AeroVironment Inc (AVAV) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AeroVironment, Incorporated fourth-quarter FY15 earnings call.

(Operator Instructions)

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, interim CFO, Teresa Covington, and Vice President of Investor Relations, Mr. Steven Gitlin.

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

Thank you, Tamara. Welcome to AeroVironment's fourth quarter and full FY15 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 statement whether as a result of new information, future events or otherwise.

The content of this conference call contains time sensitive information that is accurate only as of today, June 30, 2015. 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. The AeroVironment team made great progress on our business objectives in FY15. Our results are best summarized by the two following achievements. First, our strong core business delivered the revenue we expected and exceeded expectations for profitability. Second, our growth portfolio advanced through careful strategic investments that improved our position for large new market opportunities.

More broadly, we strengthened our market leadership positions, moved key programs forward to generate long-term value, reinforced our strategic plan and continued to extend our track record of successfully driving innovation.

Today I will summarize our FY15 by first reviewing our financial performance and achievements during the quarter and the year and then discussing our operating performance in our core business and in our growth portfolio. Teresa Covington will provide a detailed overview of our financials before our I'll share our outlook and goals for FY16 and then we'll take your questions.

Now our financial results. Our fourth-quarter revenue was $86 million, an 18% year-over-year increase. Gross margin in the quarter increased by 50% year over year, and fully diluted earnings per share were $0.31. Our FY15 revenue of $259 million was just about at the midpoint of our revenue guidance range of $250 million to $270 million and was up 3% year over year.

Gross margin as a percent of revenue for the year was 40%, well above our guidance range of 34.5% to 37.5%. We're pleased to report that even after making the incremental investments we plan for the year, the strong gross margin produced an operating profit of $2 million, which translates to fully diluted EPS of $0.13.

Total cash equivalents and investments increased by over $27 million, up 11% year over year. Ending funded backlog was $64.7 million compared to $65.9 million the prior year. In our core business we reported another year of revenue in line with projected growth targets and our team delivered strong gross profits.

Briefly I'd like to provide additional context to the accounting restatement referenced in our press release. This matter related to accounting for amortization of the premium of held to maturity bonds and had no impact on our balance sheet, income statement or on net cash flow. Teresa will provide more details in her prepared remarks.

Now let's review our operating performance in FY15 starting with our Efficient Energy Systems segment, or EES, where we maintain market leadership positions in all three product lines. Electric vehicle, or EV test systems, industrial EV charging solutions and passenger EV charging solutions.

In our EV test system product line, we introduced the next generation of smart EV test systems last September with the AV-900 EX. Capable of more varied and accurate testing and scalable from 250 kilowatts to more than 1 megawatt. We believe our current and prospective customers will embrace this new capability in the EV testings market.

In our industrial EV charging business, we continue to serve our customers in airports, vehicle manufacturing, distribution, consumer goods and industrial product markets while engaging with new global enterprise customers for potential expansion. We expect industrial EVs to continue to gain market share from fossil fuel vehicles.

In passenger EV charging solutions, we have deployed nearly 25,000 level 2 charge docks throughout North America. We have significantly differentiated our market-leading technology with our portable TurboCord dual-voltage charging system which we launched in January of 2014.

At the beginning of our FY16, Volvo became the first automaker to include TurboCord as standard agreement with the delivery of its plug-in vehicles. This important development highlights TurboCord's value in a global OEM solution and establishes an important new distribution channel for us. We hope to secure additional TurboCord in the trunk OEM adoption.

This January we introduced TurboDock level 2 workplace charging system. With Bluetooth connectivity, TurboDock provides access controlled charging at lower cost than cellular-based networks. We see great potential for growth in the workplace and commercial market segments with this product.

And now let's turn to operating performance in our Unmanned Aircraft Systems segment where we focus on global defense and commercial markets with unmanned airplane systems, or UAS, tactical missile systems, large UAS and commercial UAS. I will update you on each of these areas separately starting with small UAS.

In our core small UAS business we remain the market leader with the largest installed base in the global defense industry and a very active development portfolio. Our battle proven Puma became the first small UAS approved by the FAA for commercial operations, demonstrating how our core technology delivers value across defense and commercial markets.

AeroVironment developed and introduced the concept of a family of small UAS with differentiated platforms optimized for different missions and interoperable with the common ground control system, data link, user interface, training, support and all environment capabilities. All environment refers to the unique capability of these airplanes to regularly land in saltwater in addition to landing on the ground, and is designated by the suffix AE. This family of small UAS is unique to AeroVironment and is another growing differentiator for our solutions.

