an adjusted basis, which excludes the impact of the CybAero convertible notes, FY14 EPS would have been $0.56 per share.

Now looking at backlog, funded backlog at the end of the fourth quarter was $65.9 million, up $6.4 million, or 11% from April 30, 2013. Turning to our balance sheet, cash equivalents and investments at the end of the fourth quarter totaled $248.1 million, up $34.7 million from the prior quarter. Positive cash flow was driven primarily by lower working capital needs, higher income, and non-cash impairment expenses.

Turning to receivables, at the end of the fourth quarter, our accounts receivables including unbilled receivables, totaled $42.7 million, down the $8.6 million from the prior quarter. Total days sales outstanding were 52 days compared to the prior quarter of 67 days. Taking a look at inventory, inventories were $50.7 million at the end of the quarter compared to $55.4 million at the end of the prior quarter. Days in inventory were approximately 105 days compared to 118 days at the end of the prior quarter.

Turning to capital expenditures, in the fourth quarter, we invested approximately $1.1 million, or 2% of revenue, in property improvements and capital equipment. We recognized $2.4 million of depreciation in the quarter.

Now I'd like to turn things back to Tim to discuss (inaudible) expectations for our FY15.

Thanks, Jikun. In 2014, we solidified and enhanced our position for continued market leadership and future growth. And now I would like to discuss where we see the business moving this year and beyond.

To frame this discussion for 2015 it may be helpful to think about AV as operating two business models that report one set of financials. The first model produces a market leading and profitable core business with strong growth prospects. Historically, we've invested between 8% to 10% of revenue in internal R&D in addition to up to 10% of revenue generated through customer-funded research. For fiscal 2015, we will need to maintain that full level of investment to support our ongoing core business and be adequately positioned to sustain growth.

The second model produces market-focused innovations targeting value creation and large market opportunities over the mid to long term. The accelerating adoption trends that we are seeing in Tactical Missile Systems, commercial UAS, and Global Observer make a compelling case for increased investments in fiscal 2015 to strengthen our position for these largely pre-revenue key growth opportunities.

These investments will mostly consist of research and development and SG&A, and may largely offset operating profits from our core business in fiscal 2015. We're confident that these additional investments that we are planning for fiscal 2015 will deliver outstanding future returns for stockholders. With that said, let me first address our approach to fiscal 2015 in our core business, and then I will discuss these growth opportunity investments.

In our EES segment, we will focus on maintaining our market leadership in all three business areas and continue to position AV for long-term growth in passenger electric vehicle charging infrastructure. Overall, we expect fiscal 2015 EES revenue to be about flat year-over-year.

In our core UAS business, again, which is primarily our US Department of Defense business, we will continue to focus on current and emerging customer needs and maintaining our leading market share for small UAS. Retrofits and upgrades for small UAS across DoD, and requirements for the new small UAS CPDs for both the Army and the Marines will most likely account for a significant percentage of revenue this year and next. Initial WASP AE procurement under the new Marine Corps CPD could be an early indicator of this demand.

Anticipating and developing upgrades and retrofit solutions for the large installed base of our systems has historically provided high value for our customers and we plan to continue these developments. We also intend to continue investments to expand our DoD solutions beyond small UAS where success in larger UAS programs could drive significant future revenue growth. We expect our overall Department of Defense UAS revenue to be about flat in fiscal 2015 with growth potential beyond.

In Tactical Missile Systems, Switchblade's unique capabilities and operational performance support sustained demand with current customers and we maintain [actively] engagement in our ongoing Switchblade development. We expect Switchblade revenue to grow again in fiscal 2015.

In our international UAS business, we will continue to team with strong partners where a combination of capabilities and relationships can better serve customers and be competitively effective. We expect year-over-year growth in international UAS revenue in fiscal 2015.

And now I would like to share our perspective about upcoming investments in fiscal 2015. Those of you familiar with our investment history know us to be prudent allocators of capital. We know adoption, timing and rates are hard to predict, and investment levels accelerate as we move from innovation to production scaling. We know what it takes to appropriately time investments to preserve our first-mover advantage during market adoption, while effectively managing scarce resources.

Our objective is to avoid investing too much, too early, and too little, too late which would risk failure to secure adoption or failure to secure sustainable market leadership when adoption accelerates. We think there's a critical window of time before full adoption and business scaling when targeted incremental investments can support initial market adoption and better position us to success before market acceleration begins.

