AeroVironment, Inc.

Good afternoon, ladies and gentlemen, and welcome to AeroVironment's first quarter fiscal year 2021 earnings call. This is Steve Gitlin, Chief Marketing Officer and Vice President of Investor Relations for AeroVironment. At this time, all participants are in a listen-only mode. We will conduct a question and answer session after management's remarks. As a reminder, this conference is being recorded for replay purposes. Before we begin, 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. For further information on these risks, we encourage you to review the risk factors discussed in AirVironment's periodic reports on Form 10-K and Form 10-Q filed with the SEC. and the Form 8-K filed today with the SEC, along with the associated earnings release and the Safe Harbor Statement contained therein. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation on our website at avinc.com in the Events and Presentations section. The content of this conference call contains time-sensitive information that is accurate only as of today, September 9, 2020. The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after this conference call. Joining me today from Air Environment are President and Chief Executive Officer Mr. Wahid Nawabi and Senior Vice President and Chief Financial Officer Mr. Kevin McDonald. We will now begin with remarks from Wahid Nawabi. Wahid?

Thank you, Steve. Welcome to our first quarter fiscal year 2021 earnings conference call. On today's call, I will emphasize three key messages also included on slide number three of our earnings presentation. First, despite the unprecedented COVID-19 pandemic and resulting global economic challenges, we are on track to achieve our fiscal year 2021 objectives. Second, we continue to make progress on our key growth initiatives within our tactical UAS, Tactical Missile Systems, and HAPS product lines. And third, we are successfully executing our long-term growth strategy while delivering significant value to our shareholders. I will start by summarizing our first quarter fiscal year 2021 performance, and then we'll discuss our achievements during the first quarter. Next, Kevin will provide a more detailed summary of financial performance in the quarter, and then I will discuss our outlook for fiscal year 2021. Before Kevin, Steve, and I take your questions. Now let's review our financial performance in the quarter, which we have summarized on slide number four of our earnings presentation. We delivered first quarter revenue of $87.5 million, consistent with the expectations we shared with you during our fourth quarter fiscal year 2020 earnings conference call. Full-year diluted earnings per share from continuing operations was $0.42 compared to $0.71 for the prior year, a difference resulting primarily from a shift in revenue mix which we expected. Non-GAAP earnings per diluted share from continuing operations for fiscal year 2021 was $0.44 compared to $0.74 for the prior year. We are executing our plan effectively while meeting continued robust global demand for Air Environment's highly differentiated solutions. Now I will review our business achievements in the first quarter. Our small unmanned aircraft systems product line represented 64% of total revenue in the first quarter. Importantly, we remain the leader in the global market for small UAS. Demand for our battle-proven Raven, Puma, and WAAS solutions remains strong. Additionally, we continue to engage with a growing number of customers and have received orders for our Puma LE system, which now can fly continuously for six and a half hours. This extended flight time provides customers with even more Group 2 capabilities and the Puma LE's Group 1 footprint at a substantially lower cost than other Group 2 solutions. We continue to demonstrate Quantex Recon to customers who are interested in its advanced capabilities such as fully automated launch, flight planning, operation, data collection, landing, and radio frequency silent operation. We believe these advanced features are compelling to customers who are focused on enhancing capabilities and reducing the cognitive load on system operators. Quantix Recon is one of the first unmanned systems to deliver a level of intelligence and autonomy that does not require a human operator's attention during its mission. We expect these capabilities to continue to expand and increasingly to define our solutions in the future of unmanned systems. Our teams are hard at work creating these features for our next generation of tactical UAS to provide to our customers. Next, our Tactical Missile Systems product line represented about 11% of first quarter revenue. We are executing against the record LMAAMS contract award for such relief that we received on April 30th. We recognized about $32 million of revenue from this award in fiscal year 2020, another $2 million as of the end of our first quarter of fiscal year 2021, and we anticipate recognizing a total of about $42 million during our fiscal year 2021. Our strong momentum last fiscal year developing our larger switchblade variant