AeroVironment Inc (AVAV) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AeroVironment, Inc. fourth-quarter FY16 earnings call.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. With us today from the Company is the President and Chief Executive Officer, Mr. Wahid Nawabi; Senior Vice President and Chief Financial Officer, Mr. Raymond Cook; and Vice President of Investor Relations, Mr. Steven Gitlin. And now at this time I'd like to turn the call over to Mr. Gitlin. Please go ahead, sir.

Thank you very much Latoya, and welcome to our fourth-quarter and full FY16 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 include without limitation any statement that may predict, forecast, indicate, or imply future results, performance or achievements, and may contain words such as believe, anticipate, expect, estimate, intend, project, plan or words or phrases with similar meaning. 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.

Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: reliance on sales to the US government, availability of US government funding for defense procurement and R&D programs, changes in the timing and/or amount of government spending, difficulty or inability to obtain required export authorizations to sell our product to international customers, potential need for changes in our long-term strategy in response to future developments, the extent of regulatory requirements governing our contracts with the US government and international customers, the consequences to our financial position, business and reputation that could result from failing to comply with such regulatory requirements, unexpected technical and marketing difficulties inherent in major research and product development efforts, changes in the supply and/or demand and/or prices for of our products and services, the activities of our competitors and increased competition, failure of the markets in which we operate to grow, failure to remain a market innovator and create new market opportunities changes in significant operating expenses including components and raw materials, failure to develop new products, product liability, infringement and other claims, changes in the regulatory environment, and general economic and business conditions in the United States and elsewhere in the world. For a further list and description of such risks and uncertainties, see the reports we file with the Securities and Exchange Commission.

The content of this conference call contains time-sensitive information that is accurate only as of today, June 28, 2016. 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 Wahid Nawabi. Wahid?

Good afternoon, and welcome to our fourth-quarter and full FY16 earnings call. I'll begin by expressing my appreciation to the entire AeroVironment team of passionate innovators, our Board of Directors, our customers, and our stockholders for your support in my new role as CEO. Since joining the Company in 2011 I have worked closely with many of our talented and hard-working team members, and developed a strong understanding of our operations.

More recently I have developed relationships with many other stakeholders including customers, stockholders and analysts. Together as a team we have positioned AeroVironment as a Company that develops innovative technology solutions to help customers accomplish their goals, is committed to making prudent strategic investments that enhance stockholder value, and above all is continually working to maintain and enhance its leadership position in large and growing markets.

We're continuing our ongoing efforts to articulate our value proposition to our stakeholders with clarity. Recently we set out to fine tune our corporate brand and positioning by speaking with employees, customers, stockholders and analysts to explore their perceptions of what we do, how we do it, and why it's important to each of our stakeholder groups.

The conclusion from that process is encapsulated in the following statement, which powerfully conveys who AeroVironment is today. AeroVironment is a courageous technology company that provides customers with more actionable intelligence so they can proceed with certainty.

The key message here is, proceed with certainty. I believe this describes our core value proposition which is, how we help customers succeed. This is our goal across all our operations.

In defense, front line troops use Raven, Puma AE and WASP AE small UAS to gain critical intelligence that enables them to make better decisions and move forward safely. Our Switchblade systems give them the ability to neutralize lethal threats more accurately and with less collateral damage than ever before.

In emerging commercial applications the detailed analytics we deliver to our customers provide growers, engineers and railroad operators with a much better understanding of their operations so they can make more informed decisions that improve outcomes. In our EV charging solutions we provide drivers with the confidence to go farther, knowing they've received a safe and reliable charge.

From an investor's perspective at a time of increasing global uncertainty, AeroVironment offers the unique combination of a core business focused on some of the most dynamic segments of the defense market, a strong balance sheet, and the prospects of a potentially large commercial UAS market.

Identifying and investing strategically in the development of innovative solutions for our customers enables us to create new opportunities for value creation. However, to deliver on our promise of certainty, we must also continuously improve our corporate planning and business processes.

I have spent the past two months collaborating with our team members and senior leadership, leading to multiple initiatives focused on achieving that goal. You can see how we're communicating our identity more effectively in the new website we just launched this week, and you will see and hear more of it as it propagates throughout and beyond our Company.