Accelerating customer adoption interest has brought us into that window now with increased investment required to maintain and build on our competitive advantage in Tactical Missile Systems, commercial UAS, and Global Observer business opportunities. It's important to understand the different milestones, investment requirements, risks and timelines characterize each of these growth opportunities.

Meaningful adoption in one opportunity may not happen at the same time as another, but the timing of investments will overlap. Throughout this period, we will use a disciplined process to meter and gate our investments. Many of these investment gates will be based on the timing of lead customer actions and broader market adoption conditions.

Investments in our fiscal 2015 Tactical Missile Systems business area will be focused on two areas. First, addressing the emerging requirements for a probable LMAMS program of record which requires investment this year to position us to win the program for this enduring requirement.

Second, developing new Switchblade variance to address new applications requested from multiple customers. LMAMS and other variations of smart missile systems represent a potentially large new market segment emerging as a direct result of the successful operation of our innovative Switchblade solution. Our Tactical Missile Systems business area is well-positioned for this opportunity with many years of successful Switchblade development.

Investment in commercial UAS applications will also be focused in two areas. First, accelerating and broadening our engagement and positioning with lead adopters in multiple vertical markets. And, second, developing optimized solutions that will include UAS information services, infrastructure, and professional services.

Commercial small UAS technology adoption can drive a large emerging global market with multiple applications in multiple verticals. Timing and rate of commercial adoption is fluid, but our next objective is to build on our first-mover advantage to be the first to get UAS-enabled commercial solutions right for large customers in large markets globally.

Investments in Global Observer will focus on accelerated international business development, and the application engineering and production readiness necessary to support the expected customer requirements for systems solutions and for delivery timing. The expressed interest and engagement from potential Global Observer customers and partners has met our required level of validation to trigger increased investment in Global Observer. With market activity accelerating globally, atmospheric satellites look increasingly like they may be nearing market adoption and associated procurement.

The aggregate growth potential of Switchblade, commercial UAS and Global Observer is very large and increasingly apparent to others, as well as to us. AeroVironment is well-positioned in each of these three emerging markets based on more than 20 years of experience in market leadership, key investments in R&D and core technology, and early success with lead customers. Our investments in the year ahead will support an increased probability of our success in initial customer adoption.

In fiscal 2015, we plan to operate our core business with our normal business model and with typical allocations for R&D and SG&A. Our incremental investments in Tactical Missile Systems, commercial UAS and Global Observer will mostly be in the form of closely managed and gated IR&D, bid and proposal, and business development expenses. We're confident that we are making the right investments today to create compelling and sustainable long-term stockholder value. The potential return on investment from each of these three opportunities I have detailed is tremendous relative to any alternatives for our capital.

With this as a background, let's now discuss fiscal 2015 guidance beginning with our core business. In fiscal 2015 revenue, our plan is skewed to the back end of the year as usual with 60% of total revenue in the second half of the year. We expect our core operating business to grow profitably in fiscal 2015 with gross margin slightly lower relative to last year as a function of revenue mix. We expect higher operating profit percentage from the core business in fiscal 2015 because of the initiatives we successfully completed in FY14 to increase profitability. However, when we factor in the investments in Tactical Missile Systems, commercial UAS, and Global Observer that will increase operating expenses, we may largely offset operating profit from our core business.

For that reason, we will guide on revenue in gross profit this year and we will update you quarterly on progress and status. As guidance for fiscal 2015, we expect overall FY15 revenue to be $250 million to $270 million. We expect gross profit to be 34.5% to 37.5%, respectively, at those revenue levels.

Key measures for our core business performance will be revenue, gross margin, operating budgets, and market share. We will measure our investments in growth opportunities by effective positioning, adoption guideposts, and project performance metrics. Accordingly, we will structure our employee bonus plan metrics to reward success in these areas.

We've covered a lot of ground today and we will give you time for questions shortly. We expect our investments this year will create significantly greater value for our Company and our stockholders in the years ahead. Many of you are familiar with the breakthrough nature of our Company and our track record for disciplined investment and success in managing disruptive innovations.

These investments we've outlined today should signal an important inflection point in the cultivation of our large long-term growth opportunities. We believe we are now entering a new and even more exciting phase of the AeroVironment story, and we look forward to updating you as our story continues to unfold. Thank you for your interest. And now Jikun and I will take your questions.

Thank you, gentlemen. (Operator Instructions)

Patrick McCarthy from FBR Capital.

