AeroVironment Inc (AVAV) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AeroVironment first-quarter fiscal 2017 earnings call.

(Operator Instructions)

As a reminder, this conference 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 would like to turn the conference over to Mr. Steven Gitlin. Please go ahead, sir.

Thank you, Christy, and welcome to our first-quarter FY17 2016 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 products to international customers; potential need for changes in our long-term strategy in response to future developments; the extensive regulatory requirements governing our contracts with 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 our products and services; the activities of 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, August 30, 2016. 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 Wahid Nawabi. Wahid?

Thank you, Steve. Good afternoon, and welcome to our first-quarter fiscal 2017 earnings call. Our message today is this, we remain focused on continuing to execute our strategy in support of our full-year goals and long-term value creation. On today's call, I will review our first-quarter financial performance and the progress we are achieving across our business. I will then discuss our 2017 strategic objectives and how they support our long-term goals. Raymond Cook will then provide a detailed financial review before I discuss our outlook. Following our prepared remarks, Raymond, Steve, and I will take your questions.

Now a brief review of first-quarter financials. First-quarter revenue of $36.2 million reflects our historical first-quarter seasonality and is consistent with the expectations we provided in our fourth-quarter earnings call. As you may recall, we said that we expected the first half of this year to produce one-third of fiscal 2017 revenue, and that the first quarter would represent about 40% of first-half revenue. I would like to remind you that our recurring seasonally lower first-quarter revenue stems mainly from customer order timing and the budget cycle of our customers. Because our spending plan and operations are based on the full fiscal year, lower first-quarter revenue and higher warranty and sustaining engineering expenses resulted in a lower gross margin with a net loss of $0.51 per share. Raymond will provide more details on the factors that drove this result in his prepared comments.

Our funded backlog increased by approximately 14% over fourth-quarter FY16 to $74.7 million contributing to full-year visibility of about 51% that Raymond will detail in his prepared comments. Our level of visibility at this point in this fiscal year is lower than what we experienced in recent years.

Now let's review our progress in the first quarter. In our fourth-quarter earnings call two months ago, I introduced a set of key milestones to help communicate how we are progressing against our plans. I will now provide updates on those milestones for which new information is available. Our pipeline of international opportunities remains strong. In fiscal 2016, our international revenue more than tripled, increasing from roughly $20 million to more than $70 million.

We are currently working with existing and new customers in Europe and the Middle East that have significant requirements. We continue to see strong demand for our small UAS as they become embedded in the way our allies plan, train, and operate. We believe fiscal 2017 international small UAS revenue will remain strong in fiscal 2016. We believe this demand reflects recognition of our successful track record serving the US Armed Forces and our 35 international customers.

It is important to note that the timing of international deliveries can be particularly difficult to predict, and all international opportunities require US State Department approval and export licensing. The international market for our small UAS is very active, and our win rate is high. In tactical missile systems, we continue to develop a family of systems based on the architecture of our initial Switchblade solution but with a broad range of performance and mission effects.

A key difference between Switchblade and our Raven, Puma AE, and Wasp AE small UAS is its ability to self launch from a tube at a push of a button, as opposed to a hand launch by an operator. Because of its tube launch capability, Switchblade and its variants can readily be launched from the ground, the air, and the sea, including from underwater vessels as Blackwing illustrates. This means that these variants can be deployed in backpacks, on ground vehicles, on manned and unmanned aircrafts, on surface ships, and submarines.

Within our family of tactical missile systems, Switchblade in some of its variants each carry an explosive charge while Blackwing carries extra batteries instead of an explosive payload, resulting in greater endurance for longer reconnaissance missions covering greater distances. And because all of our TMS air vehicles incorporate AeroVironment's secured Digital Data Link, they can provide a pop-up communications and data relay network. This network can link people to each other and to other unmanned vehicles across large geographic areas to create entirely new concepts of operation. Furthermore, our tactical missile systems' architecture is scalable, meaning we can design air vehicles around payloads of different sizes to achieve different mission effects.