Now let's discuss our successes during the quarter and full year and the bright future ahead for AeroVironment. On today's call I will highlight three key messages. First, profitability. Our core business remains profitable, with leading market positions and strong customer pull.

Second, growth. We are progressing on our strategy to deliver high long-term growth with continued progress in key initiatives targeting very large market opportunities. It is important to note that these opportunities may take time to materially contribute to our results. And third, confidence in our future. Our prospects for FY17 and beyond are promising.

Today I will briefly review our fourth-quarter financial results, then discuss progress across our business in FY16. Raymond Cook will provide a detailed financial overview. Then I will wrap up our prepared remarks and provide our outlook for FY17 before Raymond, Steve and I take your questions.

Now, fourth-quarter and full FY16 results. Our profitable core business continues to create value. Fourth-quarter revenue of $84.8 million and gross profit margin of 45% contributed to full-year revenue and gross profit margin of $264.1 million and 42.4% respectively. This represents 2% revenue growth and a 230 basis point increase in gross profit margin year over year.

Our government contract reserve reversal along with favorable product mix contributed to our strong gross profit margin during FY16. The high gross profit margin produced a 380% increase in operating income. And an R&D tax credit helped drive a 200% increase in earnings per share year over year.

Revenue in our UAS business segment increased by 6% over FY15, reflecting continued customer demand and solid performance. Please note that we experienced typical AeroVironment seasonality in FY16, with 42% and 58% of revenue occurring in the first and second halves respectively. Additionally the first quarter of FY16 revenue represented slightly more than 40% of first-half revenue.

Before I continue, I would like to remind you of the way we define our core business and growth portfolio. Core business refers to products and services we sell to customers on a regular basis. Growth portfolio refers to initiatives under way that have not yet transitioned to full production and sales but have the potential for significant long-term value creation and growth. In some cases these growth initiatives also produce revenue through customer-funded R&D. Some of our product lines contribute to both our core business and growth portfolio.

Now I will review the specifics of each of those product lines and clarify how we think of them, while also updating you on our progress in FY16. I'll begin by turning to the operating performance of our Unmanned Aircraft System segment, or UAS, where we focus on global defense and commercial markets with small UAS, tactical missiles systems and commercial UAS.

I'll update you on each of these areas separately, starting with small UAS. Our core small UAS business consists of selling Raven, Puma AE and WASP AE systems to US government customers and sustaining them with spare parts, upgrades and training. Small UAS continues to serve as the main driver of our overall business.

In FY16 we supported our US customers, primarily through sustainment of their large fleet as illustrated by the $47 million spare parts order we received in August. In November we announced a $13 million Marine Corps contract for new Puma AE systems, reflecting the strong continued demand for our small UAS. In May 2016 we introduced our new I-45 gimbaled sensor suite for Puma AE, which delivers unmatched imagery capabilities for small UAS.

In the past these types of upgrades have contributed meaningfully to our revenue base. Similarly today we are confident that customers will find I-45 to be an attractive and compelling upgrade opportunity.

While our domestic small UAS business is part of our core, we view the international opportunity for our small UAS as a growth driver. In fact, our international small UAS business generated record revenue in FY16. During the year we received orders from a growing list of countries including Australia, Spain, Saudi Arabia and seven Allied nations. We believe the international market for our small UAS is about a decade behind that of the US Department of Defense. This means that 35 international customers we have today and new customers we're pursuing represent significant future growth potential for the business.

Our small UAS continues to demonstrate capabilities above and beyond those of even larger competitors. In January a joint AeroVironment and Nova team operated Puma AE as an advanced scout for the Coast Guard Ice Breaker Polar Star in Antarctica. Even in such a challenging environment, operators were able to fly Puma AE more than 25 miles from the ship, demonstrating their ability to rely on our technology while keeping people out of harm's way and helping the Polar Star and Coast Guard proceed with certainty.

Small UAS is our primary core business, and potential new requirements such as the US Army's short-range micro UAS, a soldier-borne sensor, and a pending Army program to relocate the frequency spectrum on which our small UAS operate represent potential growth opportunities within it. Our Shrike VTOL could potentially satisfy the short-range micro UAS requirement. Another one of our micro UAS in development could potentially satisfy the soldier-borne sensor.

