AeroVironment Inc (AVAV) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the AeroVironment Incorporated first-quarter FY15 earnings call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after management's remarks. As a reminder, this conference is being recorded for replay purposes.

With us today from the Company is the Chairman and Chief Executive Officer, Mr. Tim Conver; Chief Financial Officer, Mr. Jikun Kim; and Vice President of Investor Relations, Mr. Steven Gitlin.

Now, at this time, I would like to turn the conference over to Mr. Gitlin. Please go ahead, sir.

Thank you, Eric. 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, September 3, 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 now begin with remarks from Tim Conver. Tim?

Thank you, Steve. Welcome to our first-quarter FY15 conference call. Less than two months have passed since our fourth-quarter earnings call where we outlined our plans for FY15, and we are pleased to report that these initiatives are on track.

On this call, I will summarize our Q1 highlights and review the significant progress we're making towards these FY15 financial and operational goals. I'll then provide an update of our FY15 investment plan, which is designed to position AV for long-term growth through strategic investments in large emerging market opportunities. Following these remarks, Jikun will provide financial details before we take your questions.

During the first quarter, our team delivered results that met and exceeded our expectations. Revenue for the quarter was about $52 million, and gross profit was about $14 million, up 18% and 12% respectively year over year. Cash from operations was $14 million. Funded backlog increased by 25% over last year, to $82 million.

$45 million of the $68 million bookings in the first quarter were Army orders for spares and Raven upgrades. Strong bookings are continuing with the additional $52 million booked in the second quarter to date. This backlog gives us the highest visibility of revenue in recent years at 80% of the midpoint of guidance.

Small unmanned aircraft systems, or small UAS, are now standard requirements for equipping ground forces throughout the Department of Defense, and we expect this capacity will continue to be a priority. At AV, we have built and maintained market leadership by anticipating and responding to market needs more effectively than others to develop unique value for customers.

For example, both the Army and the Marine Corps recently announced their selection for their next generation of small UAS to be a family of systems. The future requirements defined by these services are small UAS solutions previously anticipated and developed by AV.

The Marine Corps' new family of system requirement is an important long-term program for both Puma AE and WASP AE. We believe this will be the largest opportunity for WASP AE since we introduced the significant capability upgrade in 2012, and it's a powerful endorsement after extensive Marine Corps evaluation and field use.

The Army's strong order flow for small UAS reflects their ongoing priority on upgrading and maintaining their large Raven and Puma fleet for optimal performance and operational readiness. The Army has yet to begun acquisition against their recent announced family of systems CPD for small unmanned airplane systems, which includes Raven, Puma, and a micro UAS to be named later. Overall, our order flow continues to far exceed identified line item funding of the defense budget, and this is consistent with what we have seen historically.

In efficient energy systems, our recent new product launch of TurboCord continues to delight customers and grow in sales, quarter over quarter.

In our unmanned aircraft systems, we continue to leverage our innovative technology solutions as we pursue additional opportunities for growth. We believe success with larger-sized longer endurance UAS can significantly expand the percent of the defense budget that we compete for, and we will continue to advance these initiatives.

Turning to our tactical missile systems business, during Q1, we completed delivery of the full-up rounds for Switchblade that were contracted for in FY14. Our ongoing Switchblade developments, its operational performance, and customer feedback continue to be positive, and we expect continued growth from this innovative technologies solutions.

In innovative energy -- in efficient energy systems, our recent new product launch of TurboCord continues to delight customers and grow in sales quarter over quarter. Online sales have rapidly become our customers' preferred channel for acquiring electric vehicle charging solutions. We now have deployed nearly 20,000, 240-volt electric vehicle charging products in North America, and we're seeing continued signs of strength in the demand for our industrial PosiCharge, while our EV test systems business continues to look about flat year over year.

In last quarter's conference call, I outlined our plans to accelerate investments in FY15 to position AV for three large growth opportunities in response to increased customer interest and adoption. These investments are in commercial UAS, specifically for development of commercial solutions and positioning in multiple large vertical markets.

In Tactical Missile Systems, specifically for development of Switchblade variants, and our solution for the expected Army program of record. And, in Global Observer, here, specifically for business development and production readiness. These investments will be gated and controlled as we progress through FY15.

