AeroVironment Inc (AVAV) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AeroVironment, Inc.

First Quarter 2019 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, Ms. Teresa Covington; and the Vice President of Investor Relations, Mr. Steve Gitlin.

And now at this time, I would like to turn the conference over to Mr. Gitlin.

Please go ahead, sir.

Thank you, Michelle, and welcome to AeroVironment's 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 statements that may predict, forecast, indicate or imply future results, performance or achievements, and they 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 United States government; availability of U.S. government funding for defense procurement and research and development programs; changes in the timing and/or amount of government spending; risks related to our international business, including compliance with export control laws; potential need for changes in our long-term strategy in response to future developments; the extensive regulatory requirements governing our contracts with the U.S. 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; the impact of potential security and cyber threats; 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; uncertainties in the customer adoption rate of commercial unmanned aircraft systems; failure to remain a market innovator and create new market opportunities; changes in significant operating expenses, including components of 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 filed with the Securities and Exchange Commission.

The content of this conference call contains time-sensitive information that is accurate only as of today, September 5, 2018.

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.

Thank you, Steve, and welcome to our first quarter fiscal year 2019 earnings call.

On today's call, we will focus on 2 key messages.

First, our team is successfully executing our plan, and we're on track to achieve our fiscal year 2019 objectives.

And second, demand drivers for our solutions remain strong, and we're capitalizing on these opportunities to make progress towards our long-term goals.

Today, I will summarize our solid first quarter fiscal year 2019 financial and operating performance and then provide an overview of some notable developments during the quarter.

Next, Teresa Covington will provide a detailed financial review of the first quarter, and I will discuss our goals for fiscal year 2019 before Teresa, Steve and I take your questions.

Our momentum continued into the first quarter as we delivered strong results, including revenue of $78 million, up 127% year-over-year, driven by solid funded backlog at the end of fiscal year 2018.

This positions us for a more normalized quarterly run rate than in previous years, with our first quarter revenue representing approximately 1 quarter of the midpoint of our full year guidance range.

Our favorable mix of products versus services, plus a strong mix of higher-margin products in contracts, produced gross margin of 42%, up from 25% in first quarter of fiscal year 2018.

Diluted earnings per share from continuing operations was $0.85, up more than $1 from the same period last year.

Please note that first quarter EPS includes a onetime gain of $0.26 per diluted share from a litigation settlement.

Continued demand for our solutions is reflected in our strong funded backlog of $157 million as of the end of the first quarter, an increase of 120% year-over-year.

In the first quarter, we adopted ASC 606, the new accounting standard for revenue recognition, which is reflected in our first quarter fiscal year 2019 and 2018 financials.

The standard relates to the timing of how we recognize revenue and associated expenses on our contracts.

In the quarter, we disclosed -- we closed the divestiture of our Efficient Energy Systems business.

As a result, we recognized a gain of $8.8 million net of taxes, which is reflected in discontinued operations on our income statement.

We expect to receive additional cash proceeds of $6.5 million from this divestiture in the current quarter.

Through the EES divestiture and the formation of our HAPSMobile joint venture, we have transformed AeroVironment into a pure play, unmanned technology solution provider.

We are focused on delivering innovative solutions based on future-defining technologies that include robotics, sensors, software analytics and connectivity to large and growing global defense telecommunications and commercial markets.

These solutions currently consist of advanced unmanned aircraft systems, tactical missile systems, high-altitude pseudo-satellite systems under development and Commercial Information Solutions.

In all cases, our solutions deliver either actionable intelligence or advanced effects that help our customers proceed with certainty.

We believe our solutions provide a unique combination of advanced technology, reliability, safety, effectiveness and ease-of-use that differentiate them from our competition, contributing to our outstanding track record of success when competing in our global-end markets.

Within the U.S. Department of Defense market, we remain the leader in small UAS, and our growing loitering missile systems business is disrupting the tactical missile systems category.

In the first quarter, small UAS represented 53% of revenue, and TMS, another 29%.

On August 13, the President signed the government fiscal year 2019 Defense Authorization Act into law.