Last year the Army and the Marine Corps each defined their next-generation small UAS requirements as a family of systems. And both are built almost entirely around AeroVironment's solutions. The Army defined a new micro UAS as part of its system requirement and our Shrike vertical takeoff and landing, or VTOL solution is well positioned for that requirement when the Army decides to initiate a procurement.

In FY15, we supported the Army's large installed base of Raven and Puma systems with sustainment orders and performance improvement upgrades. We expect sustainment revenue from maintaining and upgrading our large and growing fleet of systems supplied across all military services to continue to be an important ongoing component of our business.

The Marine Corps began procurement of their new small UAS requirement with Wasp AE systems in FY25 -- FY15 and is evaluating additional Puma AE procurement.

The US Navy shows great potential as the next market to begin adoption of small UAS. Our all environment and enhanced ship deck landing capability are unique and compelling for Navy applications. In fact the Navy recently conducted successful evaluations of our Puma AE and procured their first systems.

International demand for small UAS continues to grow with multiple acquisition programs moving forward on independent but hard to predict timelines. For example, the Australian Defense Force recently began training on its new Wasp AE systems. These international programs include significant opportunities emerging in India, with our Dynamatics MoU. And in Turkey with our Altoy joint venture.

We remain in a strong position to fulfill established and emerging needs for small UAS to support United States and allied forces, as well as any urgent needs that may develop in an increasingly uncertain world.

And now I will discuss our FY15 investments and how they improved our competitive position across three areas within our growth portfolio. Innovation is at the core of our business model and strategic investments will position AeroVironment for continued success and value creation.

During FY15, we invested $46 million in internal research and development, or R&D. Each about $26 million of that amount, or 10% of revenue, was used to support our core business and the additional $20 million was strategic investment into our growth portfolio. In addition, we spent $25 million performing customer funded R&D for a total of $71 million in research and development invested primarily in UAS and tactical missile system technology.

We think our investment in new UAS solutions and our deep understanding of the industry represents a strategic advantage in the race to deliver next-generation solutions to customers, build market leadership and deliver return on invested capital.

We said at the beginning of last year, investments throughout FY15 in tactical missile systems, Global Observer and commercial UAS would position AeroVironment to lead when adoption accelerates and would generate significant value in the near and long term and we continue to believe that.

These investments yielded the intended results to better position us for the specific tactical missile systems and Global Observer adoption opportunities that we can now continue to pursue within our normal incremental investments -- within our normal and without incremental investments. Building out enterprise solutions for large commercial market UAS adoption, however, will require continued investment this year.

In tactical missile systems, we have been delivering Switchblade systems and generating revenue from hardware sales, customer support and R&D for the last few years. We applied incremental FY15 investment to develop and demonstrate new Switchblade variants that customers have requested as a result of seeing Switchblade's unique capabilities. These variants have now demonstrated and been deployed from ground, air and sea platforms.

Additionally we prepared for a pending Army program of record for LMAMS by developing advanced capabilities for Switchblade. We did develop three separate customer funded Switchblade variants in FY15 and all demonstrations met or exceeded customer expectations. We co-funded these developments with AeroVironment R&D investment as I outlined earlier, which proved essential in successfully driving all three opportunities forward.

As a direct result of these successes to date, we are confident that at least one of these variants will produce significant product revenue in FY16. We expect the other two likely will receive additional customer funding to proceed in FY16. We are optimistic that continued success in these programs will accelerate adoption of a family of tactical missile systems and drive significant revenue growth.

A program objective memorandum, or POM, is the recommendation of an armed service on how they plan to allocate resources for a program over the next five-year planning cycle. We believe the LMAMS program of record has not yet been included in the Army FY17 POM which will likely move a start of that program of record out by one or two years.

However we think this can actually have a positive outcome for us. It provides the opportunity for Switchblade as the only deployed solution to continue satisfying multiple procurement opportunities prior to a program of record.

Last year we combined our Global Observer solution for high altitude long endurance, or HALE UAS, and our TERN solution or medium altitude long endurance, or MALE UAS, to form our large UAS business area.

Our strategic investments in FY15 ensured we are well positioned for both Global Observer and TERN Phase III opportunities and we anticipate the ongoing pursuit of programs in both categories in our FY16 base plan. We remain engaged in active teaming in MoU agreements and customer discussions for Global Observer adoption by allied governments.