Another important distinction between our tactical missile systems and our small UAS is that each TMS variant is designed only for a single use. In other words, they are consumable assets. The net result of this family of tactical missile systems is a unique and compelling set of capabilities targeting an expanding addressable market of customers, applications, concepts of operation, and ultimately, geographies.

The historical US Department of Defense procurement of legacy military solutions for the type of missions Switchblade can address includes mortars, grenades, shoulder fire missiles, air launched missiles, and rockets. The value of these existing solutions, a proxy for our addressable market, represents hundreds of millions of dollars in annual procurement. Two recent government announcements, one for production of Switchblade systems and the other for support services for the period government FY17 through FY19, provide additional visibility into our progress and our customers' intent.

Additionally, a recent news article identified a recent $24 million DOD reprogramming request to support an urgent need for 360 Switchblade rounds, 35 control units, and 150 inner training vehicles. To achieve its potential, we continue to enhance our Switchblade solution to address anticipated requirements for the US Army's [L-Man's] program of record. We expect this program to be highly competitive, similar to every DOD small UAS probe on the record. Note that we have won every program of record competition for DOD small UAS to date.

We also continue to make solid progress on the multiple TMS variants we have been developing primarily through customer funded R&D. Among our forward TMS variants beyond Switchblade and Blackwing, we are producing and delivering one variant to customers, moving towards production of a second variant, and continuing to make progress on the other two.

In our core small UAS business, we anticipate progress on the US government's frequency reallocation program with the US Army RFP expected by the end of our current fiscal year. As a reminder, this program involves upgrading all the federal government's existing Raven, Puma, and Wasp UAS to a new radio frequency in order to accommodate the government's decision to sell the spectrum currently used for small UAS. We believe this broad upgrade requirement will generate significant revenue and we're working hard to win it.

With respect to new US DOD customers, the US Navy continues to deploy our Puma AE with its unique salt water and autonomous precision landing system. Our system's effective performance on Navy destroyers and patrol craft has generated significant interest in support from Navy personnel. One Navy official said the Puma gives those platforms some eyes in the sky they never had before. The Navy views Puma as a new capability for missions that include man overboard, personnel recovery, search and rescue, visit-board-search and seizure exercises and operations, as well as area surveillance and range clearance during gunnery exercises. The Navy's adoption of Puma AE along with Blackwing adoption represent important pathways to broader Navy and maritime procurement of AeroVironment solutions in the near and long term both domestically and internationally.

In commercial UAS information solutions, we continue to gain valuable knowledge and experience working with early adopter customers in agriculture, energy, utilities, and transportation. We are digitizing images of crops, power lines, railroad tracks, and towers, accumulating expertise, and refining our solution in the process. We look forward to sharing with you the compelling set of capabilities we have been working so hard to develop.

Taking a longer view, we are also engaged with partners and federal agencies to establish a leading market position for future beyond-visual line-of-sight commercial operations through advanced communications, [hence] and avoid, and air traffic management technology development.

Shifting to our EES business, we continued our engagement with important automotive OEM players in the EV charging industry. Specifically, a top-five automaker selected our home and in-trunk charging solutions for distribution throughout their US dealer channel. Another OEM is pursuing international home charging opportunities with us, and we're discussing our solutions with a third OEM for their global EV presence. We're also seeing the highest interest in our EV test systems that we have seen in several years. We see heightened activity amongst automakers to increase EV adoption with more new plug-in models coming to market.

As I have outlined, we are making important progress on seven of our key milestones: domestic small UAS, international small UAS, the Army frequency reallocation project, Switchblade tactical missile systems, our commercial UAS information solution, Switchblade variants, and our EV charging offering. We will continue to execute on our strategy to deliver high long-term growth with continued progress in key initiatives targeting very large market opportunities.

Now, Raymond Cook will discuss first-quarter financial results. Raymond?

Thank you, Wahid, and good afternoon, everyone.

Moving now to AeroVironment's fiscal 2017 first-quarter results are as follows. Our revenue for Q1 was $36.2 million, a decrease of $10.8 million or 23% as compared to $47.1 million a year ago.