Now the Senate and House of Representatives are conferencing to resolve differences between their 2 versions of the Defense Appropriations Bill so they can send it to the President before October 1, the beginning of government fiscal year 2019.

Both the Senate and House versions of the Appropriations Bill reflect continued strong demand for our solutions and related capabilities as follows: nearly $113 million for Army LMAMS procurement for -- of hardware and services to be satisfied by our Switchblade offering in the Senate version with $105 million in the current House version; $5.5 million for Marine Corps LMAMS procurement in both versions, this is the first year the Marine Corps requested funds for LMAMS procurement; $46 million for Army Raven procurement in both versions; and $13.5 million for Air Force Puma procurement in both versions.

This totals more than $170 million in proposed funding for our solutions, a much higher level of budget visibility than in prior years.

In our international business, we secured our first contract for the adoption of our Puma systems by the German Navy.

This provides another indication of the continued strength of our small UAS in the global market.

International sales, which constituted 55% of total revenue in the quarter, remained an important driver for the company as our Family of Systems continues to be the solution of choice among U.S. allies.

We remain excited about the long-term business opportunity HAPS represents for us, and our HAPS team remains fully focused on executing the development and demonstration contract.

In coordination with our joint venture partner, we look forward to providing update as we achieve key milestones.

While we do not expect Commercial Information Solutions to contribute meaningfully to our financial results this fiscal year, we are receiving positive feedback from growers, agricultural service providers and scientists supporting our belief that this is a truly differentiated solution.

Our CIS team continues to focus on building our channel and expanding awareness of our highly differentiated Quantix and AV DSS solution within the agriculture market.

We continue to seek strategic partners to help us capitalize on this large long-term value creation opportunity.

Our MacCready Works team continues to push the envelope of technology and capabilities through its groundbreaking projects.

One such project is helping JPL and NASA build the Mars Helicopter, which will be the first robotic system to fly in the atmosphere of another planet.

This is another example of AeroVironment doing what has never been done before, part of what makes us unique in the eyes of the most selective customers on this planet.

Thanks to our outstanding team, we continued our momentum into fiscal year 2019 with another quarter of strong financial and operational performance.

Looking ahead, we remain focused on our fiscal year 2019 objectives and are confident that with continued disciplined execution of our strategy, we will build on this foundation and deliver continued growth and long-term value creation.

Now Teresa will discuss our first quarter financials in greater detail.

Teresa?

Thank you, Wahid, and good afternoon, everyone.

AeroVironment's fiscal 2019 first quarter results are as follows: revenue from continuing operation for the first quarter fiscal 2019 of $78 million, an increase of $43.6 million or 127% from the first quarter of fiscal 2018 revenue of $34.4 million.

The increase was due to an increase in product deliveries of $36.5 million and an increase in service revenue of $7.1 million.

Gross margin from continuing operations for the first quarter fiscal 2019 was $32.6 million or 42% of revenue compared to $8.7 million or 25% of revenue for the first quarter of fiscal 2018.

The increase in gross margin was primarily due to an increase in product sales margin of $22.7 million and an increase in service margins of $1.2 million.

Gross margin as a percentage of revenue increased from 25% to 42%, primarily due to higher revenue and a higher percentage of product sales in the first quarter.

Looking at the rest of the income statement, SG&A expense from continuing operations for the first quarter of fiscal 2019 was $12 million or 15% of revenue compared to SG&A expense of $11.3 million or 33% of revenue for the first quarter of fiscal 2018.

R&D expense from continuing operations for the first quarter of fiscal 2019 was $6.4 million or 8% of revenue compared to R&D expense of $5.5 million or 16% of revenue for the first quarter of fiscal 2018.

Income from continuing operations for the first quarter of fiscal 2019 was $14.2 million or 18% of revenue compared to a loss of $8.1 million or minus 24% of revenue for the first quarter of fiscal 2018.

The increase in income from operations was primarily due to higher gross margins of $23.9 million, partially offset by an increase in R&D expense of $0.9 million and an increase in SG&A of $0.7 million.

Net other income for the first quarter of fiscal 2019 was $9.3 million compared to net other income of $0.5 million for the first quarter of fiscal 2018.