continued into this year with a number of successful demonstrations, tests and continued customer support and funding. As part of this variant's maturation, we plan to deliver a number of systems to our customers for operational deployment this fiscal year. We're also establishing low-rate initial production capability consistent with the expectations of our customers. We continue to believe this larger switchblade variant represents a game-changing solution to disrupt a larger segment of the missile market currently dominated by legacy systems such as Hellfire, Javelin, and TOW missiles. These legacy missiles accounted for more than a billion dollars in enacted DOD procurement funding in government fiscal year 2020. Moving now to HAFs, which represented 19% of first quarter revenue, we successfully completed the fourth test flight of the newly named Sunglider Solar HAFs in the first quarter. This was a longer flight that also flew higher than previous tests. Following the envelope expansion process we are executing during this demonstration phase. We expect this program to transition to a full testing and certification phase toward the end of our current fiscal year 2021. As a result, this should produce revenue similar to our fiscal year 2020 annual HAPS run rate of about $60 million. From a broader perspective, momentum for HAPS continues to build with the HAPS Alliance expanding awareness of this emerging capability and global leaders in telecommunications, aerospace, and technology joining forces with us to realize its potential. As a pioneer and leader in this space, AirVironment is very well positioned to establish the platform and related capabilities and build the relationships that will bring HAPS to market. Our strong relationship with SoftBank Corporation, our HAPS Mobile Inc. joint venture, and our collaboration with Alphabet's Loon on the Sunglider's communication payload provide a solid foundation for continued progress and the realization of HAPS as a means to deliver global connectivity and create shareholder value. Now I would like to address the impact of COVID-19 on our business. We are experiencing some delays in customer contracting decisions as our domestic and international customers continue to adjust to their own remote work situations. We are also experiencing some delays in limited areas of our supply chain resulting from the impact of the pandemic. When we developed our fiscal year 2021 annual plan, We included assumptions about the pandemic, which is why it is slightly back and loaded, with about 60% of revenue in the second half of the fiscal year. While this is a very fluid and unprecedented situation, we are prepared for the likelihood that the COVID-19 pandemic will persist into next calendar year and are well positioned to mitigate its impact on our business. Thank you for joining us. Thanks to the unwavering focus of our employees, we are confident we will emerge from this pandemic as an even stronger company. As a measure of how our people feel about working at AeroVironment, we were recently certified by the Great Place to Work organization as a great place to work for second year in a row. The Great Place to Work methodology involves sending A very detailed anonymous survey to all of our team members to assess their views on questions relating to justice, fairness, credibility, respect, and a number of other important dimensions of a company's workplace, environment, and culture. 87% of our people completed the survey this year, and our overall score of 90% rose significantly from last year. When we look at how different demographic groups within the company feel about AeroVironment through the Great Place to Work assessment, 100% of African Americans, 90% of Hispanic or Latinx, 87% of Asian, and 89% of our LGBT team members who responded to the survey agree that AeroVironment is a great place to work. While these are very high and best in class scores, We realize that there is more work to do. As we discussed on our last earnings call, we remain committed to promoting diversity and increasing representation of African American and other underrepresented groups within AirVironment. Our new Internal Diversity and Inclusion Committee includes 16 team members from across our company representing a broad spectrum of backgrounds and identities. This committee has been meeting on a regular basis and has developed a calendar of events designed to raise awareness further within our environment about issues relating to diversity. Our recruiting efforts include outreach to minority serving institutions, both through partners and directly. We're also continuing to plan and carry out STEM education and mentoring programs in our local communities. We remain committed to the objective of diversifying our team further, and more generally, we continue to advance our efforts to seek the most talented people to join our team, regardless of race, gender, religious belief, ethnicity, country of origin, or sexual orientation. Now, I will turn the call over to Kevin McDonnell for a summary of first quarter financials.