Looking at our revenue by segment, our UAS revenue was $30.5 million, a decrease of $9.7 million or 24% compared to last year. The decrease is primarily due to a decrease in product deliveries of $9.8 million, a decrease in customer funded R&D work of $1.8 million, partially offset by an increase in service revenue of $1.9 million. EES revenue decreased $1.2 million or 17% to $5.7 million in the first quarter. This decrease was primarily due to a decrease in product deliveries of our power processing products and our industrial fast charge systems.

Turning to gross margin, our gross margin for the first quarter was $6.7 million or 18%, a decrease of $9.3 million as compared to $16 million or 34% in the prior year. The decrease in gross margin was primarily due to a decrease in product margin of $9.4 million. Our product gross margin percentage for Q1 2017 was 3.3% as compared to Q1 2016 of 37.1%. Our service margins were consistent at 30.1%. The decrease in gross margin percentage was primarily due to an increase in warranty related costs of $1.7 million related to certain small UAS delivered in prior periods, an increase in engineering and technical analysis costs of $1.5 million related to existing products, a decrease in product sales volume which resulted in an increase in the per unit fixed manufacturing and engineering overhead support costs, and unfavorable product mix.

By segment, our UAS gross margin for the first quarter decreased to $5.4 million or 18% from $13.7 million or 34% in the prior year. The decrease was primarily due to an increase in warranty related costs related to certain small unmanned aircraft systems delivered in prior periods, an increase in engineering and technical analysis costs related to existing products, a decrease in product sales volume which resulted in an increase in the per unit fixed manufacturing and engineering overhead support costs, a decrease in product sales volume, and unfavorable product mix.

EES gross margin for the first quarter decreased $1.1 million or 45% to $1.3 million in the quarter primarily due to a decrease in sales volume and unfavorable product mix. As a percentage of revenue, EES gross margin decreased from 34% to 22%. SG&A expense for the first quarter was $13.7 million or 38% of revenue compared to SG&A expense of $15.3 million or 32% of revenue in the prior year. R&D expense for the first quarter was $8.6 million or 24% of revenue compared to R&D expense of $9.8 million or 21% of revenue in the prior year.

The operating loss for the first quarter was $15.6 million or 43% of revenue compared to prior-year operating loss of $9.1 million or 19% of revenue. The operating loss increase was primarily due to the lower revenue and gross margin dollars. Net other income for the quarter was $0.1 million compared to the prior year net other expense of $2.2 million.

The increase in other income was primarily due to the recording of an other than temporary impairment loss on our CybAero equity securities for the three months ended August 1, 2015. Our effective income tax benefit rate was 24.9% for the quarter as compared to an effective income tax benefit rate of 37.8% in the prior year. The net loss for the quarter was $11.6 million or a $0.51 loss per share compared to a net loss of $7 million or $0.30 per share in the same quarter last year. Looking at backlog, our funded backlog at the end of the first quarter was $74.7 million, a decrease of $14.3 million or 16% from the first quarter of the prior year and an increase of $8.9 million or 14% from the prior quarter.

Turning now to our balance sheet, cash, cash equivalents, and investments at the end of the first quarter totaled $257.2 million, a decrease of $4.3 million from the prior quarter. Net accounts receivable, including unbilled receivables and retentions, at the end of the first quarter totaled $47.1 million, a decrease of $27.8 million from the prior quarter. Net inventories were $44.1 million at the end of the quarter compared to $37.5 million at the end of the prior quarter. In the first quarter, we invested approximately $2.6 million or 7% of revenue in property improvements and capital equipment. We recognized $1.7 million of depreciation in the quarter.

Now to an update of our FY17 visibility. As of today, we have year-to-date Q1 revenues of $36 million, Q1 ending backlog that we can execute into FY17 of an additional $67 million, Q2 quarter-to-date bookings that we can execute in FY17 of an additional $19 million, unfunded backlog from incrementally funded contracts that we expect to recognize revenue for the balance of this year of $1 million, and revenues needed to hold EES revenues flat relative to last year of $13 million. This adds up $136 million or 51% at the midpoint of our revenue guidance.