TERN represents the next generation category of MALE UAS for operation from small naval vessels. We, with our industry-leading partners, remain focused on executing our Phase II TERN program with DARPA. We are committed to delivering the most capable and effective solution and competing to secure an anticipated Phase III contract later this year.

Our third area of strategic investment in FY15 was in developing a new business in commercial UAS. Here we are developing both hardware and software solutions to deliver powerful insights on demand that will support competent decision making for improved enterprise performance.

Our investments in commercial UAS include pilot programs with lead adopters in large markets, like our service agreement with BP. These customer engagements are delivering important successes and valuable learning and are expanding in terms of applications, customers and industry verticals.

The FAA issuance of Section 333 exemptions for our Puma AE and VTOL UAS provide us with increased flexibility to conduct customer demonstrations and commercial services supporting our market entry strategy and exposing more potential customers to our differentiated offering.

In FY16 we will need to continue to invest to position AeroVironment for leadership in commercial UAS solution adoption. We will continue to develop the hardware, back-office and customer-facing software to optimize our solution for maximum customer value. We will work closely with lead customers to refine the winning solutions for what we believe is a large and dynamic global opportunity. And for our shareholders, we are confident that this will lead to enhanced value.

Our team has substantial innovation capacity and is developing a compelling small UAS platform for broad commercial appeal. In FY15, we executed our plan and achieved the financial, operating and new opportunity positioning goals we had established. Our team developed and maintained strong relationships with customers, continued our leadership position in our core business markets and developed strong positions for future leadership positions in the large new market opportunities we're pursuing.

We also made several leadership changes to optimize our management resources for scaling into large new opportunities. Wahid Nawabi was appointed Chief Operating Officer. Roy Minson took on a new commercial UAS strategy position. And Kirk Flittie and Ken Karklin have been promoted into the Business segment General Management roles. And now Teresa will discuss our fourth quarter and full FY15 financials.

Thank you, Tim, and good afternoon, everyone. AeroVironment's FY15 fourth-quarter results are as follows. Revenue for the fourth quarter was $86.5 million, an increase of $13 million, or 18%, as compared to $73.5 million a year ago.

Looking at revenue by segment UAS revenue was $78.7 million, an increase of $18.7 million, or 31% compared to last year. The increase was primarily due to higher product deliveries of $9.1 million, higher customer funded R&D work of $12.7 million, offset with lower service revenue of $3.1 million. EES revenue decreased $5.7 million, or 42%, to $7.8 million in the fourth quarter. This decrease was primarily due to lower product deliveries of our industrial EV charging solutions.

Turning to gross margin, gross margin for the fourth quarter was $45.4 million, an increase of $15.2 million as compared to $30.1 million in the prior year. By segment, UAS gross margin increased $16.8 million, or 66%, to $42.3 million in the quarter. The increase was primarily due to favorable product mix.

As a percentage of revenue, gross margin for UAS increased from 42% to 54%. EES gross margin decreased $1.6 million, or 35%, to $3 million in the quarter primarily due to lower sales. As a percentage of revenue, EES gross margin increased from 35% to 39%.

SG&A expense for the fourth quarter was $15.6 million, or 18% of revenue, compared to SG&A expense of $17 million, or 23% of revenue, in the prior year. R&D investments for the fourth quarter were $22.3 million, or 26% of revenue, compared to R&D investments of $6.2 million, or 8% of revenue in the prior year.

Operating income for the fourth quarter was $7.5 million, or 9% of revenue, compared to prior-year operating income of $6.9 million, or 9% of revenue. Operating income was higher primarily due to higher sales and gross margin.

Other expense net for the quarter was $0.5 million compared to the prior-year other income net of $2.9 million. Other income was lower primarily due to the prior-year gain related to our convertible notes investment. No convertible notes were held in the fourth quarter of this year.

The effective tax rate for the quarter was minus 1.2%, a decrease from the prior year of 18.2%. Net income for the quarter was $7.1 million, or $0.31 per diluted share, compared to the net income of $8.1 million, or $0.35 per diluted share in the same quarter last year.

On an adjusted basis, which excludes the impact of the convertible bond and related equity investment, fourth-quarter EPS would have been $0.32 per diluted share compared to $0.27 per diluted share in the same quarter last year. We have provided an EPS reconciliation table in the press release.