Late in Q1, we began initiating these investments and I'd like to provide you an update on our initial progress. Commercial applications for unmanned airplane systems represented emerging global market with multi billion-dollar potential. In fact, the Association of Unmanned Vehicle Systems International published a report last year that calculated total economic impact of unmanned airplane system integration in the United States alone, at $82 billion over 10 years.

We have anticipated this market opportunity for years and have sustained majored investments over time, with the strategic intent of preparing for the right commercial solutions at the right time. The development of our turnkey information service for BP is a good example of how these early investments can help better position AV to lead, as these potentially large markets move closer to adoption.

The major milestone of AV deploying the first and only FAA compliant commercial UAS services over United States' soil was no accident. The right solution required anticipating and solving for FAA certification requirements, the payloads and data analysis capability to deliver the information industry needs to make more efficient and more timely decisions, and the business model that qualifies as a tier-one supplier in large industries. The certification, product development, and data analysis we invested in long beforehand to understand and solve for the complex regulations and important customer needs, each proved to be essential in getting the integrated information solution right for the success that we are delivering today in Prudhoe Bay.

This capability now presents a unique solution that we can extend more broadly and that will help us lead the eventual adoption through the oil and gas industry. Remember, we have always provided solutions that deliver better information that empowers our customers to make better decisions sooner. In this case, we are doing it as a service.

During Q1, we increased our commercial UAS business development investments to position our business model with customers in additional major industries that we believe can benefit from the use of small UAS. We also accelerated our research and development investments in new UAS platforms, payloads, and industry-specific solutions.

In Tactical Missile Systems, we can size the opportunity we are investing for by considering that the US Army received $1.7 billion in appropriations for missile procurement and support in government FY14, while the US Air Force received $4.3 billion. We intend to address this multi-billion dollar market with smarter, thus expensive, smaller footprint solutions that can address the important objective of eliminating collateral damage better than other technologies. We believe our initial success with Switchblade positions us very well for large and broader applications.

During Q1, we initiated investment in the research and development of Switchblade variance based on customer requests for new solutions that incorporate many of Switchblade's unique capabilities. Each of these variants will have customer-funded support for demonstration this year.

As for Global Observer, we conceived it as a lower cost, more flexible and persistent atmospheric satellites system. Widespread government needs for persistent ISR and communication, as well as emerging applications for broadband internet, remote sensing and other valuable missions, represent a potentially large opportunity for this new class of stratospheric platform. Our memorandum of understanding with Lockheed Martin to pursue international opportunities for Global Observer is progressing on a schedule of planned phases.

We also continued to invest in our joint venture in Turkey. During this quarter, we entered into a memorandum of understanding with Turkey's largest electronics and payload supplier, to expand the systems solution for that country and others.

Predicting the timing and the rate of adoption of innovations is always difficult, but we see clear signs of large customer interest in each of these three large growth opportunities now. We're convinced that investing now to put AeroVironment in the strongest position to lead will optimize shareholder returns when adoption accelerates.

I'd like to now turn the call over to Jikun to provide additional financial details on our first-quarter performance.

Thank you, Tim, and good afternoon, everyone. AeroVironment FY15 Q1 results are as follows. Revenue for the first quarter was $51.9 million, an increase of 18%, or $7.7 million, over Q1 last year of $44.1 million.

Looking at revenues by segment, UAS revenue was $41.2 million, an increase of 17% over the prior year. The increase in UAS revenue was largely due to higher product deliveries of $13.4 million, driven by higher deliveries of Switchblade systems and Raven gimbaled. These increases were offset by lower customer-funded R&D revenues of $6 million, driven by a decline in small UAS-related [crad] activity, as well as a lack of Global Observer contract termination cost reimbursement that we recognized a year ago.

Logistic and repair services for small UAS also declined by $1.5 million. EES revenue was $10.7 million, an increase of 20% from Q1 last year, primarily due to higher hardware deliveries over industrial electric vehicle charging systems, offset by lower deliveries of our passenger electric vehicle charging systems.

Turning to gross margin, gross margin in the first quarter was $14.1 million, up 12% from Q1 last year of $12.5 million. Gross margin as a percent of revenue was 27% versus 28% in the first quarter last year.

By segment, UAS gross margin was $10.2 million, down 4% from the first quarter last year. This decrease reflects higher cost and service-related contracts in the current quarter. As a percent of revenue, UAS gross margin was 25% compared to 30% in the first quarter last year.