Now, I would like to turn things back to Wahid to discuss AV's expectations for the remainder of fiscal year 2017.

Thanks, Raymond. As we look ahead across the balance of fiscal 2017, we continue to work towards full-year revenue of $260 million to $280 million with between $0.20 and $0.35 per diluted -- fully diluted earnings per share.

The lower first-quarter revenue and lower than planned bookings increased the amount of revenue we will need to realize in the second half of the year, most notably in the fourth quarter, to achieve our stated guidance. As I mentioned in our fourth-quarter earnings call, we expect continued strong international sales which will require State Department export licenses, adding time between orders and deliveries. Our focus remains on execution and long-term value creation, and we are excited about the multiple opportunities we are cultivating.

We will provide updates on key orders when customer and competitive constraints permit. We expect second-quarter and remainder of fiscal 2017 gross margins to increase and move closer to historical levels after adjusting for the incremental sustaining engineering expenses we described in our fourth-quarter fiscal 2016 earnings call.

We are confident in our ability to continue executing against our plan and generating value for our stockholders. I am confident in our team's ability to continue moving our business forward. Thank you for your ongoing interest in AeroVironment, and thanks to our outstanding team for their unwavering efforts to provide our customers with more actionable intelligence so they can proceed with certainty.

Now Raymond, Steve, and I will take your questions.

(Operator Instructions)

Our first question is from the line of Joseph DeNardi of Stifel. Your line is open.

Wahid, I'm wondering if you could just provide a little bit more detail around the higher warranty costs in the quarter, maybe what program that was related to, and was it just the new capability being implemented that led to it, or just a little bit more detail there.

Sure. Hi, Joe. Good to talk to you.

If you recall on the last quarter's earnings call at Q4, we specifically mentioned that because our installed base of small UAS is really growing to a large number, well over 30,000 now, and the fleet has also been in use in different customers in 35 different countries for close to, if not more than, a decade. So, in general, there is opportunities for us for upgrades and sustainment. In order for some of those upgrades to occur, we said on the call that we are increasing our sustaining engineering investment incrementally this year so we can prepare ourselves to take advantage of that opportunity and to address customers' needs throughout the whole market.

Related to the warranty expenses, on any given quarter or year, now since our installed base has grown so large, we typically accrue and reserve a certain dollar amount for various warranty needs that we provide. And knowing what our products are like and what they are used to and how the customers use this and how mission -- how critical it is to their mission, the expectation is that it has got to work when they operate it and it has got to do what it is supposed to do. Various customers and countries have different various levels of expectation as well on that regard.

So, we had some issues that we had recognized with one of our products in the small UAS back at the beginning -- we saw some signs of that last year, fiscal year, and we did not have a true root cause and we had to go do some more assessment of what exactly it is, the extent and all that. And as a result, we believe now that we have a specific solution. And the expenses that you see now, we accrued for that in the first quarter based on our assessment and based on what we found, and we expect this to address that issue and get back to business as usual going beyond Q1.

Okay. That's very helpful.

Just on Global Observer, if you could just provide us an update to the extent that you can, where do customer discussions stand at this point, and when do you think we'll know what the future of that program holds for you guys? Is there six months from now is when you think you will have a go or no-go decision -- just any color there.

Sure. Joe, in general, I have been in this business now for five years, and out of my 25 years of experience, the timing of prediction for when some of these decisions are made and when some of this adoption is going to occur, if it is going to occur, is extremely difficult. It has been difficult since the day I joined the Company.

Global Observer specifically is even more challenging because it is a very new capability, and the customers typically don't have this type of capability today as a comparable solution. There are other means by which they address their needs, but this is fairly new. The cycle is not really predefined by the customer -- the timing -- and the decision process are not very well defined.

We have been engaged for years that we have been talking to you about Global Observer with interested customers. We continue to be engaged with interested parties. As updates become available, we will share it with you. Whether it is positive or negative, we will be able to share it with you, but that is what I can provide at this moment, to the extent possible.