Now moving quickly through the full-year FY15 results. Revenue for the year was $259.4 million, an increase of $7.7 million, or 3%, as compared to $251.7 million in the prior year. UAS revenue increased $12.1 million, or 6%, to $221 million primarily due to higher product deliveries of $12.2 million and higher customer funded R&D work of $8.6 million, offset by lower service revenue of $8.6 million. EES revenue decreased $4.4 million, or 10%, to $38.4 million, primarily due to lower product deliveries of our industrial EV charging solutions and lower passenger EV charging solutions.

Gross margin for the year was $104.3 million as compared to $93.6 million in the prior year. This represents an increase of $10.7 million, or 11%. UAS gross margin increased $11.9 million, or 15%, to $92.7 million. The increase was primarily due to favorable product mix. As a percentage of revenue, gross margin for UAS increased from 39% to 42%. EES gross margin decreased $1.2 million, or 10%, to $11.6 million, primarily due to lower sales volume. As a percentage of revenue, EES gross margin remained at 30%.

SG&A expense for the year was $55.8 million, or 21% of revenue, compared to $55.7 million, or 22% of revenue in the prior year. R&D investments for the year were $46.5 million, or 18% of revenue, compared to R&D investments of $25.5 million, or 10% of revenue in the prior year.

Operating income for the year was $2 million, or 1% of revenue, compared to operating income of $12.4 million, or 5% of revenue last year. Other expense net for the year was $0.1 million compared to the prior-year other income net of $2.5 million. Other income was higher in the prior year primarily due to the gain related to the conversion feature of our convertible notes investment.

The effective tax rate for the year was minus 52.9% compared to the effective tax rate from prior year of 7.9%. Net income for the year was $2.9 million, or $0.13 per diluted share, compared to the net income of $13.7 million, or $0.60 per diluted share last year.

On an adjusted basis, which excludes the impact of the convertible bond and related equity investment, EPS would have been $0.13 per diluted share compared to earnings of $0.56 per diluted share in the prior year. Looking at backlog, funded backlog at the end of fourth quarter was $64.7 million, down $1.2 million, or 2%, from April 30, 2014.

Turning to our balance sheet, cash equivalents and investments at the end of the fourth quarter totaled $275.6 million, up $17.4 million from the prior quarter. The increase in cash equivalents and investments was driven by lower working capital needs and higher income.

Turning to receivables at the end of the fourth quarter, our accounts receivable including unbilled receivables totaled $51 million, up $5 million from the prior quarter. Total days sales outstanding was at approximately 53 days compared to 61 days at the end of the prior quarter.

Taking a look at inventory, inventories were $39.4 million at the end of the quarter compared to $48.8 million at the end of the prior quarter. Days in inventory were approximately 86 days compared to 106 days at the end of the prior quarter.

Turning to capital expenditures, in the fourth quarter we invested approximately $3 million, or 3%, of revenue in property improvements and capital equipment. AV recognized $2 million of depreciation in the quarter. For the full year we invested approximately $5.3 million, or 2% of revenue in property improvements and capital equipment, and recognized $8.4 million of depreciation and amortization.

During the fourth quarter of our fiscal year ended April 30, 2015, we identified a presentation error in our consolidated statements of cash flows for the fiscal years ended April 30, 2013 and 2014 and for the first three quarters of the fiscal year ended April 30, 2015. The amortization of premiums related to held to maturity investments was presented within the investing activities section rather than the operating activities section of our consolidated statements of cash flows.

We corrected the error by restating those prior financial statements in the notes included in our Form 10-K for the year ended April 30, 2015. The error did not impact our consolidated balance sheet, consolidated income statement or the overall change in cash flow for any of those periods.

Now an update to our FY16 visibility. As of today, we have fourth-quarter ending backlog that we can execute in FY16 of $61 million. We have various orders we have booked to date in the first quarter of $19 million. Incremental revenues to hold EES revenues flat year over year, $38 million. And finally the balance of the government FY15 that we have not booked yet of $43 million. This adds up to $162 million, or 60% at midpoint of revenue guidance. Now I'd like to turn things back to Tim to discuss AV's expectations for FY16.

Thank you, Teresa. We have a strong position in our core small UAS and efficient energy systems business as demonstrated by our leading market share and ongoing competitive success. The core business has strong profitability as evidenced by our gross profit. And the markets for both segments suggest long-term growth trends. We anticipate single-digit growth in our core business this fiscal year and continued opportunity for long-term growth.