Hi, good afternoon, guys, and thank you very much for taking my question. My first question is on the R&D and business development that you spoke about, and, Tim, thanks for the details. I guess, as you walk through each of the three areas, it seems like it's relatively balanced between business development and R&D. Is that actually how the math works, as well, or is it more geared towards R&D versus business development?

Patrick, it's much more geared to R&D than business development, but as you recognized in my comments, there is a significant amount of business development, but the percentage we expect to be largely R&D.

And is there a way to give us a sense as to how much of it is in tactical versus commercial UAS versus geo?

Well, we've got -- each one of these three areas is a very, very large opportunity, and each is independent of the other. So they are going to -- we expect them to move at different rates, and we expect to adapt our investments midway based on how we see the market adoption signals evolving and how we see lead customers reacting.

So I think it's going to be -- there is going to be too many moving parts to try to get specific about how much in each particular area at this point. We do expect to be able to update you on our progress and outcomes quarterly as we move along, however.

Thank you. Andrea James from Dougherty and Co.

Hi, thanks for taking my questions, and thanks for the thorough breakdown of what you're going to be investing in next year. You had previously talked about Global Observer as maybe contributing in the back half of a three- to five-year timeframe. Am I just detecting that you're thinking it could bear fruit a little bit sooner, or you've just gotten some really positive indicators in the market about that program?

I think it's more the latter, Andrea. I think the general timing that we've indicated in that motional chart that we have got in our investor deck is probably still largely intact. In the areas of Global Observer, Tactical Missile Systems, and commercial UAS, we are clearly seeing a higher level of activity with lead customers recently.

And I think that strongly suggest to us that we're on track in all three of those areas, and that if anything the timing that we had anticipated, and previously indicated in those areas, is increasingly solid. We probably are seeing some slide in timing of what we had expected mission services adoption to be that would somewhat offset the balance of those six.

Makes sense. And then with this BP contract in Alaska, it just sounds like you're providing so much more than the aerial vehicle and the payload. And so, I guess, my question is, are you feeding data into some sort of BP software or are you developing information systems that are proprietary to AeroVironment?

We are generating the data, we are processing and analyzing the data, and we're providing actionable information as a service under our contract relationship with BP. So that's the long answer, I guess. The short answer is we're doing that process within the service that we are providing. That's a combination of organic work and partnership relationships that we have and will continue to develop in this business area.

Peter Arment from Sterne Agee.

Hi, guys. Good afternoon, Tim and Jikun. Tim, in the past, you've given us a little bit of color on the funding buckets that are still available to you. With $66 million in backlog, can you kind of give us what you still see on current visibility without -- just in case we have to go into another computing resolution at the end of this year, et cetera? What is currently, in terms of visibility of what is funded, is still left on some of the key programs?

Sure, Peter. Let me try to take a shot at that. A couple things. At year-end, we had $65.9 million of funded backlog. At this point in time, we believe 95% of that will be [calendarized] into FY15 as revenue, so that's about $63 million.

As Tim alluded to, we also booked $76 million of orders, from backlog orders, quarter-to-date, various SUAS orders. And then, if you want to hold EES revenue flat relative to last year, taking out all the bookings and backlog that they have would be an additional $28 million. And then finally, the last increment of the GFY14, which is about $7 million that we have not booked at this point in time. That adds up to $174 million, or about 67% at midpoint of revenue visibility.

Okay. That's very helpful. And then, Tim, you did mention also on the EES, that there was kind of involving subscription model. Could you give us a little more color on that? I'm interested in hearing how that is rolling out?

Sure, Peter. That was in reference to the network of charging systems that we have installed along the I-5 freeway through Oregon and Washington in cooperation with the transportation departments of those states. When we initially installed those, we made them openly available, or free of charge to join and acquire subscriptions there or memberships. And recently, at the end of last year, we converted that to a paying subscription process.

It's continued -- the operational availability of that system has become quite robust. We get very positive feedback from our users and we have a growing number of paying subscribers that are now using those charge docks. There's a combination of DC fast chargers and 240 volt Level 2 chargers at each of those sites and so they are used by a number of commuters.

Thank you. Tyler Hojo from Sidoti & Company.

Hi, thanks for taking the question. I'd like to expand on EES a little bit. When you talk about kind of a flat growth expectation, or flat revenue expectation for fiscal 2015, what are the puts and takes? I'm assuming that industrial charging is up. It sounds like TurboCord should be somewhat of a driver. What's the offset?