Thank you. And our next question is from the line of Josephine Millward of The Benchmark Company.

Hi, guys.

Hi, Josephine.

Wahid, can you talk about timing on the Army's frequency reallocation? Is this a FY17 event? Help us to size this opportunity.

Sure. So, Josephine, we've spoken about this for quite a while. This is a decision that it is upon the US DOD, primarily because of the government's decision to sell off the existing frequency that our UAS is having to operate on. So the government has sold that frequency spectrum. And in order for them to be able to deliver on that sale and commit on it -- commitment, they have to convert from the existing frequencies all of their installed base of our UAVs -- Puma, Raven, and Wasp -- to the new frequency.

We are in constant engagement with the Army and other potential users of our product. The timing is, again, not in our control. It is up to the customer to decide.

The indications that they have given us that I provided to you on my prepared remark is that they intend to have some movement on that by the end of our fiscal year. Whether that is going to hold true or not, I can't comment or guarantee, but we will keep you abreast of those movements and progress, and we will let you know.

Okay. That is helpful.

Let's talk about the Navy. Is the Navy planning its own program of record for small UAS? How is this program getting funded right now, and how do you guys get visibility for longer-term requirements?

Sure. So, Josephine, we have been working with the Navy for quite some time now to help them incorporate and integrate small UAS within their operations -- in their Navy operations and Navy system. So we have two airplanes, as you know, Puma AE and Wasp AE, which we believe and our customers are telling us is very unique in terms of its capabilities and what it can do for the Navy.

Both have the ability to be all environment, which means that they can withstand operations and they can land in salt water, in the ocean, and then you can literally wash it off and wipe it off and just fly it again. You can do this over and over again. It's part of the specifications of the product.

So based on the engagement that we have with the Navy, on the small UAS front, they are working towards the, what I call the adoption process of how it actually becomes as part of a standard plan for the Army -- for the Navy.

We have received some funding to work with them in terms of delivering some products. We shared with you the progress we made in terms of the precision landing system recently that we have developed, which essentially allows the Puma AE to precisely land on a net which requires zero retrofit really to the ship's existing structure or operation. Essentially, it is a walk-on, walk-off capability, which is very exciting and very attractive to the US Navy.

So, are they planning to work on a program of record? I do not have any specific details on that to provide today, and I can't predict that right now. All indicators are that there is a fairly large opportunity for us. The Navy is very interested in this capability, and we believe that the adoption will happen; however, the timing is really unpredictable.

Lastly, I want to add to this comment about Blackwing. We did demonstrate the capability of Blackwing, which is a variant of Switchblade. It has a longer endurance than our standard Switchblade. And we demonstrated this from submarines to the Navy, and this is a capability the Navy has been looking for, and it actually opens up a whole new set of capabilities and concepts of operation which has never been heard before in this space, in this segment.

So I think that Blackwing demonstration, and progress that we have made so far, also is a fairly significant long-term opportunity for our Business, the timing of which is unpredictable, again.

Next question is from the line of Troy Jensen of Piper Jaffray.

Thanks for taking my question, gentlemen. This is Austin on behalf of Troy.

The first one is for Wahid. I'd just like to dig into the commercial UAS opportunity. The UAS rules in place now are going into effect yesterday. We just wanted to get an update on that. And what are some milestones we should expect to see, whether it has to do with new product introductions or when to expect that part of the Business to be more material?

Sure, I will let Steve -- he has been immersed in this specific topic and I will let him give you the details. Steve?

Yes. Hi, Austin. The Part 107 rules that were implemented yesterday make it much easier for folks to become certified for operating unmanned aircraft systems in the national air space for commercial purposes, as you know. And it is still very much -- they are still required to operate within certain parameters, namely primarily daylight hours, 400 feet above ground level or above buildings, within visual line of sight.