But our growth strategy for AV goes far beyond our core business. In our growth portfolio, our 2015 incremental investments solidified the positions we have been building to compete for and capture identified tactical missile systems, Global Observer and MALE UAS opportunities. We expect contract decisions on each of these opportunities are likely to be decided over the next 24 months.

Each of these three opportunities represents initial adoption into potential billion-dollar markets. With the strong positions we have established last year, we can fund the ongoing pursuit of these new significant opportunities as well as support growth in our core business without incremental IR&D and SG&A spending levels this year.

Building the strong position we want in the very large commercial UAS market opportunity that we believe is emerging will require incremental investment in both IR&D and SG&A this year. We intend to invest this year to develop enterprise solutions for global vertical markets including energy and agriculture and an innovative commercial small UAS.

Third-party forecasters project billion-dollar market growth in commercial UAS. Our potential return on investment could be very large with success in this opportunity, but we will need to invest prudently now or risk missing a wave of adoption.

These incremental investments in commercial UAS market solutions could offset much of the operating profit our core business would otherwise generate this year, resulting in reduced or possibly no operating profit in FY16. As a result, we will guide profitability for FY16 at the gross profit margin level.

With that background we expect FY16 revenue of between $260 million and $280 million, and gross profit margin between 36% and 37.5%. We will maintain focus and visibility on the underlying gross profit, competitive effectiveness and revenue growth of our core business throughout FY16, while we pursue key new opportunities in tactical missile systems and large UAS. We will prudently manage gated investment decisions to develop winning solutions for our new commercial UAS business.

We see a future full of opportunities to drive shareholder value through success in these new markets. We built our core business by developing innovative new solutions and we are familiar with the process of new market adoption.

We will remain constructively engaged with lead adopting customers which positions us to make informed decisions on investments in order to be first to market with the right solution. As new opportunities develop in these dynamic emerging markets, we will continue to be guided by optimizing our return on invested capital and maximizing shareholder value.

There are numerous specifics regarding our innovative solutions for these new opportunities that we cannot discuss in order to maintain a competitive advantage or because of customer confidentiality agreements. To the extent that these constraints ease in the future, we will share these bold and innovative solutions with you.

Across our business, our technology solutions are designed to bring our current and our future customers the confidence to proceed in the complex and uncertain world in which they operate. Others have recognized our performance with Aviation Week selecting us as the Top Performing Company in the $250 million to $1 billion revenue category. This recognition reflects the quality and the performance of our people.

From design engineering to production, from procurement to sales, our people strive every day to do what's right for our customers and our shareholders. As always, thank you to the members of the AeroVironment team whose creativity, passion and grit turns bold ideas into compelling value propositions for our customers. To those customers who place their trust in us and to you on this call for your interest in AeroVironment. Teresa and I will now take your questions.

(Operator Instructions)

Andrea James, Dougherty & Company.

You touched upon this in your opening remarks, but I was hoping we could go a bit deeper. You said you're expecting single-digit growth in your core business, and I guess that accounts for all of the guidance. So, I just want to make sure, does the FY16 guidance imply any recognized revenue growth against Switchblade commercial UAS or Global Observer?

Well, Andrea, I think I mentioned in the prepared remarks, or observed, that we have been delivering revenue from Switchblade programs for the last few years. That's a combination of hardware deliveries, customer-funded R&D, and services. So, certainly ongoing revenue from Switchblade. In fact, probably growing revenue from Switchblade this year.

In terms of Global Observer, we don't have Global Observer revenue built in to our core plan. I did mention that we expect the first opportunity for a contract decision on Global Observer from a foreign government within the next 24 months; back to predicting the timing of adoption of innovation being difficult.

Okay. And then, I guess I'll just throw this out there because it was in the news this week. Do you have any thoughts on the Board structure in light of the activist letter that made the rounds?

Well, we haven't responded to that letter at this point. As always, we continue to welcome open communication with all of our shareholders, and we value the input that is particularly directed towards enhancing shareholder value. So, we'll continue to make all of our decisions around the Business from a management and a Board level, with a focus on strong corporate governance and maximizing shareholder value.

Thank you. I'll hop back in the queue.

Troy Jensen, Piper.

Congrats on the nice quarter and the margins.

Thank you.

To follow up a little bit on the commercial opportunities here, do you think you'd be selling military-quality UAVs in the commercial applications, or do you plan on a new line of hardware to get in to the commercial space, or will your guys' entrance be more in the services side, like you're doing with BP?