The increase in net other income was due to the onetime gain on a confidential legal settlement, higher interest income and income from the transition services agreement with Webasto Charging Systems.

The effective income tax rate from continuing operations was 10.9% for the first quarter of fiscal 2019 as compared to an effective income tax rate of 42.3% for the first quarter of fiscal 2018.

The effective income tax rate for the first quarter fiscal 2019 included a discrete excess tax benefit of $1.1 million resulting from divesting of restricted stock awards and exercise of the stock options.

Equity method investment activity, net of tax, for the first quarter of fiscal 2019 was a loss of $0.6 million or $0.02 per diluted share compared to no equity method investment activity, net of tax, for the first quarter of fiscal 2018.

Net income from continuing operations attributable to AeroVironment for the first quarter of fiscal 2019 was $20.3 million or $0.85 per diluted share compared to a net loss from continuing operations attributable to AeroVironment of $4.4 million or a $0.19 loss per share for the first quarter of fiscal 2018.

The $0.85 per diluted share included a $0.26 onetime gain from a confidential legal settlement.

Without this onetime gain, the net income from continuing operations attributable to AeroVironment for the first quarter of fiscal 2019 would have been $0.59 per diluted share.

The company completed the sale of the EES business to Webasto Charging Systems in the first quarter of fiscal 2019.

The company received cash consideration of $32 million upon closing, which resulted in a gain of $11.4 million pretax and $8.8 million after-tax.

The company will receive additional cash consideration of $6.5 million upon the assignment of 2 of the remaining customer contracts to Webasto.

This amount was not recorded on our first quarter fiscal 2019 as the amount was not realized or realizable as of July 28, 2018.

The company expects to collect the additional cash consideration in the second quarter, and it will show as a gain from discontinued operations.

The gain from discontinued operations, net of tax, for the first quarter of fiscal 2019 was $7 million or $0.29 per diluted share compared to a loss from discontinued operation, net of tax, of $1.5 million for the first quarter of fiscal 2018 or a $0.06 loss per share.

The $7 million gain net of tax for the first quarter included $8.8 million gain net of tax on the sale of the EES business and a $1.8 million loss, net of tax, on discontinued operations.

Turning to our balance sheet.

Cash, cash equivalents and investments at the end of the first quarter fiscal 2019 totaled $325.8 million, an increase of $28 million from the end of fiscal 2018 cash, cash equivalents and investments of $297.8 million.

Net accounts receivable, including unbilled receivables and retention from continuing operations, at the end of the first quarter fiscal 2019 totaled $73.7 million, which was consistent with the end of the fourth quarter fiscal 2018.

Total days sales outstanding from continuing operations for the first quarter fiscal year 2019 was approximately 85 days compared to 48 days for the fourth quarter fiscal year 2018.

Net inventory from continuing operations at the end of the first quarter fiscal year 2019 was $42.2 million compared to $37.4 million at the end of the fourth quarter fiscal year 2018.

Days in inventory outstanding from continuing operations for the first quarter fiscal year 2019 was approximately 79 days, the same as the fourth quarter fiscal year 2018.

Accounts payable from continuing operations at the end of the first quarter fiscal year 2019 was $12.9 million compared to $21.3 million at the end of the fourth quarter fiscal year 2018.

Total days payable outstanding from continuing operations for the first quarter fiscal year 2019 was approximately 34 days compared with 24 days for the fourth quarter fiscal year 2018.

Turning to capital expenditures.

In the first quarter fiscal year 2019, we invested approximately $1.4 million in property improvements and capital equipment for continuing operations and recognized $1.7 million of depreciation and amortization expense.

We adopted the new ASC 606 revenue recognition standard as required for all public companies on May 1, 2018, under the full retrospective transition method.

The adoption of 606 resulted in a cumulative adjustment to decrease retained earnings by $1.1 million at May 1, 2018, relating to both our continuing and discontinued EES operations.

For our continuing operations, the adoption of 606 resulted in a cumulative adjustment to increase retained earnings by $1.1 million at May 1, 2018.

The impact to our revenue in prior years is primarily driven by contracts in our tactical missile systems business, which will now be recognized over time.

Now an update to our fiscal 2019 visibility.