Well, Tyler, you're correct, at least you're in agreement with us in terms of your assessment that industrial PosiCharge solutions should grow. We also believe we'll continue to see increasing adoption of TurboCord. In general, we think our consumer solutions for Level 1 and Level 2 charging will continue to grow as we expect adoption of electric vehicles to grow.

We're backing off on the focus we've had -- the level of focus we've had on our fast charging going forward into this year, so we expect that revenue -- sales revenue of those new systems would be lower. And we also expect relatively low sales of our electric vehicle test equipment. A lot of the customers that buy that equipment basically built excess capacity during the stimulus funding period, and I think we're working that off now. That's kind of the plus/minus contribution that ends up with an expectation of about flat revenue.

That's very helpful. Thanks for that.

And just on a different topic, I was wondering if you could perhaps provide an update in regards to CybAero? I guess you have been a seller, or a slow seller of your investment there. Could you perhaps give us an update regarding your strategic relationship? Is that still ongoing?

We have an ongoing relationship with CybAero. As you may have noticed, they are having continued success in marketing their Tier 2 helicopter on a global basis, and we're delighted to see that success. We originally acquired two convertible notes when we established this -- our relationship with them. And then last year we converted one of those notes to equity.

So I don't know that we want to go into any more detail on that relationship right now. I did mention that we have taken out Department of State revenue expectations from our fiscal 2015 plan, and all things considered that was expected to be the anchor tenant in that services business that would utilize Tier 2 helicopters, and probably as I also suggested earlier that market adoption in our services business is probably a little pushed out.

Thank you. Michael Ciarmoli from KeyBanc Capital.

Good evening, guys, thanks for taking my questions. Maybe, Tim, just to follow up on the R&D investments this year. I'm just trying to get a sense if the timing toward some of the revenue growth in that three- to five-year window hasn't changed, how should we be thinking about this period of sort of zero earnings or operating income? Is this something that spills over into 2016?

Does it gradually normalize? Just from a modeling perspective, how long should we think about this period of investment lasting before we see some revenue and earnings contribution?

The principal focus, Mike, is this year fiscal 2015. As I indicated, I think there's a reasonable amount of variation in how much of that investment continues in each one of those areas that is a function of the ongoing adoption signals from each of those three large independent markets, opportunities. And so we'll adapt as we see customer action in response.

It's possible that some of those investments could slide into 2016. Hard to predict at this point. I think if they did, it would be a good sign. It would indicate that that's continuing to accelerate. But I think about it more in terms of this is localized.

You may recall that back in fiscal 2011, after we began the year, we told you that we were going to increase our R&D investments by about 2% of revenue in the second probably three quarters of the year. That was a one-year investment that mostly was earmarked for Switchblade, and luckily enough, we've managed to increase Switchblade revenue by a factor of 10 since then, and I think it was largely accelerated by that incremental investment we did in that one fiscal year.

Okay. That's helpful. And then, just a last one, what sort of probability are you guys putting around these investments? LMAMS, I would imagine, I know there's a couple of well-capitalized competitors with good products. It sounds like some of these opportunities aren't necessarily slam dunks. Internally, how are you guys handicapping win rates or the ROIs here on this investment?

I don't think anything we take on is particularly easy. And by definition, when we get committed to bringing an innovative solution to customer sets, we're targeting what we believe are very large market opportunities. So for sure, to the degree that is successful, we're going to either displace large entrenched incumbents or we are going to attract large competitors. And that has been the case in every one of our historic efforts.

You know that we've competed head-up with some of the largest aerospace companies in the world for the last decade in the small UAS area, and, again, been lucky enough to win every one of those programs of record with the Department of Defense. In each of these large new markets that we've talked about, including the Tactical Missile Systems area that you specifically addressed, we have a strong early position, and much like our initial work in small UAS, even though we have attracted in both areas lots of competition from very capable, and in many cases, very much larger competitors than ourselves, historically, we've been able to maintain that first-mover advantage and achieved the leading market share and maintained that market share.

So our handicapping is based on our history and our current position. We're optimistic and I think we operate with a reasonable and appropriate amount of paranoia in every one of these areas. So we run fast and we stay focused on customers.

Thank you. Brian Ruttenbur from CRT Capital.

Thank you very much. A couple quick questions. In terms of funding for the DoD part of your business for UAS, is it still primarily OCO, and if not, what is OCO as a percentage?