We have a primary focus on enterprise solutions that would address large global vertical markets like energy, like agriculture. And our experience to date has brought us down to a business model that we're developing that would comprise capturing data from small unmanned aircraft. And that amounts to specific and sometimes specialized payloads on small UAS platforms that we think will be optimized for these enterprise solutions in industrial markets. So, probably a long way of saying that our target solution would be built around platforms that would be optimized for commercial applications rather than military applications.

Right.

Beyond that collection, of course, we've got a lot of data analytics and software presentation capability to close the loop on an actionable information enterprise solution.

The entry into our engagement with commercial customers, however, has been based on applying our previously developed and proven small UAS from the military. And Puma, being the first FAA-certified small UAS for commercial applications, has been a great help in working with BP and others in that area.

Great. So, if I could follow up with a couple questions for Teresa here, mainly on the model and mainly on the expense side? I understand you talked about the investments maybe offsetting the operating profits. But if we just look at the R&D, it was up significantly here in the April quarter, how do we think about modeling that on a quarterly basis through 2016?

And maybe touch on SG&A; it spiked up a bit here. Does it grow from this level, or was there some one-time stuff in the fiscal fourth quarter?

The R&D in Q4 was abnormally high from our prior run rate, and is not a level that we expect to maintain going forward. We were closing out a year of incremental investment to position ourselves in these new markets, and we got off to a bit of a late start and a strong finish.

Understood. But I guess I was wondering, Teresa, or for Teresa specifically, that we're two months in to the quarter, so you've got to have a fairly good grasp on what your R&D expense should look like this quarter. So, could you give us a range of where you think that number will be?

I think the R&D for the first quarter, if you exclude the fourth quarter from 2015, the range for R&D will be in the range of the quarters from FY15, quarters one, two and three.

Are you talking $7 million to $8.5 million roughly on a quarterly basis?

Correct.

But you said excluding July quarter, so that might be at a higher level?

As Tim mentioned, the fourth quarter was abnormally high, at $22 million. Our first three quarters of FY15 were closer to our historic levels, in terms of R&D investment.

Peter Arment, Sterne, Agee.

A follow-up on that, Tim: The last couple years, you've had a revenue base that was 40% in the first half of the fiscal year, and 60% in the second half of the year. With the guidance range you put out, and obviously there's a lot of moving parts, and I don't want to pin you down on any of them, but how do we think about the revenue progression throughout the year?

I think the best -- a good way to approach that is just looking at those historic patterns that you mentioned. We have been about 60% in the first half -- 40% in the first half, excuse me, and 60% in the second half. As we look at 2016, Q1 this year probably looks a lot like Q1 last year.

Okay, that's helpful. And then, Tim, if I could just ask you about, in terms of your building cash position, you guys continue to obviously generate a lot of cash and make the necessary internal investments on these -- a lot of these growth opportunities. But at what point do we -- either the cash gets returned back to shareholders, or you see an external use for it where you're going to look to acquire or something? Can you give us a little color on your thoughts on that? Thank you.

Yes, absolutely. The management and the Board are regularly looking at capital allocation, and evaluating options for return on invested capital. To date, we have continued to look at that, in the terms of primarily these very large growth opportunities that we are pursuing and that we've been talking about today in positioning for multiple new market opportunities that have billion-dollar potential.

Our investments to date have primarily been on the income statement to position ourselves for those markets. When those markets adopt, we expect the likelihood -- and historically we have seen the necessity to increase our investments to ensure adoption. And once they have adopted and begin to scale across an industry, if we then have proven -- if it then proves to be the kind of large opportunity we believed, we will either be displacing or attracting the largest competitors in the space, which means we'll have to move with great agility and make meaningful investments to secure a leading position in order to deliver the return to our stockholders that we have been investing for, all these years.

That ability to move with agility is significantly enabled by the cash on the balance sheet, and that's what has driven our structure to date. At some time in the future, if in the context of those compelling returns on executing our plan, the Board -- if the Board ever determines that we, in that time, have excess cash, then obviously we'll consider other uses of that cash.

Thank you.

Bobby Burleson, Canaccord.

This is a question for Tim. I was curious, when we look at the opportunity for commercial UAS, and you talk about additional investments in enterprise solutions, how much is data analytics part of that investment in developing your own proprietary data analytics? And how long could you sustain that investment? If you're looking at energy and agriculture and maybe other verticals, how much reuse do you get out of what you developed for one?