Successful evaluation of our Tether Eye, a virtual observation and communication tower for buildings, fixed installations in vehicles, would bode well for its adoption and contribution to small UAS growth. In small UAS, we see additional opportunities for adoption in the US Navy which has already deployed Puma AE systems on several vessels, in the Coast Guard, and for Homeland Security applications. We are working hard to achieve all of these opportunities.

Next, our relatively new tactical missile systems business includes Switchblade, our recently unveiled Black Wing ISR system, and several Switchblade variants that address new customers and new concepts of operations. We've been delivering Switchblade systems designed for use by dismounted infantry units to our US military customers under urgent needs requirements within our core business. The potential US Army program of record for lethal miniature aerial missile systems, or LMAMS, represents a significant growth opportunity.

In May we announced that our black 10C Switchblade upgrade had transitioned from development into production. Black 10C integrates our digital data link to position us even more favorably to address existing demand, as well as the pending LMAMS program record once the customer initiates a competition.

As we announced in May, we recently unveiled Black Wing, a small tube launch UAS that deploys from under the surface of the sea from manned submarines and unmanned underwater vehicles. You can think of it as a stealthy, sly periscope for submarines.

Black Wing represents a growth opportunity and is a compelling capability that is currently being adopted by the US Navy. Instead of housing an integrated warhead, Black Wing carries extra batteries, providing longer endurance and shorter range -- greater range. Black Wing's command and patrol system is tightly integrated into US Navy submarine fire control systems, part of the integral system similar to a periscope.

At AeroVironment, we are very excited about the Black Wing opportunity, which I will provide some context to. According to publicly available data, the US Navy currently operates about 70 submarines. Outfitting each submarine in the fleet with multiple Black Wings, for example, would represent a total opportunity for hundreds of these single-use units.

Unmanned underwater vehicles, some surface ships and Allied vessels could provide additional opportunity. In assessing this opportunity, it is important to consider that the DoD's five-year future years defense program, or FYFYDP, envisions a multi-year procurement for providing this capability to US submarines.

Our emerging family of tactical missile systems is the direct outcome of prior-year investments that are continuing to yield results. Having the strategic foresight to invest our own funds into the development of Switchblade and its variants has positioned us extremely well as the leading supplier of this capability, as illustrated by the revenue growth we have experienced for this product line.

In FY11 we generated about $6 million from tactical missile systems. That amount grew to approximately $41 million in FY16. In FY16 we also began shipping production units of one Switchblade variant in addition to Black Wing, and we could see another variant transition to production this fiscal year.

Beyond military applications for our small UAS, we continue our investment to develop solutions for the commercial UAS opportunity which we will introduce to the market once we are confident our solution is robust and scalable. Today the commercial UAS initiatives include two significant potential growth opportunities. One, the deployment of small UAS with other sensing technologies and data analytics to provide customers with more actionable intelligence. And two, atmospheric satellites for high altitude long endurance UAS for remote sensing and communication.

Our investments to development an integrated information system solution for the commercial opportunity focus on four primary industries. First position, agriculture; second, energy; third, transportation; and fourth, utility infrastructure with hardware and software as part of an integrated system solution.

Our commercial software solution includes a functioning cloud-based analytics portal that provides powerful and easy to use geo-rectified data products. This secure portal gives customers their own environment in which to perform analyses, store and compare historical data, and identify anomalies that may pose risks to their operations.

While this solution is still in its early stages, initial pilot customer response is very positive. Even though we're still in the early stages, we have several small but important customer contracts in commercial UAS which demonstrate the opportunity and potential of this market.

In fact, we are currently seeing positive feedback from customers on our work. For example, we are engaged with a global energy customer on a pipeline surveying project in the Lower 48. We have worked with two top 10 US electric utilities to provide them with greater insight into their infrastructure, such as power lines and associated right-of-ways.

We're also under contract for information solutions as a system integrator with one of the largest US railroads. In May 2016 we announced that we are working with NASA and others to demonstrate a next generation traffic management solution for unmanned aircraft integration in the national air space.

We continue to choose early adopter customers selectively based on their appreciation for the value our solution can deliver to enhance safety, improve risk management, and address regulatory compliance. We're working with these customers to demonstrate our capabilities and understand how best to integrate them into their operations.