As of today, we have: year-to-date revenue in fiscal 2019 of $78 million; first quarter ending backlog from continuing operations that we expect to execute in fiscal 2019 of $128 million; Q2 quarter-to-date bookings from continuing operations that we anticipate to execute in fiscal 2019 of $3 million; unfunded backlog from incrementally funded contracts and continuing operations that we anticipate to recognize revenue during the balance of the year of $13 million.

This adds up to $223 million or 74% at the midpoint of revenue guidance.

With the Tax Cut and Jobs Act, we anticipate a lower full year effective tax rate for continuing operations in the range of 14% to 17%.

Now, I would like to turn things back to Wahid to discuss AV's expectations for fiscal year 2019.

Thank you, Teresa.

We're off to a solid start in our fiscal year 2019.

With strong backlog, revenue visibility of 74% to the midpoint of our guidance range and a focus and committed team, we continue to expect fiscal year 2019 revenue from continuing operations of between $290 million and $310 million with diluted earnings per share of between $1.10 and $1.40.

We continue to expect R&D investments totaling 10% to 11% of annual revenue.

With respect to the distribution of revenue and earnings in fiscal year 2019, we continue to expect first half revenue about equal to half of the midpoint of our full year revenue guidance range.

In contrast to first quarter revenue mix, we expect lower-margin revenue mix for the balance of the year.

We also expect increased operating expenditures, including R&D and SG&A investments, along with a higher effective tax rate through our fourth quarter.

While revenue in our second, third and fourth quarters will be close to that of our first quarter, the effects of lower-margin revenue mix, higher operating expenditures and a higher effective tax rate imply lower quarterly earnings, producing the annual earnings guidance I just mentioned a moment ago.

In summary, we are confident in our ability to achieve our fiscal year 2019 objectives and deliver another strong year of profitability and growth.

To reiterate our main points for today's call: first, our team is successfully executing our plan, and we're on track to achieve our fiscal year 2019 objectives; and second, demand drivers for our solutions remain strong, and we're capitalizing on these opportunities to make progress towards our long-term goals.

Thank you to our team members who worked tirelessly to create value for our customers and stockholders.

Thank you to our customers who place their trust in AeroVironment to support their most critical missions.

And thank you to our stockholders for recognizing the value creation potential of our people and our company.

Teresa, Steve and I will now take your questions.

(Operator Instructions) The first question in the queue, sir, comes from Joseph DeNardi with Stifel.

Wahid, I think you mentioned in your prepared comments that TMS was 29% of revenue in the first quarter, small UAS was 53%.

What's the other 18%?

Is that HAPS?

Or what's the right math there?

Joe, Teresa here.

HAPS -- HAPS was 15% in Q1, and then we have other at 3%, which is inclusive of MacCready Works (inaudible).

Okay.

And Teresa, do you have the similar percentages for first quarter '18 just so we can get a sense for the growth rate?

Sure, Joe.

In the first quarter of fiscal '18, small UAS was 58%, TMS was 28%, HAPS was 7%, and other was 6%.

Great.

That's very helpful.

Wahid, just maybe a higher-level question for you.

Given what the stock price has done, I'm wondering if that changes how you view your appetite for M&A and how you think about using stock to finance any of that.

No problem, Joe.

So obviously, we have a very strong and healthy balance sheet in terms of our financials.

That is obviously not an accident.

We worked really hard to achieve that.

The primary reason for that is to execute our strategy -- our organic strategy and delivering the long-term value creation and achieving the success and the opportunities that we're pursuing, Joe.

We also recognize that there will be multiple opportunities to use our balance sheet, and potentially even our stock if we needed to, to supplement or to achieve our strategic gets, either faster, better, cheaper in different ways.

An example of that in the past year, for example, was the formation of a joint venture with SoftBank Corp., where we invested 5% initially, and we can raise that percentage up to 19%, and we expect that decision to happen sometime this fiscal year.

So with those types of activities, we intend to use our balance sheet to progress our strategy.

Beyond that, there may be other opportunities inorganically that would require a combination of potentially cash and noncash, such as our stock.

Those are all options that we as a management team as well as the board considers on a regular basis.

We review those.