Kevin? Thank you, Wahid. Today, I will be reviewing the highlights of our first quarter finance performance. I will be referring to both our pressure lease and earnings presentation available on our website. I will deviate slightly from past practice by only addressing the key financial metrics in my remarks and leaving some of the details of the pressure lease and earnings presentation. Revenue for the first quarter of fiscal 2021 was $87.5 million, an increase of 1% from the first quarter of fiscal 2020 revenue of $86.9 million. The breakdown of revenue by product area is contained on slide 6, of the quarterly earnings presentation. During the quarter, we saw strength in domestic small UAS, which was up 24% from the same period last year, and HAPS mobile development revenues, which were up 33%. This was largely offset by lower international small UAS revenue. In general, international visibility has been most impacted by COVID. Turning to gross margins, slide five of the quarterly earnings presentation shows our product-service mix and overall gross margin trends Over the past five quarters, gross margin for the first quarter was $35.4 million, or 40% of revenue, compared to $41.3 million, or 47% of revenue for the first quarter of last fiscal year. The 47% gross margin last year was an outlier, with exceptionally strong gross product margins of 54% and favorable product-service mix. The 40% overall gross margin the first quarter this year was in line with our expectations. Next, I will turn to operating expenses. SG&A expense for the first quarter was $12 million, or 14% of revenue, compared to SG&A expense of $13.7 million, or 16% of revenue for the first quarter of FY20. The lower spend in the current quarter is in large part related to a reduction in travel and trade show expenses as a result of COVID-related restrictions. RD expense for the first quarter was $11.1 million, or 13% of revenue compared to R&D expense of $8.7 million or 10% of revenue for the first quarter of FY20. We continue to make significant R&D investments. These investments include enhancements to current products, new variants within product lines and product additions. We believe these investments will enable continued leadership in the small UAS space and drive growth in both our small UAS and TMS product lines in the near future and longer term. Looking at the bottom line, Net income attributable to air environment for the first quarter of fiscal 2021 was $10.1 million, or 42 cents per diluted share, compared to $17.1 million, or 71 cents per diluted share, for the first quarter of fiscal 2020. The $7 million reduction in net income was largely a result of reduced gross margin dollars of $5.9 million and increased R&D investments of $2.4 million, which were mentioned previously. and reduced interest income of $1.1 million related to lower investment yields and more conservative investment policy. Net income was positively impacted by lower SG&A expense of $1.7 million and reduced tax rate of 9.6% versus the prior year of 10.4%. The decrease in tax rate was primarily due to an increase in excess tax benefits from equity awards. Looking at the full year, we expect the year-end tax rate to be between 11% and 12%. In terms of adjusted EPS, FIFE 11 shows the reconciliation of GAAP and adjusted or non-GAAP EPS. Non-GAAP diluted earnings per share for the first quarter of fiscal 2021 was 44 cents per diluted share and includes two cents per diluted share of intangible amortization expense associated with our acquisition of Pulse Aerospace. Non-GAAP diluted earnings per share for the first quarter of fiscal 2020 was 74 cents per diluted share and exclude $0.03 per diluted share, which includes deal costs, integration expenses, and intangible amortization expense associated with our acquisition of Pulse Aerospace. Turning to the balance sheet. Once again, we ended the quarter in a strong cash position. Cash, cash equivalents, and investments at the end of the first quarter of fiscal 2021 totaled $338.5 million, an increase of $20.8 million from the end of fiscal 2020. Total cash flow from operating activities during the quarter was $26.8 million, of which $10.5 million was the result of working capital improvements and the remainder from other operating activities. The working capital improvement came primarily from lower accounts receivable, partially offset by lower accounts payable, and reduced accrued liabilities as a result of year-end bonus payouts. In terms of capital expenditures, we spent $4.1 million during the quarter. Now I'd like to highlight some of our backlog metrics. Our funded backlog at the end of Q1 was $154.4 million, a decrease of $10.1 million from the first quarter of fiscal 2020, and a decrease of $53.6 million from the fourth quarter of fiscal 2020 backlog of $208.1 million. In terms of fiscal 2021 visibility, which is highlighted on slide seven of the earnings presentation, as of today, We have year-to-date revenues of $87 million, first quarter ending backlog that we anticipate to execute in fiscal 2021 of $147 million, quarter-to-date bookings that we anticipate to execute in fiscal 2021 of $20 million, unfunded backlog from incrementally funded contracts we anticipate to recognize revenue during the balance of the year of $30 million. This adds up to $284 million, or 71% of our fiscal 2021 revenues. Midpoint Revenue Guidance Range. Now I'd like to turn it back to Wahid.