Beyond these information solutions, we continue to pursue opportunities to deploy atmospheric satellite systems for remote sensing and communications on opportunities that remain binary. That is, it will either happen or not. If this opportunity does occur, it would be meaningful to our growth strategies.

Now moving to our EES business segment. We consider EE test systems positively charged industrial EV charging systems and passenger EV charging systems components of our core business. The introduction of ProCore and new Charging solution for electric forklifts demonstrates continued progress in EES towards strengthening our market position and building pathways to growth. The potential upside for passenger EV charging should global EV adoption increase rapidly is another growth opportunity for which we have established a leading market position.

Our accomplishments in FY16 produced results within the range of our expectations and advanced our progress towards our long-term objectives. Now Raymond will provide a detailed review of our financial performance in the year.

Thank you Wahid, and good afternoon everyone. AeroVironment's FY16 fourth-quarter results are as follows. Revenue for the fourth quarter was $84.8 million, a decrease of 2% from fourth quarter FY15 revenue of $86.5 million. The decrease in revenue was due to a decrease in product deliveries of $3 million partially offset by an increase in contract services revenue of $1.3 million.

Looking at revenue by segment. UAS revenue was $75.9 million, a decrease of $2.8 million, or 4% compared to the fourth quarter of 2015. The decrease is primarily due to a decrease in product deliveries of $4.3 million, a decrease in customer-funded R&D work of $1.2 million which was partially offset by an increase in service revenue of $2.7 million.

EES revenue increased $1.1 million, or 14%, to $8.9 million in the fourth quarter versus the same period in 2015. This increases was primarily due to an increase in product deliveries of $1.4 million that's was partially offset by a decrease of $0.3 million of service revenue.

Turning to gross margin. Gross margin for the fourth quarter was $37.9 million, or 45%, a decrease of $7.4 million as compared to $45.4 million, or 52%, in the fourth quarter of 2015. The decrease in gross margin was primarily due to a decrease in product margins of $8.1 million, partially offset by an increase in service revenue margins of $0.7 million.

By segment, UAS gross margin for the fourth quarter was $35 million, a decrease of $7.4 million as compared to $42.3 million for the fourth quarter of 2015. As a percentage of revenue, gross margin for UAS decreased from 54% to 46%, primarily due to product mix. EES gross margin for the fourth quarter was $2.97 million, a decrease of $0.1 million as compared to $3.04 million for the fourth quarter of 2015. As a percentage of revenue, EES gross margin decreased from 39% to 33%, primarily due to product mix.

SG&A expense for the fourth quarters was $16.8 million, or 20% of revenue, compared to SG&A expense of $15.6 million, or 18% of revenue in the fourth quarter of FY15. R&D expense for the fourth quarter was $14.3 million, or 17% of revenue, compared to R&D expense of $22.3 million, or 26% of revenue in the fourth quarter of FY15.

Operating income for the fourth quarter was $6.8 million, or 8% of revenue, compared to operating income of $7.5 million, or 9% of revenue in the fourth quarter of FY15. The provision for income taxes for the fourth quarter was $1.9 million, or an effective tax rate of 26.4%, compared to the benefit for income taxes of $0.1 million, or an effective tax rate of negative 1.2% for the fourth quarter of FY15. Net income for the fourth quarter was $5.4 million, or $0.23 per diluted share, compared to net income of $7.1 million, or $0.31 per diluted share for the fourth quarter of FY15.

Now moving through full year 2016 results as compared to FY15. Revenue for FY16 was $264.1 million, an increase of $4.7 million, or 2%, as compared to $259.4 million for FY15. The increase in revenue was due to an increase in contract services of $20.3 million, partially offset by a decrease in product revenue of $15.6 million.

UAS revenue was $233.7 million, an increase of $12.8 million, or 6%, compared to FY15. The increase was primarily due to an increase in customer-funded R&D work of $16.6 million, primarily driven by our tactical missile systems variant programs.

An increase in service revenue of $4.5 million, primarily due to an increase in sustainment activities in small UAS, partially offset by a decrease in product deliveries of $8.3 million that was primarily due to a decrease in deliveries of WASP and Switchblade systems, partially offset by an increase in deliveries of Puma and Raven systems.