And should we make any decisions on that, we will keep you updated.

But certainly, that's under mix of our consideration for decisions in the future.

The next question comes from Brian Ruttenbur with Drexel Hamilton.

So I just wanted to clarify a couple of points.

First of all, the way you're looking at the quarter, it's a normalized $0.59, and that would equate to your guidance, that $0.59 goes into the $1.10 to $1.40.

Is that correct?

The $1.10 to $1.40, when we gave that range, was inclusive of the onetime legal settlement that we had of $0.26.

So that included that.

So it was the $0.85 that we've talked about from continuing operations was part of the guidance, the $1.10 to $1.40.

Okay.

So you've made $0.85 in the first quarter, but you only anticipate making another $0.35 to $0.60, whatever, you've made half your -- over half your year.

I haven't done the math, off the top of my head, I apologize.

You've made half your year in the first quarter, and you anticipate the second quarter being also very strong, is that correct, at least on the revenue side, but not as much on the margin side.

Is that correct?

That is correct, Brian.

So this is Wahid.

You raised up a really good point, which is absolutely, as you heard from my remarks, we expect the second, third and fourth quarters in terms of revenue to be roughly equal to that of our first quarter.

However, the profit margin on the second quarter and the remaining of the year has a significantly different picture than the first quarter, and it's driven primarily by the following factors.

First, the mix of our revenue for the remainder of the year is quite different.

We have lower-margin product sales as well as a higher percentage of services contracts than product contracts that we anticipate to shift throughout the remainder of the year. .

Second, we also expect to increase our OpEx investments.

Q1 was lower, as we've -- we mentioned that to you guys last quarter.

And then third, our effective tax rate would also be higher for the remainder of the year.

We benefited from that on the first quarter, and that would not be the case in the remaining 3 quarters.

So the combination of those 3 factors equates to a lower EPS for the remainder of the year, and we therefore reconfirmed our guidance of $1.10 and $1.40 for the full year.

Okay.

I'm sorry to have you repeat that.

I heard that.

You made those in the prepared comments, but it seemed odd to me that it was such a big quarter and that there was no raising.

And I appreciate you going back over that.

Can you talk a little bit...

No problem.

Yes.

And then can you talk a little bit about the long-term growth in the business?

Where do you see it going?

It's obviously going to be a solid year this year.

And now that you're kind of a pure play on the UAS side, where do you expect that to grow in 2020 and beyond?

Sure, Brian.

So this is Wahid again.

Obviously, we feel very good about our performance for the first quarter.

We're very pleased with the results that we achieved -- accomplished so far.

It is still early for the year, and that's why we're reconfirming the guidance, and we expect to achieve the outcomes that we have set in front of us as part of our goals for this year.

Beyond fiscal '19, we don't comment specifically on the growth in dollars or revenue percentages and all that.

We will provide them in the fourth quarter.

I can tell you that inherent to our strategy of the business is to pursue these very large global end markets with highly differentiated, compelling and sustainable value proposition solutions and then capitalize on those and basically achieve adoption with those and achieve great success.

That has been our history in our small UAS.

That has been our history so far in our Tactical Missile Systems business.

And we intend to achieve even greater successes with the other 2 businesses that we're somewhat younger in those businesses, such as our HAPS business as well as our Commercial Information Solutions.

So in general, that's our strategy, and we're -- we feel pretty strong about our value proposition and our odds for success in the long term.

The next question comes from Joseph DeNardi with Stifel.

Wahid, I appreciate the revenue disclosures you guys have provided.

That's helpful for us to understand how the business looks, and I don't want you to regret doing that.

But given the commentary around the mix of business changing a little bit in the back of the year, should we think about the margin profile of kind of the TMS business, the small UAS business and the HAPS business as being different?

So as one ramps up a little bit, that there's going to be a margin drag associated with that?

Joe, certainly, that is the case with our businesses on any given time.

Our different product lines and businesses have different profiles even based on specific contracts.

So even within our small UAS business, Joe, our fixed price contracts tend to have slightly higher risk but also a higher profitability of gross margins.

Our cost-plus contracts are less risky in terms of its outcome for AeroVironment.

However, it's got also a lower profile for profitability.