We've been asked that question in the past, and it's really difficult to decipher that information from the budgetary documents. A lot of these contract that we get, the [akron] numbers are not very clear because these are long-term IDIQs, and so it's been difficult for us to decipher. However, having said that, in our Q1 quarter-to-date bookings of $76 million, most of that did look like it came from the GFY14 funds in some fashion.

Okay. Very good. And just my second question, trying to understand the breakdown of profitability. I assume in the first half of the year in fiscal 2015 you'll be somewhat unprofitable, and then in the second half of the year you will go to more profitability, and make you break-even on an earnings per share basis. Is that the kind of guidance you are giving on the year?

This is a question as to fiscal 2015, correct, Brian?

That's correct. For fiscal 2015, I apologize, so first half of the year kind of unprofitable, second half of the year profitable, and a wash on the year?

No, I don't think that's the intent of our communication. I think we've got these three large emerging opportunities. We're responding to the very clear and accelerating customer activity in each of those.

We're going to accelerate investments in each of those areas throughout the year, and while we can't be sure of what that total investment will be, we know it could reach throughout the total year about the amount of operating profit that we would otherwise produce in the ongoing growing profitable business. So I think at this point, that's why we think it's too uncertain for us to put a specific number on it and too uncertain for us to put a profit guidance number out.

Thank you. Howard Rubel from Jefferies.

Thank you very much. Tim, in your outlook you talked about margins at the low end, which is really at a level, gross margins that we've really not seen. Could you talk about -- you alluded to mix as part of that. Can you elaborate a little bit on why is that the case, and then maybe talk about what your continuing to do to take costs out in advance of pricing pressure?

Howard, I can try to help you with the first portion in terms of the gross profit percentage rate. In FY15, we have two impacts. One is, we will have a higher mix of cost plus business in FY15. Some of the growth areas that Tim identified had to do with the [crad] types of contracts that we're looking for in the future, as well as we are going to have a mix change meaning higher mix of newer products that are going into production like Switchblade, which historically has had some margin pressure for us as we transition it into production.

And then maybe to follow up on that, and this sort of ties a couple things together. You talked about [crad] and Tim talks about customer interest and usually in the world of aerospace you usually get a little bit of customer money to help you along. So in fact, have you gotten some contracts from some of your customers and is that sort of the underpinning for your optimism and confidence going forward with the higher levels of R&D?

Within the defense portion of our business, Howard, I agree with your assessment on the attractiveness and the expectation that as we move new technologies along we would want to see customer adoption in the form of some contractual support. We've seen some of that to date. We expect more of that as we move along.

And to some degree those kinds of activities would be customer behaviors that would gate some of our ongoing investments in that defense area. As to the second part of your first question, yes, we are continuing to focus on our cost structure of our products, and we expect to continue to pay a lot of attention to product cost, both as a function of how we source and cost reduction design opportunities.

Thank you, gentlemen, very much.

Thank you. Brian Gesuale from Raymond James.

Hey, guys, thanks for taking my question. Wondering if you could give us a little bit of a sense, it was helpful on the revenue breakdown throughout the year, Tim. I wondered if you can give us a sense on how these expenses that your going to put on the business filter through the year? Given that we are mostly through Q1, are we going to see those in Q1 or are those going to be principally Q2, Q3 and Q4, or really, how should we look at the timing of that?

I think we'll see them mostly through Q2, Q3, and Q4, Howard -- or, Brian, excuse me. So I think you have that about right. I did mention that the revenue is as usual skewed to the second half, with about we think of 60% in the second half. So maybe as we build up the investment in these areas it will to some degree match that growing revenue stream.

Okay, great. And then, with the revenue outlook and 60% in the back half of the year as troops are coming home in pretty significant batches, do you feel that -- do you have concern with those orders or what visibility do you have in that remaining one-third of the business to get you there in the back half of the year?

I think we're as confident as we ever can be in our forward-looking expectations of orders and bookings, Brian. It may surprise you to see this level of bookings even quarter-to-date that already exceeds the address of the identifiable small UAS funding in the budget language. I don't see a material difference in the quality of our confidence in our outlooks right now then we've had last year.

Thank you. Josephine Millward from Benchmark

Good afternoon. Hi, Tim.

Good afternoon, Josephine.

I was hoping you or Jikun could walk us through how you get to a flat small UAS business in 2015 since the Army has pretty much reached its acquisition objective? And I believe you've upgraded most of the Raven and Puma, I believe 2015 request for small UAS, the funding level is about $13 million. So how do you get to the level, how do you maintain this business flat?