And that is a really important development for the market because that is going to enable a wide range of applications that are localized in nature, whether they be for taking pictures or surveying localized infrastructure or crops and things of that nature. All of our pilots -- most of them are already licensed pilots within the AeroVironment organization, and all of our pilots are now working towards obtaining their certificates under these new rules.

In terms of our operations, we've already been operating under Section 333 exemptions, as well as operating under certificates of authorization with certain of our customers. So the Part 107 rules are helpful, but we have already been able to benefit from what we have already established from an operating perspective, and that helps us from the perspective of engineering and acceptance testing and also certain kinds of applications.

We will be applying for waivers for extended visual line of sight operations and nighttime operations. And of course, that extended visual line of sight is not the same as beyond visual line of sight. It is probably a couple of miles range primarily, but that begins to open up the opportunity set for us and for our customers. So, we think it is all very favorable and very positive for the Business.

In terms of milestones, as we have mentioned before, we're working with a number of early-adopter customers; Wahid said in his prepared comments that we're continuing to learn a great deal. We're continuing to refine our solution. He said earlier that, in prior calls, that we expect to introduce elements of our integrated solution this fiscal year. And we're very much focused on getting it right, such that it is going to really add value to customers' operations, as well as add value to our Business and our other stakeholders.

Okay. Just one quick follow-up -- Steve, you might be able to answer this or it might be a better question for Raymond. Just looking at the business model when tactical missile systems and the UAS begins to ramp, do you guys feel that could be accretive to margins? I'd just love to get a sense of how that will impact the Business model going forward.

So, Austin, I will take that one. It's Wahid, again. Our historical gross margins has been quite healthy. And as our Business ramps up or stays the same, we generally think not only for FY17 but beyond FY17, we don't expect any major issues with our gross margins in general.

What you saw -- the anomaly in Q1 was related primarily due to those four key drivers. Typically, it is a product mix issue that affects it. It's lower volume based on fixed costs, which essentially makes the overhead structure a little bit of a higher amount of absorption for a lower volume. We mentioned on our last quarter earnings call that we are incrementally investing in sustaining engineering this year, so we can keep up with the installed base. Lastly, this was a one-time warranty at an expense that we took on this quarter, which we believe that we have addressed the issue.

That is an anomaly, I refer to it. It should reflect back and bounce back for the FY17, and back to our historical levels minus the incremental investment in sustaining engineering that we are intentionally doing this year. So I do not see anything inconsistent with our historicals at a macro level on our gross margins, should our Business ramp up. Either it is tactical missile systems or small UAS or other products.

Thank you. Next question is from the line of Howard Rubel of Jefferies.

Thank you very much. Wahid, I do want to follow up on this gross margin for a second. If we do the math, if I think I am correct, it is about a 50% incremental. So, as you look at mix or -- what in there was so dramatically different?

Howard, I think Raymond is going to give you some comments on that.

Yes, so I think as Wahid had mentioned, Howard, as we went through this quarter we did have the increase in our warranty-related costs for certain small UAS deliverables in the prior periods. That was about $1.7 million. We had that increase in engineering and technical analysis costs that Wahid had talked about from a sustaining perspective of about $1.5 million. Then you add into that our mix, as well as our fixed manufacturing costs being spread over a smaller base. When you take those things into account, that is really what drove the gross margin this quarter.

All right, can we talk about revenues for half a second? We see inventories are up sequentially and you talked about missing sales somewhat. Can you elaborate a little bit on the recovery plan to get within the target range for the year?

Sure. So Howard, I'll take that one. This is Wahid.

So our revenue, I would say that we achieved our revenue based on what we provided in terms of the overall color and guidance in the last previous quarter. We said that one-third, two-third is two halves of our year, and a 40/60 split between first quarter and second quarter within the first half, which, $36 million, $36.2 million is really much in line with the math on that if you took our full-year guidance of $260 million to $280 million as your reference point.

What we really fell a little bit short on was some of the bookings during first quarter, which we expected that did not occur during the first quarter as we expected it. And as a result of that, we expected a lower first quarter to begin with, and that basically is what we had planned to achieve and we had built for that. And in fact, we still feel confident that those orders are primarily a timing delay.