EES revenue was $30.4 million, a decrease of $8.1 million, or 21% compared to FY15, primarily due to a decrease in product deliveries of our industrial fast charge systems and passenger electric vehicle charging systems, as well as a decrease in service revenue.

Gross margin for FY16 was $112.1 million as compared to $104.3 million for FY15, representing an increase of $7.8 million, or 8%. The increase in gross margin was primarily due to an increase in service margins of $10.5 million, partially offset by a decrease in product margin of $2.7 million, both of which were impacted by the settlement and resolution of the prior-year government incurred cost audits during 2016.

UAS gross margin increased $8.8 million, or 10%, to $101.5 million for FY16, primarily due to an increase in service revenue as well as favorable product mix and the government contract reserve reduction. As a percentage of revenue, gross margin for UAS increased from 42% to 43%. EES gross margin decreased $1 million, or 8%, to $10.6 million for FY16, primarily due to a decrease in sales volume, partially offset by the government contract reserve reduction. As a percentage of revenue, EES gross margin increased from 30% to 35%.

SG&A expense for FY16 was $60.1 million, or 23% of revenue, compared to SG&A expense of $55.8 million, or 22% of revenue for FY15. SG&A expense increased $4.3 million primarily due to higher bid and proposal costs, an increase in sales commission expense, and an increase in severance-related charges. R&D expense for FY16 was $42.3 million, or 16% of revenue, compared to R&D expense of $46.5 million, or 18% of revenue for FY15.

Operating income for FY16 was $9.7 million, or 4% of revenue, compared to operating income of $2 million, or 1% of revenue for FY15. The increase in operating income was primarily due to increased gross margin of $7.8 million, decreased R&D expense of $4.2 million, partially offset by an increase in SG&A expense of $4.3 million.

The effective income tax benefit rate for FY16 was negative 11.1% compared to the effective income tax benefit rate from FY15 of negative 52.9%. The variance in the effective income tax rate was primarily due to higher pretax income and an increase in federal R&D tax credits.

Net income for FY16 was $9 million, or $0.39 per diluted share, compared to net income of $2.9 million, or $0.13 per diluted share for FY15. Net income per diluted share for the FY16 was increased by $0.10 due to the reserve reversal for the settlement and resolution of prior-year government incurred cost audits, increased by $0.05 due to the R&D tax credits related to prior fiscal year primarily as a result of the reenactment of the federal R&D tax credit, and decreased by $0.06 due to both the impairment loss and the loss on sale of our remaining holdings of CybAero equity securities during the first half of FY16.

Looking at backlog. Funded backlog as of April 30, 2016 was $65.8 million as compared to $64.7 million at the end of FY15.

Turning now to our balance sheet. Cash, cash equivalents and investments at the end of FY16 totaled $261.6 million, a decrease of $14 million from $275.6 million as of April 30, 2015. Net accounts receivable as of April 30, 2016 including unbilled and retention receivables totaled $74.9 million, an increase of $24 million over 2015.

Total days outstandings was approximately 87 days for FY16 compared to 66 days for FY15. Net inventory was $37.5 million at the end of FY16 compared to $39.4 million at the end of FY15. Days in inventory were approximately 92 days for FY16 compared to 106 days for FY15.

During FY16 we invested approximately $8 million, or 3% of revenue, in property improvements and capital equipment. We recognized approximately $6.1 million of depreciation and amortization expense in the year. Now I'd like to turn things back to Wahid to discuss AV's expectations for FY17.

Thanks, Raymond. FY16 positions us well for FY17 with strong customer engagement and important progress in our core business and growth portfolio. As we look ahead across FY17, some important milestones to look for include, one, continuing the expansion of our domestic small UAS business through sustainment and upgrades, potential US Army procurement programs and promising US Navy adoption. Two, expanding our growing international installed base for small UAS with existing and new customers. Three, progressing towards the US DoD's frequency relocation program for small UAS.

Four, continuing successful delivery of Switchblade tactical missile systems to our defense customers who see great value in this unique capability. Five, deploying Black Wing systems to the US Navy submarine fleet. Six, continuing progresses in our Switchblade variants, including ongoing production of some variants and progress towards the production of others.