Higher prior-year Q1 gross profit percentages include the impact of the Global Observer termination settlement. EES gross margin was $3.9 million, up 101% from Q1 last year, primarily due to higher sales volumes and favorable product mix.

As a percent of revenue, EES gross margin was 36% versus 22% of the first quarter last year. Lower prior-year Q1 gross profit percentages include the impact of severance charges we recognized in that quarter.

SG&A expense for the quarter was $13.4 million, or 26% of the revenue, compared to $12.5 million, or 23% of revenue in the prior year. The increase was primarily driven by proposal and business development activities. R&D expense for the quarter was $7.1 million, or 14% of revenues compared to the prior-year amount of $7.2 million, or 16% of revenue.

Operating loss for the quarter was $6.5 million or negative 12% of the revenue, compared to the prior-year loss of $7.1 million, or negative 16% of revenue. Operating loss was lower, primarily due to higher sales volumes, partially offset by higher SG&A investments.

Other income for the quarter was $0.8 million compared to the prior-year expense of $3.2 million. The other income for the first quarter includes the increase in the unrealized gain of the [si vero] convertible notes.

The effective tax rate for the quarter was 36.3%, an increase from the prior-year effective tax benefit rate of 30%. This increase was driven by lower R&D tax credits.

Net income for the quarter was $3.6 million, or a $0.16 loss per share compared to a loss of $7.2 million, or $0.32 loss per share in the same quarter last year. On an adjusted basis, which excludes the impact of the [si vero] convertible notes, FY15 Q1 EPS would have been $0.18 loss per share, compared to the $0.21 loss per share in the prior year. We have provided an EPS reconciliation table in the press release.

Looking at backlog, funded backlog at the end of the quarter was $82 million, up $16.1 million, or 25% from April 30, 2014.

Turning to our balance sheet, cash equivalents and investments at the end of the quarter totaled $264.2 million, up $16.1 million from the prior quarter. The positive cash flow was driven primarily by lower working capital needs.

Turning to receivables, at the end of the first quarter, our accounts receivables, including unbilled receivables, totaled $30.9 million, down $11.8 million from the prior quarter. Total days sales outstanding were 54 days compared to 52 days at the end of the prior quarter.

Taking a look at inventory, inventories that $46.4 million at the end of the quarter, compared to $50.7 million at the end of the prior quarter. Days in inventory were approximately 111 days, compared to 105 days at the end of the prior quarter.

Turning to capital expenditures, in the quarter, we had limited investments in property improvements and capital equipment. Depreciation in the quarter was $2.2 million.

Now, an update to our FY15 visibility: as of today, Q1 FY15 actual revenues of $52 million, Q1 ending backlog that we can execute in FY15 of $79 million, other orders that if we have booked to date in Q2 of $52 million, and incremental orders to hold EES revenue flat year over year of 26, would size up to $209 million, or 80% at midpoint of guidance.

Now, I'd like to turn things back to Tim to discuss AV's expectations for the balance of our FY15.

Thanks, Jikun. Looking ahead, we are on track to achieve our FY15 financial guidance and expect to generate $250 million to $270 million in revenue and 34.5% to 37.5% in gross margin.

We still expect about 60% of our revenue in the second half of the year, similar to last year's experience. That would imply Q2 revenues about the same as Q1. Strong bookings year to date and a good pipeline of future orders suggest a growing backlog to support our plan for higher second-half revenues.

Our core business in small UAS Switchblade and efficient energy systems remained solid, with sustained market leadership and demand. The customer adoption interest that led us to accelerate the investments I outlined earlier, remains active.

Looking ahead, we will continue to meter and control these investments throughout the year, based on results, customer activity, and the market adoption timing indicators. If we deploy all of the potential R&D and SG&A investments in FY15 that we anticipate could maximize future growth and return on investment potential, we could largely offset the operating profit generated from our core business, resulting in low or no profit for the year. For this reason we have provided FY15 guidance on gross profit rather than earnings per share.

Our team continues to execute effectively in our core business areas, while moving our new capabilities forward to market adoption and expansion. Accelerating these initiatives would not be possible without the exceptional talent and dedication of the entire AeroVironment team.

Thank you for your time, and with that, we would like to open the call for questions.