And in terms of our different businesses, that is also true.

Obviously, right now in our HAPS business, in the joint venture, we are executing against the contract that we have in place, which we announced earlier, which is a cost-plus fixed fee contract.

And by nature, it is a lower gross margin endeavor, which we believe is the right thing for the long-term value creation opportunity for AeroVironment.

So throughout the year, Joe, we do expect differences in gross margin based on different product lines as well as within the product lines based on the mix of the products.

Okay.

That's helpful.

And then just on Switchblade or TMS.

I'm wondering if you can just talk about, to the extent you can, how it's being used by the customer right now.

I know you've been hesitant to talk about that in detail in the past.

I'm wondering if that's changed at all.

Is the usage primarily in theater still?

Or is it being used more broadly kind of the normal course of training?

Or is it still very focused, limited type of deployment at this point?

So Joe, we have always believed and continue to believe that our Switchblades, the original Switchblade that we have introduced many years ago, is a disruptor of a very large typical missiles business.

We believe that our solution set is very compelling, and it provides a very compelling value proposition for the type of problems and challenges that our men and women in uniform face daily out in the world.

We've been at the belief of that.

And as you see -- as you can see from our results and our track record, we have built that business and grown it very, very steadily over the last few years, very handsomely.

We still believe we're in the early stages of adoption.

Our customer still is the U.S. government.

We're not shipping those internationally to date.

Cannot comment specifically on the actual use of the product with what type of forces and all that due to our customer confidentiality needs.

However, there's very strong funding line within the U.S. DoD budget, as I mentioned in my earlier remarks, close to $113 million in the proposed budget, which was just signed by the President.

And again, this is a repeated demand signal of high demand, high validation of the solution's compelling value proposition to the market that we serve.

And we've also mentioned that there are multiple variants of that solution and different phases of its adoption and development process, which we believe is going to address a much bigger market long term.

Helpful.

Wahid, the $113 million that's in the budget, I'm assuming that's not in your backlog yet.

When would that go into your backlog?

And when do you expect to record that $113 million in revenue?

Is that primarily an FY '20 event for you guys?

Or would some of that start to hit this fiscal year?

So Joe, you are right that it is not in our backlog today because it's actually proposed funding that has been just signed by the President.

There are still some debate and discussion that has to happen between the 2 Houses of Congress.

And then the expected plan as of right now is for that to be resolved and delivered to the President before October 1, which is the beginning of the new government fiscal year.

And what that means is if that were to happen by that time frame, then that line of approval is going to be funded through the government fiscal year 2019, which starts October 1 and ends in September -- end of September of 2019 calendar year.

That means that the booking of that could happen any time towards the end of our year or beginning of next fiscal year.

And we will update you as we progressed through that process.

We're engaged with our customer on that very closely, and we're working towards a successful outcome for both our customer and AeroVironment.

Okay.

And then one last one for me if I could.

Just on the international opportunity for Switchblade.

Can you just talk about what the time line there could be when you could actually start to sell that to some of our closer foreign allies and whether any of those customers have expressed interest in that type of capability?

Sure.

So Joe, we believe that similar to the U.S. DoD customer of ours that the capability and the value proposition of Switchblade and its variants is very attractive and applicable to our multitude of allied nations.

Obviously, because it is such a disruptive solution, in technology, our customer, U.S. government, feels that it needs to be carefully vetted in terms of the ability for it to be able to ship internationally.

We have been working on that, and we continue to work on that with the U.S. government and State Department.

We've been very successful of that in our small UAS business for the last multiple decades, and we've grown that business as you've seen.

Long term, I believe that we're going to be successful there.

However, it's going to take more effort, and you have to go through the process.

When will that happen?

It's really hard to predict the exact timing of that, Joe, but we're working through that process.

And we will update you as we have any updates on that.

We have no further questions at this time.

I would turn the call over to Mr. Gitlin for any closing remarks.

Thanks, Michelle, and thank you all for your attention today 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, avinc.com.

We look forward to speaking with you again following next quarter's results.

Good day.

Thank you, ladies and gentlemen.

This concludes today's teleconference.

Thank you for participating.

You may now disconnect.