Seven, launching our commercial UAS business for precision agriculture and other verticals, including announcing key customer relationships and projects. Eight, further customer engagement in atmospheric satellite systems. Nine, accelerating progress in our global turbo core EV charging strategy. And 10, successful execution on our continuous improvement initiatives.

With our plan in place, we expect effective execution across our portfolio of opportunities to produce FY17 revenue of between $260 million and $280 million. We are moderating our incremental internal R&D investments this year based on our progress last year and our expectations for market adoption timing this year.

For FY17 we are targeting an internally funded R&D rate of 12% of revenue. As a reminder, we are generating a growing amount of customer R&D funding, resulting in total R&D higher than what we fund ourselves. As a result of lower internally funded R&D, we expect to produce operating profit this year that will deliver earnings per share of between $0.20 and $0.35.

We expect seasonality similar to what we have experienced in recent years but a bit more pronounced, with the second half of the year representing two-thirds of full-year revenue. Within the first half of the year we expect a similar distribution to FY16 with about 40% of first-half revenue in the first quarter.

Before we turn the call over to Q&A, I would like to reiterate our points for continued areas of focus for value creation. One, our core business remains profitable with leading market positions and strong customer pull. Two, we're progressing on our strategy to deliver high long-term growth with continued progress in key growth initiatives targeting very large market opportunities. It's important to note that these opportunities may take time to develop into material financial contributors to our results. And third, our prospects for FY17 and beyond are promising.

We have much work to do and I cannot think of a more capable team than the one I have been given the privilege to lead. I look forward to spending more time with our stockholders, analysts, our leadership team and our Board in order to deliver on your high expectations of us. Thank you to our employees, our customers, and our stockholders for your trust and ongoing engagement. I am eager to help all of our stakeholders proceed with certainty.

Raymond, Steve and I will now take your questions.

Thank you.

(Operator Instructions)

The first question comes from Troy Jensen of Piper. Your line is now open.

Gentlemen, congrats on a nice profitability.

Thank you.

Wahid, for you, and maybe Raymond can help with this, too. Just to go over your full-year guidance again. So you said $260 million to $280 million, it's 65%, or two-thirds in the second half and one-third in the first half.

Correct.

And then what was the comment about 40% of it, you expect 40% of the first-half number expects to be in the July quarter, is that correct?

Yes. What we did is we gave some color. And we said about one-third/two-thirds between first half and second half. And then for the first half we expected it to be about a 40%/60% split between Q1 and Q2.

Understood. So if I run the math off the midpoint that equates to about $36 million in sales for the July quarter? Am I doing that correctly, Ray?

I think if you're doing the math at the midpoint, that's about correct.

Your comment on more pronounced volatility on the revenues here, can you kind of comment on why the big (inaudible) drop? Why the big year-over-year drop? What are you seeing in the pipeline, kind of guide to such a low number?

Troy, this is Wahid. Historically if you look at our past years, for many, many years, going back to FY11, FY12 and all those years, our business in general has been quite seasonal. And we have tried to figure out exactly what drives that. And we can all have different thoughts on this.

But generally we have smaller first halves than second halves. And the ratios that you've seen this year in FY16 is fairly similar to the prior years. And in FY17 it's slightly more pronounced. As Raymond pointed out that in first half it's roughly one-third of the revenue and then two-thirds in the second half.

And we have a very high portion of our business that is what I refer to book and bill. Because of the urgent need nature of our customers' requirements and needs, we have to have the ability to turn around quickly and convert contracts into shipments so they can utilize the capabilities that our products and services offer to them.

So for that reason we have a fairly short what I call gestation period between when we receive a contract and when we actually ship products. And they are lumpy because they're fairly different sizes in nature.

Just the $36 million seems well below any number we've seen in prior years. So just kind of curious why is it so pronounced this year versus other years?

We have different theories behind it. I couldn't give you a specific reason as to why, but it's really driven by our markets and our customers.

That's fine. (Multiple speakers) Go ahead, Ray, finish.

Yes, I was going to say, and their ordering patterns, what we're projecting for the year.

All right. Understood. So (multiple speakers)

Sorry. Another thing to keep in mind, Troy, is that we now have -- the government fiscal year is different than our fiscal year. And so we believe that that has an impact on it. We also have a very large growing number of international customers, and those customers have different fiscal years, depending on the country. And of course based on their demands and requirements, the timing of their demand and requirements change and it's not really in our control. So we try our best to address their need as soon as they have a need and they execute a contract with us.