It is really hard for us to be able to predict the exact timing of those orders based on our quarter, our fiscal years, and our customers' budgeting process and their fiscal years. So, therefore, we expect to rebound. And for the full year, we will update you and we are still working hard to achieve the $260 million to $280 million revenue.

Q4 now, because of the timing, does look larger than the previous years. There is still roughly about a one-third/two-thirds split between first half and second half. But because of the timing of Q1 for orders and bookings, now Q2 will be slightly lighter and our second half will be slightly bigger, which means that Q4 has a higher dollar amount associated with it.

We are focused on this. This is part of our plan. We had planned for this at the beginning of the year, to the great extent that we could, and we do not have any data that suggests for us to change our plan any differently today. However, if anything changes, we will keep you updated.

We do have some significant orders that we expect to book in this quarter, during second quarter, which will -- which it is, by the way, on track. And the timing is the one that we always are challenged with and it is hard to predict. So as updates become available, we will let you know. But in general, our year is -- we expect to rebound -- recover from this throughout this amount of time.

Raymond, do you want to add anything to it?

Yes, and, Howard, on the inventory front, our inventory is up about $6.6 million for the quarter. That is based upon strategic plans that we have in place, bringing in long lead-time items so that we can have the necessary raw materials and with in-house in order to fulfill the anticipated orders for the second half of the year.

I just want one small follow-up on export licenses that you alluded to. Is that part of the challenge?

Howard, great question. This is Wahid.

Last year, as you saw, our international sales was quite significantly up. We went from the $20 millions up to the $70 million range from FY15 to FY16. We expect FY17 to be as strong, if not stronger, and so, therefore, there is always risk.

All of our products for a small UAS that we ship internationally to date require export licenses. And we do ship to countries that are -- and that we have prospects and customers in the Middle East and Europe and Asia, so therefore, that is always a risk factor within our plans.

And the timing of that is unpredictable. We have had experiences both on very short turnarounds and also very long turnarounds.

Depending on -- we understand the process as far as how it works and what it should be doing. We have dedicated teams that focuses on that, and we track that on a regular basis. We have processes internally that we work on that.

However, the way the process works from the State Department's perspective, it's something that there is no specific guidance or commitment given in terms of a predictable timing of how long it takes. So, yes, that is a challenge and an issue that has been ongoing, and continues to be a challenge for us or an obstacle to overcome as we go forward.

Thank you. Our next question is from the line of Michael Ciarmoli of KeyBanc Capital Markets.

Hello. Good evening, guys. Thanks for taking my questions.

Just one on maybe the visibility or just the model in general -- your service revenues this quarter were greater than the product revenues, and I think that is the first time that's occurred since maybe FY12. How are you guys thinking about that internally? I mean, is that a function of just a lack of new wins, or should we be concerned at all that the product revenues are not maybe growing as fast, and that this is becoming more of a service-based model, or is that the intent to shift this more towards the services? Or just if you can provide us any color there.

Sure, Michael, it is a great question. In a nutshell, I would not read into this too much in terms of the fundamentals of our Business. It is purely what I refer to as a timing effect -- timing of orders and timing of opportunities.

In any given year, the past five years that I have been here and even before that within the Company, we have always had a certain percentage of our Business that is really related to what we refer to as customer funded R&D and/or services, project work that we do for various customers, primarily on the defense side, but we do a little bit of it also on the commercial EES side as well. That is a business that customers pay for based on a project and it's got a duration. It's more what I call predictable and reliable in terms of its execution and timing.

Product revenue is primarily based on opportunities and engagements where we have with different customers. And because the lumps of those opportunities are significant that we work on with various countries and various customers domestically, the timing of that at any given moment varies and changes. So the lens by which you look at those two services -- let's say at the end of Q1, does show that services and product revenue were out of line from historical levels. However, we expect historicals to get back to the normal averages of the years before, and it is just purely a timing issue related to first quarter. That is about it.