(Operator Instructions)

Patrick McCarthy of FBR Capital Market.

Hey, good afternoon and thank you very much for taking my questions. My first question is, I'm wondering whether you feel comfortable with where you are right now in your breakeven rates, or are you contemplating anymore belt-tightening like we saw last year?

Our breakeven rate, if you remember last year, we had draw from 60 to 65, to 50 to 55. Obviously, our breakeven is breakeven at the operating profitability level. Given the fact that this year we are investing -- increasing our investments in R&D and G&A, that breakeven level is increasing.

And we aren't anticipating any belt-tightening to the extent that we had last year, Patrick. Although, we obviously continue to focus on optimizing our processes and optimizing our product cost as we move forward in the business.

Okay, great. I was also wondering if you could take a moment to put some more context around your comments on Switchblade. Are you done with all the orders that you've received? I wasn't sure if I understood that correctly.

I was referring to all up round. You may recall that last year we transitioned from funding on Switchblade that had previously been primarily associated with development and testing and validation, to include ongoing development, as well as the production and delivery of all up rounds and testing rounds.

That deliverable hardware element of last year's purchase orders were completed. The delivery was completed in the first quarter of this year. We have ongoing contracts for continued development, support, and testing.

Okay. Great. Thanks for the clarification.

Michael Ciarmoli from KeyBanc Capital Market.

Hey, good afternoon, guys. Thanks for taking my questions. Tim, you elaborated on -- or you discussed on the spending required to expand and penetrate into new industries on the commercial side. Can you give us a sense of what industries, what type of payloads, what solutions you are potentially targeting, or some broader context there?

I can start with going back to what we have discussed on the solution we are currently delivering on the North Slope with BP. That's based on payloads that include both daylight, nighttime, video, LiDARs, and we are generating information that -- in large volumes, that we process through large back-office capabilities, in order to extract from that large database the actionable information that the customers need to optimize their enterprise.

We will expand the platform and payload and processing capabilities, or modify them as appropriate, for different industries and the specific needs that large customers in those industries have. Does that help?

Can you give us a sense of what other industries?

Well, the general areas that I think are publicly acknowledged include everything from oil and gas to agriculture, to mining, to public safety, border patrol, and environmental applications. And, considerably more beyond that. So, we are looking at this sequentially in areas where we think these technologies can deliver the highest value to large customers and industries.

Okay. Fair enough. Shifting gears to the defense side, we've obviously got -- there's more talk, continuing resolution, sequestration. We've got the midterm elections. Are you guys seeing anything changing or hearing anything from your customers out there, regarding the availability of funding or expectations for the remainder of this fiscal year, early FY15?

We are coming off of a period of significant uncertainty on funding levels from our customer base. Clearly, relative to a year ago, I think all of our customers have a higher level of confidence in their near-term funding expectations. I don't think they are back to the position that they were in a few years before that.

Nevertheless, we see strong recent bookings. Our pipeline looks good. The ongoing spares and upgrade demand for the existing fleets continues to be an important revenue source. And as I mentioned earlier, both the Marine Corps and the Army have now announced their next-generation requirements for small UAS, and luckily enough, those incorporate solutions that we've developed.

Andrea James of Dougherty & Company.

This is Rob Bennett on for Andrea James. Thanks for taking my question. Will there be any upside from troops going to Baghdad?

Could you repeat the question, please, Rob?

Yes, will there be any upside for troops going to Baghdad in Iraq?

Rob, I think you are aware that our solutions go where US troops go. At this point, now, where it goes to 30 other nations. I think what I can say is that we are ready to support all of our customer needs whenever and wherever they are.

Okay. Can you go through what investments you made in Q1 for Global Server and Switchblade?

In Global Observer, we are primarily in Q1. Recall that we announced these investments after Q1 started. So, we've just really begun to deploy these in the latter part of Q1. With Global Observer, we are primarily focused on the business development element of that two-pronged investment intent.

With the Tactical Missile Systems business area, our initial investment launches have been focused on the research and development to bring the new variants of Switchblade to demonstration for multiple customers later this year.

Howard Rubel from Jefferies.

Thank you very much. There's been some very high profile demonstrations of UAVs, whether it's been Amazon or now Google. Where do you stand in discussions with them, Tim?