Data analytics, we believe, will be a significant element of that system solution that we intend to deliver, and that we believe will be the basis of the winning solution. To date, we have addressed that with a combination of internal development and extensive use of external partners. So, I think we'll continue that approach.

We do not intend to build out everything from scratch. So, wherever possible, as we have to date, we'll engage with existing enterprises that have large and optimized solutions, much like we've done in addressing the multiple applications with BP on the North Slope. I don't know if that fully answered your question, but I'll wait to have you follow up.

That definitely helps. You obviously don't want to compete with your customer, let's say, in the agricultural space, it sounds like.

No, but the agricultural vertical, at least as much, if not more so, than energy, is a pretty complex set of opportunities that runs across the growers' operation, and precedes it and follows the food after it leaves the grower. So, it's a pretty interesting opportunity-rich new frontier, I believe.

Greg Konrad, Jefferies.

I was hoping to start on the EV business. I looked at EES in the quarter; it was down a bit. I think you said some of that was the industrial business. When I think about the past couple years, you've announced a number of agreements with electric cars for -- on the charger side. Can you maybe discuss a little bit what type of take rate you're seeing there, and some of the larger opportunities to announce other agreements with OEs?

Well, we do have half a dozen relationships with some of the largest auto manufacturers in the world. They're a very important part of our business strategy. One of our channels for distribution of our charging systems is through the dealer networks of those OEMs. We think it's particularly important that we've been able to announce this recent adoption of Volvo of TurboCord, that now includes TurboCord with the delivery of their plug-in vehicles that'll begin with their premium model launch in North America later this year.

That's an entirely new distribution channel. It has the potential to grow across, we believe, other OEMs. It seems to us like a compelling advantage to consumers. And that channel has the ability to significantly lever volume because it comes with the car when the consumer buys it.

That makes sense. And then, to follow up on cash, you had a very good conversion rate in this year, and it seems like inventories came down quite a bit. What should we expect going forward? And given the growth expectations of 2016, should we expect working capital to come up a bit from 2015?

I think the biggest -- we were very focused on driving that inventory number down this year. That inventory number peaked a couple of years ago. And it's been a priority for the operating management team to get to the target that they achieved at the end of the fourth quarter. I think at this point going forward, it'd be a good assumption to plan on us keeping the same kind of ratios as we move along with growing revenue.

Michael Ciarmoli, KeyBanc Capital Markets.

Tim, you mentioned it before; in terms of creating shareholder value, what do you think you guys might be doing wrong? The playbook you guys have now, I guess it's still generally similar to the S-1 filed nine years ago. There's a lot of growth opportunities; earnings aren't growing; it seems like the commercial market, to some extent, is passing you guys by when you look at DJI or what GoPro wants to do, Google and Amazon. Do you think the market really cares about exquisite optimized solutions, or do they just want cheap drones with off-the-shelf analytics out there? Trying to get a sense, from a strategic standpoint and a shareholder value standpoint, what you guys are thinking out there, because it seems like some of that first-mover advantage has eroded on you guys.

Well, we've talked about multiple market opportunities. You're addressing the commercial UAS market opportunity explicitly, Michael. And I think the -- we continue to see a very large opportunity with major organizations in large verticals that I described.

Now, that's quite different than the market for consumer quadcopters that you're addressing. And certainly that's generated a lot of market cap, and a lot of initial investment that's been publicized in the last few months. Nevertheless, we believe that our validation with large industrial users of this enterprise model is going to produce a significant opportunity that we continue to pursue.

Outside of the commercial UAS market, we have been pursuing Global Observer and MALE and tactical missile system market opportunities. And we see, beginning last year, significant increased adoption activity from customers. That activity has sustained and increased over the last year, and we're now in a position to be able to look at likely contract decisions in those three areas this year and next year that, if made positively, would signal the adoption of billion-dollar potential markets with these new solutions.

So, I think we have proven the underlying truth of the statement we've made for many years, that it's hard to predict the timing and the rate of adoption of innovations.

Got it. Even on something like -- you mentioned and I mentioned DJI, the quadcopters. You've got the Shrike product. You guys probably could have attacked that market first. When you guys look at your product road map and -- do you think you're at the right price points to spark this adoption, or is it still too early or too tough to tell?

We are using a variant of our Shrike product in the Qube system that we work with public safety agencies with, as they evaluate the adoption of UAS in their enterprises. That is much closer to a variant of a defense product than it is a quadcopter in the consumer class that you're describing. So, we have not entered the market with a low price-point product that you're describing, and that's not our espoused strategy.