Probably a number of pieces of that. One is, we are looking at small UAS and other DoD contracts. So a lot of that is customer-funded research, and that would be outside of the small UAS market, per se. A second piece, I think, is the, well, let me just leave it at that.

So, Tim, the customer-funded research, is it for the next-generation small UAS, and that's offsetting some of the procurement decreases we're seeing?

No. As I noted earlier in the comments, we have been increasingly focused on other UAS applications that go beyond the hand-launch small UAS category. And we have been successful with a number of customers in initiating opportunities in that area, some of which are accompanied with customer-funded development contracts.

Thank you. Patrick McCarthy from FBR Capital.

Hi, thank you very much for taking my follow-up. I'm sure you have told us in the past, but I can't find the note. Could you talk about how the CybAero is valued? Is that a market-based valuation?

Yes, so the convertible notes has the conversion feature which would be an option, if you will. We used a binomial distribution model for the valuation of that, but the fundamental value of the option is based on the stock price which is clearly observable in the market.

Perfect. And then, just a quick follow-up. You used some cash this year, it sounds like, but you are cash rich. Any thoughts on capital allocation?

Well, I think the use of this -- to the degree we're using cash to deploy these incremental investments is, we think, and management and the Board believes are the highest and best use of the capital right now. Long term, we still see the adoption of these large growth areas as driving significant investment at the time of adoption and when we need to scale the business to track what we expect to be very large and rapidly growing demand.

So the return on those investments, we continue to believe, to be far greater than any other use of our capital and that's where our current focus is at this point in time, Patrick.

Thank you. Andrea James from Dougherty & Co.

Thanks for taking my two here. So to piggyback on Josephine's question a little bit. If you do look at your quarter-to-date bookings, as well as your guidance on FY15 with the defense revenue, it does kind of feel like the Defense Department is pulling money out of nowhere to fund your programs. And so, I guess, my question is, are these programs in the classified budget or are they just too small individually to appear in the budget documents that are publicly available?

Andrea, you probably recall that historically our funding and the contracts we actually receive in any given year from DoD in our small UAS area have only had about 30% of those actual amounts have been identifiable in the budget before we started the year. And so that's always been the case, and I don't see that changing a lot right now.

Okay. Thank you for that. Can you give me the customer-funded R&D number in the quarter?

Actuals you are talking about?

Yes, the actual, you gave the change, but I just want to make sure we have it.

Sure, not a problem. $6.5 million.

So you're expecting that to scale up quite a bit next year you are thinking?

Correct.

Okay. And then one more thing, you didn't mention the Airbus Helicopter partnership. Should we just put that in the same bucket as the State Department contract as maybe being far out in the future?

I think about it differently than the State Department contract but, I guess, two things here. One is, that even though we are a short cycle business, we think that we're short cycled because we have a relatively short lead time between when we get orders and when we deliver hardware. But if we move to the development of business opportunities, especially business opportunities with international implications, those timelines for us are very often quite long cycle.

So I wouldn't expect short-term results necessarily from these business development relationships, especially when we get beyond the borders. Having said that, the Eurocopter organization is going through some changes. They changed their name, they have new leadership. And that may affect decision-making on timelines as we move forward on that particular deal.

Thank you. Michael Ciarmoli from KeyBanc Capital.

Thanks for taking the follow-up, guys. Just two quick ones. Can you elaborate, maybe, Tim, what sort of role Lockheed is playing in the Global Observer? Are they contributing investment, as well? If you could walk us through that dynamic.

And then you mentioned the $76 million of orders now here quarter-to-date a couple times. Would you be willing to parse out in terms of either product or what is from the DoD, what's from international customers, just kind of help us out with that mix?

Yes, sure. On the second part of the question, Mike, most of those orders this quarter are from DoD and they are small UAS associated. The S-2, the Lockheed Martin collaboration on Global Observer, I mentioned we're perceiving on schedule with planned phases.

A major piece of what Lockheed brings to this joint endeavor is their mission systems capabilities. Not only their payload capabilities, but very large national scale simulation capabilities and a broad, well-established global footprint. All very complementary to our Global Observer platform capabilities, and I think bringing a lot to multiple customer opportunities.

Got it. That's helpful. Thank you.

Thank you. I'm showing no further questions at this time. I would like to hand the conference back over to Mr. Steven Gitlin for closing remarks.

Thanks, Sayeed, and thank you 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.avinc.com. We look forward to speaking with you soon following next quarter's results. Good day.

Thank you. And, ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.