Our -- we're focused primarily on what makes our customers in the target markets we are pursuing most successful. We don't look at the competitive aspects so much as what the customers really need and how can we best deliver innovations that enable them to go forward. Beyond that, I think until and unless we have announced relationships, we have not talked about preliminary discussions we have in any markets with any customers.

I get that. Then, could you help me understand a little bit why, given the very strong bookings in the second quarter, you wouldn't have some either pull forward or some benefit from that a little sooner in your business, where as, you indicate its relatively flat and maybe just a little bit more on that. It seems a lot of this is -- I will call it repair and service, which has a quicker turn time. Thank you.

If you recall, Howard, a year ago, when the level of uncertainty in government budgets was very high, we modified our policy of building to inventory in anticipation of customer orders, to building in responders to orders. As a result, our lead times have increased. So, where we two years ago we might have very well converted new contracts into revenue on a much shorter basis, it takes us a little longer now because of that inventory management policy change.

Josephine Millward of The Benchmark Company.

Great quarter, guys. Tim, did you say that most of your bookings to date, are for US DoD Raven upgrades and repairs?

Well, I commented that a substantial portion of our first-quarter bookings, about $45 million of the $68 million in bookings in Q1, were from the Army, and they were primarily for spare parts and for Raven payload upgrades.

Got it. When do you need to see additional Switchblade orders to keep your production lines warm? When do think you'll get them?

We saw Switchblade total revenues almost double last year. We expect to see continued growth this year. It's always hard to predict when our customers will place what orders, but we do expect to see that increase in procurement this year. And we expect to see that convert into revenues to a significant degree, this year, as well.

(Operator Instructions)

Follow-up from Andrea James from Dougherty & Company.

This is Rob Bennett on again. Was the current OpEx rate a good way to model going forward?

If you remember, I think when we had our phone call last quarter, or at the fiscal end year, our message to the investment community was that we would increase our investments in some of these strategic opportunities that we had. That increase in investment didn't happen until probably two months, or didn't start until about two months into Q1. We would expect that run rate to increase over the next few quarters.

Great, and then just one more. Some competitors are looking at things like precisioned agriculture. Do guys see an avenue to ultimately end up somewhere in ag?

We clearly see agriculture as one of the large global industries that has the potential to significantly benefit from the use of unmanned airplane systems in the various parts of the enterprise. And I wouldn't be surprised to see us pursuing that sooner or later.

Howard Rubel of Jefferies.

Thank you. I wanted to talk about the Marine Corps Nano for a moment. You've spent a lot of time and effort developing that product. Can you provide some context, Tim, please?

You'll recall, Howard, the Nano Hummingbird was a high profile application of our work in very small, unmanned airplane systems. We have an extraordinarily talented team that has led in our Nano lab for a very long period of time. It's an area that we focus on. We've had a vision of a pocketable UAV for many years. So, we'll be actively engaged with customers as they become increasingly interested in smaller solutions that can drive UAS capability farther into the force structure.

Let me just follow-up on that, if I may. Are you -- you sort of said, and I'm not sure if I heard properly, that you are getting some customer funding for some of these initiatives?

I'm not sure where that comment -- what comment you are referring to, Howard? I wasn't intending to --

I apologize. I'm just trying to understand that some of this is pretty -- what I'd call -- customer driven and focused and exactly what -- you seem to have what the customer wants. Usually, in that case, they oftentimes provide some funding to help you along. Is that fair? Or, am I being too optimistic?

I think those comments might have been associated. I did say that we have had and continue to have ongoing customer funding around Switchblade solutions that runs alongside of our internally funded R&D, primarily in areas where we are anticipating customer requirements. I would put Nano UAVs in that category.

We have historically invested internally funded research and development to develop the technologies and demonstrate capabilities. At some point, when the customer base begins to be serious about adopting those solutions, then we typically see them begin to invest themselves.

At this point, from the perspective of Nano UAVs, that's primarily been internally funded. Of course, the Nano Hummingbird that we talked about earlier, was a DARPA project. So, that's customer-funded R&D, in itself.

I see no further questions at this time. I'd like to turn it back to Mr. Steven Gitlin for closing remarks.

Thank you for your attention and for 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, AV Inc.com. We look forward to speaking with you again following next quarter's results.

Ladies and gentlemen, that does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone, have a great day.