Josephine Millward, Benchmark Company.

Given your backlog of $65 million, can you walk us through how you get visibility for guidance? Teresa, I think you said you have 60% visibility based on your backlog. And it sounds like you expect DoD UAS sustainment and upgrades to remain fairly steady, and you expect Switchblade and International to drive growth. Can you expand on that?

Let me walk through the FY16 visibility again. We have $61 million of Q4 ending backlog that we believe we can execute in 2016. Orders that we've booked thus far in the first quarter of $19 million; $38 million holding EES revenue flat; and then we believe the balance of government FY15 not yet booked of $43 million. And so, that totals to the $162 million.

Okay. Is that $43 million from the base budget, because that seems quite high?

It is not from the base budget. As you know from our history, our actual orders often exceed what is published in the government budget. So, this represents expectations of bookings.

And the other 40% -- what can you expand on what areas they might come from?

Well, as usual at this time of the year, Josephine, we have what Steve Wright used to refer to as a go-get element of our business plan for the year. And that's defined by a set of business opportunities that we have identified with customers that we are in various stages of pursuing, and they are in various stages of contracting for.

To the degree that there is uncertainty farther out in the year in those bookings, then we use a method to discount the probabilities of either the contract not being placed, or, more likely, a delay in contract placement such that we can get to a probability of revenue that then leads to our plan and to the guidance we're providing you.

(Operator Instructions)

Andrea James, Dougherty & Company.

A couple housekeeping, and then more strategic: Teresa, what was the customer-funded R&D in Q4? Can you hear me?

Yes, she heard you; she's just checking the number, Andrea.

Thank you, appreciate it.

For the fourth quarter, the customer-funded was $19.1 million.

Thank you. (multiple speakers) And then, net/net by the end of this year, FY16, you think you'll have added to the cash balance over the course of the year?

Could you repeat the question, please?

If you plan to -- I'm just looking at free cash flow, and what I think you've communicated so far on this call. Do you think you'll have added to the cash balance over the course of this fiscal year, by the end of the year?

Well, we did last year. We have historically. We don't guide on cash, so I don't -- we don't have a forecast that we are prepared to guide on, at this point. But we continue to have confidence in the strength of the core business.

That's helpful. And then, to build off an earlier question, what's the strategic conversation that you guys have had, or to what level have you had a conversation about possibly going after that consumer market, the quadcopter market? And why not? Is it because it's commoditized? Or what is your thinking about whether or not to go after that business, and leverage maybe your brand name a little bit?

Well, as we've mentioned for the last year, we have been focused on the commercial enterprise solution. But the opportunity to address the consumer appetite for these products, with a leapfrog technology, has not escaped the innovation halls of AeroVironment engineering. So, I probably don't want to get too far ahead of myself on that. But it's an interesting question you pose.

And it sounds like you guys -- it's something you might be studying at least? Fair enough, okay. I appreciate you taking my follow-ups, thank you.

Thank you, Andrea.

Josephine Millward, Benchmark Company.

Hi, Tim. I just wanted to ask you, when you expect -- when do you expect the Phase III of TERN to be awarded? And if you can talk about the size of the program, and do you have that -- some of that in your guidance?

Our best understanding is that DARPA expects to make a decision on the Phase III of the TERN program probably in the second half of our FY16. As I mentioned in my prior comments, we're very focused on executing on Phase II, and positioning ourselves well for Phase III.

We think we have a strong position, but we know we are competing against one of the world's largest and most successful suppliers. We've got a very strong industry team working with us on this, that are as excited about this opportunity as we are.

And in terms of the component of our revenue plan that would anticipate this program, I'd go back to the earlier answer on how we address uncertain -- uncertainty in late -- in contract opportunities that fall late in the year, and that tends to be adjusted for probabilities. Mostly, in the past, we found that when the actual results vary from the potential results, the [cost] is dominated by schedule slides rather than some other reason.

And the size of the program, Tim?

I don't believe that I've seen a number published by DARPA on that program. They have said they intend to produce an operating solution, so we're talking about a MALE airplane. I would guess it's a material contract.

Thank you, and I'm showing no further questions at this time. I would like to turn the call back over to Mr. Steve Gitlin for any 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, www.avinc.com.

We look forward to speaking with you again following next quarter's results. And good luck, women's soccer team, in today's game.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.