Thank you. The next question is from Josephine Millward of The Benchmark Company. Your line is open.

Hi, guys.

Hi, Josephine.

Hi. Wahid, can you tell us what international UAS was in 2016? I think it was around $20 million in FY15.

FY15?

No, just last year, 2016. You said it grew significantly. I'm trying to size how big it was.

I could tell you that we had a record year. Historically we have not guided and given details to the product line level.

What we have said and you heard in my opening remarks that our international business is a growing business. And we have many new countries that have adopted our solutions, and as you heard in my remarks. And we have a fairly decent list of additional countries that have requested information about our products and engaged with us in terms of demand.

So we have a fairly optimistic view on our commercial sales in general. But we have not guided to the product level.

Okay. In terms of the new small UAS opportunities with the US Army, do you expect decisions on these programs this coming year? Can you give us a sense of timing and the size of the market opportunity? I think it's you talked about the short-range micro UAS and soldier-borne sensor.

Yes. The government's plans have specific requirements for these product capabilities already included in their plans. And we are working with our customers based on their own planning and timing adoption as to when they will initiate that.

At this time we do not have enough information to be able to give you a more precise answer on that. All I can tell you is that based on the engagements we've had with the customers, there is a real intent by the Army to enable our US Army with these capabilities, and both of those two requirements are in there.

Thank you. The next question is from Michael Ciarmoli of KeyBanc Capital Markets. Your line is open.

Good evening, guys. Thanks for taking the question. Just to maybe look on into the 2017 outlook, focusing maybe on backlog. Backlog entering the year at one of the lowest levels.

Can you sort of bridge the gap for us in terms of how we get to the midpoint of guidance? What ships out of backlog. I think you've done that walk a couple of time on prior calls. What you're expecting from new order flow, level of EES, et cetera.

Yes, Michael. So our 2016 funded backlog was roughly $65.8 million. I believe we've disclosed that in our -- on our earnings release. And that is fairly similar or typical to our historical levels.

In 2015 entering into 2016 was somewhat of a similar ratio. And in general our funded backlog going into the year typically has been less than roughly a third of our business in general that we've done in the past.

So I would argue that this is fairly typical of the last few years that I've been here and that I've seen our track record in that respect. As I said earlier, our business is lumpy. And the timing of these opportunities and contracts are not something that's in our control. And we try our best to give as much visibility as we can, but the most important thing is to take care of our customers and address their needs.

So can you provide a bridge in terms of what gets us to that midpoint? I mean, how much ships out of that backlog, what orders are, what the expectation is for EES revenue, as you guys have done sort of in the past, bridging that kind of path toward the midpoint of guidance?

I do not have that information handy right now. But we could work on that and get back to you on that separately later on, Michael.

Michael, with respect to the EES component of that, what we've typically done is we've typically looked at last year's or prior year's EES revenue contribution and made an assumption that that -- if that were to be stable then that would be a portion of that visibility walk-down. Obviously as we progress through the year, by the time we come down to the Q1 earnings call, we'll have better visibility into the balance of the year and be able to address it at that time.

Thank you.

(Operator Instructions)

The next question is from Howard Rubel of Jefferies. Your line is open.

Thank you. Talk a little bit more about Black Wing for a moment. I mean, you've sort of had it in your pocket. Now it's showing up.

What were the things that caused the Navy to find this so appealing? And how do you think about it going forward as part of a larger product line?

Sure, Howard. Good afternoon. It's Wahid here.

Thank you.

Yes, you're welcome. The US Navy has expressed interest in this for a while. We've been working with them in trying to understand the requirements more clearly. And we have so far delivered some products for what I refer to as a pilot's phase prototype testing and evaluation.

And then recently we have actually shipped some products for them to be able to use those in the field in an operational, what I call con ops, or concept of operation and template. And so we feel fairly optimistic about this opportunity.

And it is also in the DoD's future year's defense program, or FYDP, plan. And the US Navy intends to essentially equip our submarines with this capability. And our track record so far has been fairly positive. And we believe that this represents a fairly large opportunity long term.