Okay. And then just back to the full-year plan, did you guys have any internal discussion about narrowing the guidance down or lowering it? You've obviously got the export issues, timing. It looks like EES now, a down year-over-year quarter. We may have a continuing resolution. Amid all that, there is still a good level of confidence, even though the visibility is at 51%?

So, Michael, the shorter answer is we have discussed this internally in great detail. We have a very disciplined process by which we look at our annual operating plan. We look at our order timing, our capture activities, our opportunities. And we look at it from the ups and downs, pluses and minuses, and all the interesting parts that goes along with it.

As I shared in my prepared remarks and as Raymond shared with you, our Q1 on revenue was pretty much in line with what we expected. Our profitability in Q1, also we expected to be lower because of the volume primarily, but it was additionally incrementally lower because of the three or four items that we went through and Raymond outlined to you in his remarks.

So today, based on what we know, we have looked at our plans, we don't have enough or more information to suggest that we need to change our guidance. So we are, therefore, stating with our guidance.

We are giving you all the, what I call the color that we have that shows the issues and challenges, the ups and downs that are within our Business, which, by the way, since the five years that I've been here is always a case with our Business any quarter, any given time. So we are working hard to achieve our $260 million to $280 million in revenue guidance, and we are also focused on the EPS of $0.20 to $0.35.

Should any of those variables that I mentioned earlier change, whether positive or negative, we will update you in our second-quarter results. We do expect significant orders to be booked in the second quarter, which will really what I call make the visibility and the runway for the remainder of the year much more clear. So, unfortunately, this is just the first quarter and the amount of data that we have today is such that it suggests that we are staying with our current guidance. And we'll update you as things progress further in the future.

(Operator Instructions)

Joseph DeNardi of Stifel.

Thanks. Wahid, just to clarify your answer to -- your response to Howard's question about international -- you said it went from $20 million to $70 million last year, and you expect similar strength this year. Does that mean it goes to $120 million or it just stays at $70 million?

Joe, we do not break down specific revenue guidance by product line or by geographies. What I said is that, yes, we grew significantly last year. We expect FY17 to be similar dollar amounts as FY16, not necessarily similar growth levels.

So I would just say that it is still a significant part of our Business. We have lots of opportunities that we are pursuing and we engage in, but it is really based on timing. All of these things that I have described that it really makes the lenses of our Business from different lenses look differently, it's primarily related to timing. Our win rate is pretty high, and it is the first quarter of the year.

Yes. That is very helpful. Thank you.

On Global Observer again, I think kind of at the end of last year on the earnings call then, Tim had mentioned that maybe there would be some customer decisions on Geo in the 12- to 18-month time frame, and it sounded like there were some specific customer discussions ongoing at that point that led to that visibility. Can you just help us out with -- have any customers kind of dropped out of the opportunity set at this point, or is that 12- to 18-month horizon just gotten pushed out a little bit?

I can't comment on specific customer engagements, Joe, unfortunately, due to the constraints we have with our customers primarily, as well as the market issues. But I would say, of all of our Business, I just mentioned earlier that it is really hard to predict the timing. Large airplanes and high altitude airplanes, especially a Global Observer type airplane, is even more difficult. So, I could not predict that any better today than I was the last month or two.

We will keep you updated. If there is significant meaningful news or progress or negative news, we will be the first to tell you. At this point, we are engaged with interested parties. At any given time, there are always pluses and minuses, and it is one versus the other, and it is hard to give you any more clarity than that.

Just to add a note to that, Joe, as we stated in prior quarters, there is really no investment on the R&D side in Global Observer at this point. It's really focused on business development. From a very minor investment level to keep what could potentially be a very large opportunity, still on the radar screen, we think that the trade-off continues to make sense.

Thank you. That does conclude our Q&A session for today. I would like to turn the call back over to Mr. Steven Gitlin for any further remarks.

Thanks very much, Christy, and thank you all for your attention and your interest in AeroVironment. An archived version of this call, all SEC filings, and relevant Company and industry news can be found on our website at AVInc.com.

We look forward to speaking with you again following next quarter's results. Have a good day.

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