And just to add to that, Howard, in terms of your question about how to think about it from a broader perspective. If you turn back the clock to when we first started talking about Switchblade, that's really -- that's always been a solution focused on dismounted infantry types of application.

And as we were out demonstrating that to customers, other customers came out to those demonstrations and liked what they saw and asked us if we could modify them to address their emerging concepts of operation, unique operator requirements for that.

So we began to do that. And over time we ended up at a point where we are now where we've grown beyond just Switchblade into truly an emerging family of tactical missile systems, or loitering missile systems if you will, that encompass both direct fire, lethal types of effects, as well as ISR types of effects.

So Switchblade remains a good example of the lethal type of loitering missile system we've been talking about. Black Wing is an example of a similar architecture adapted for ISR types of application. Switchblade, as we've been talking about, has been addressing dismounted infantry. Black Wing is now addressing submerged submarines.

And so we're really expanding the addressable market, expanding the number of customers, the number of con ops that we can address through this emerging family of systems. As Wahid also mentioned, we have a growing number of variants that have continued to evolve and progress toward the point where at least one of them, as we've said, has moved into more of a production type of a situation, and others might be moving in that direction shortly. So that entire family of tactical missile systems/loitering missile systems has been growing, continues to grow, continues to expand its footprint and address a larger and growing market opportunity.

I appreciate it. I mean, we can count ships or we can count subs or we can -- it goes well beyond just a few applications. Thank you very much.

You're welcome. That's accurate, Howard. Thank you.

Thank you. The next question is from Michael Ciarmoli of KeyBanc Capital Markets. Your line is open.

Hey, guys. Thanks for taking the follow-up. Maybe just going back to this visibility question, can you guys tell me what portion of remaining government funding you have entering into this fiscal year?

I'm just trying to understand -- can you tell me what portion of government funding you have left that you expect to execute on in this fiscal year? I'm just trying to get a sense, is your visibility better entering into this year or is it lower than it's been in previous years?

Michael, I would say that in terms of better, worse, or equal, I would call it equivalent to last year. And so I would characterize our current visibility and funded and unfunded backlog fairly similar to what we did in FY15.

If you want specific numbers, these are some of the numbers that we've actually shared already. In FY15, starting at that time, our funded backlog was $64.7 million. And we had an additional $19 million worth of unfunded backlog, which totaled to about $83 million and change. In FY16, funded backlog is about $66 million, $65.8 million to be more exact, and then an additional $16.7 million worth of unfunded backlog, which totals to about $83 million as well.

Okay. Okay, that's fair. And then just on the -- you have been talking a lot about growth initiatives. Can you give us a sense -- the guidance for revenues is the same as it was for FY16. Can you give us a sense of what programs or what product lines are seeing revenue headwinds in the overall portfolio that's offsetting some of the growth in international and tactical missiles, just to try and get a better understanding of what's going on with mix in the portfolio?

Sure, Michael. So as we said before, and as we continue this journey, our family of system solutions, both in the small UAS as well as in the tactical missile systems or loitering missile systems family, is fairly large now. The portfolio's fairly large and our customer base is pretty large. And there's been variants of these products, whether it's Raven, Puma, WASP, or Switchblade or variants of Switchblade, they're in different phases of their adoption curve with different customers.

And so I will characterize, for example, our Raven and Puma business to be fairly established in a domestic market. However, we have significant opportunity for growth in international markets.

We have opportunity for growth in the defense market for sustainment and upgrades, like we launched the I-45 gimbaled sensor suite which has unmatched capability in the industry. So any one of our products, you can look at any time, the family of the system has various -- or they're in various stages of their adoption and acquisition.

So primarily in FY17 we see strong demand and growth in international markets. We see strong demand and customer needs for our tactical missile systems, as I described earlier.

Obviously we intend to enter in the commercial UAS market with the right solution first. And we're focused on perfecting that solution, and the adoption of that really will take time. And it also depends on the market itself. It's a very large market with lots of different verticals and lots of different applications.

Thank you. And at this time there are no further questions in the queue. I'll turn the call back over for closing remarks.

Thank you very much. And thanks for your attention on today's call and your ongoing interest in AeroVironment. An archived version of this call, all SEC filings and relevant Company and industry news can be found on our website, AVINC.com. And we look forward speaking to you again following next quarter's results. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.