AeroVironment, Inc.

Good afternoon, ladies and gentlemen, and welcome to Air Environment's fourth quarter and full fiscal year 2021 earnings call. This is Stephen Gitlin, Chief Marketing Officer and Vice President of Investor Relations for Air Environment. 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 four local statements. For further information on these risks, we encourage you to review the risk factors discussed in Air Environment'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 presentation section. The content of this conference call contains time-sensitive information that is accurate only as of today, June 29, 2021. 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. Waheed Nawabi, and Senior Vice President and Chief Financial Officer, Mr. Kevin McDonald. We will now begin with remarks from Waheed Nawabi. Waheed?

Thank you, Steve. Welcome to our fourth quarter and full fiscal year 2021 earnings conference call. On today's call, I will emphasize an important message included on slide number three of our earnings presentation. That message is this. Air Environment again delivered on its financial, operational, and strategic commitments despite the continued macroeconomic challenges. In fiscal year 2021, we applied Air Environment's unique value proposition of innovation, customer intimacy, and agility to help our customers succeed. We're proud to have delivered a fourth consecutive year of profitable revenue growth in the midst of the global pandemic. We deployed our balance sheet to expand our solutions portfolio and the value of our addressable markets. We successfully executed our growth strategy and created significant value for our three key stakeholders, our customers, employees, and shareholders. And the demand and preference for our innovative, reliable, and battle-proven solutions remain strong, reflecting our continued global leadership and our chosen market segments. Today, I will summarize our fiscal year 2021 performance and discuss our achievements during the fourth quarter and full fiscal year. Next, Kevin will provide a more detailed summary of our financial performance in the year, and then I will follow up with a brief discussion on our goals for fiscal year 2022 before Kevin, Steve, and I take your questions. Now let's move to our fiscal year highlights included on slide number four. Our team has done an incredible job of staying focused on serving our customers and delivering profitable top-line growth, despite a full fiscal year operating during the COVID-19 pandemic. We produced record fourth quarter revenue of $136 million and record full-year revenue of $395 million. Full fiscal year revenue increased by 7.5%, including contributions from the Arcturus UAV and ISG businesses acquired in the year, which I will discuss in a few moments. While we were able to manage the majority of supply chain issues during the pandemic, some isolated issues prevented us from achieving our revenue objectives for the fourth quarter and the full fiscal year, leaving us slightly below our guidance range. Full-year diluted earnings per share, or 96 cents, compared to $1.72 for fiscal year 2020. Fiscal year 2021 included an impairment of $8.4 million related to HAPS Mobile's investments in Loon LLC and $9.3 million for legal accrual related to our former EES business. Non-GAAP earnings per diluted share for fiscal year 2021 were $2.10, compared to $1.84 for fiscal year 2020, an increase of 14%. Record fiscal year ending funded backlog of $211.8 million rose slightly from the prior year. I commend the entire Air Environment team for adapting to new ways of working during the pandemic and achieving these solid financial results. while also acquiring three new businesses and successfully integrating them into our portfolio. Now I will review our business achievements in fiscal year 2021. First and foremost, in fiscal year 2021, we significantly reshaped our portfolio by acquiring our Tourist UAV, Telerob, and Progeny Systems ISG. These acquisitions further expand our offering to provide our customers a portfolio of intelligent multi-domain robotic systems. Beyond defense markets, we're also able to deliver valuable solutions combining air and ground robotic systems to first responders, infrastructure managers, homeland security personnel, and others. Supporting the broader adoption of UAS for commercial use, We were recently appointed to an FAA advisory rulemaking committee focused on beyond visual line-of-sight operations. This ensures we remain in a position to provide recommendations that drive adoption of UAS and the United States. As a result of our strategic acquisitions, we now organize our portfolio in six product lines, which I will now describe. First, our small unmanned aircraft systems product line represented 60% of total revenue in the fiscal year, or $236 million. We continue to secure new procurements and support awards for U.S. and some of our more than 50 international allied customers, reflecting our continued global leadership in this category. During the fiscal year, we received a number of contract awards that included more than $20 million from the U.S. Army for RAVEN radio frequency modification and a number of procurement awards from international allies for RAVEN and PUMA and for support services. In total, our small UAS product line generated approximately $111 million in international revenue during the year, a 6% increase over fiscal year 2020. Second, our new medium UAS product line is the result of our acquisition of ArcTourist UAV, a provider of Group 2 and 3 UAS and services. This transaction closed in our fourth quarter, and the product line contributed 4% or $16 million of full fiscal year revenue. Our end UAS product line addresses a market segment that is even larger than the small UAS opportunity, and the team continued to support our U.S. SOCOM customer on its MEUAS IV services contract. As a reminder, under this contract, AeroVironment provides ISR services to our customer at their overseas basis. This is a contractor-owned, contractor-operated, or COCO, business model in which our personnel operate our Jump 20 VTOL fixed-wing hybrid systems and provide customers with the actionable intelligence they generate. During the fiscal year, we also secured an extension award for one of the customer locations and are gaining share in this program, reflecting our strong operational performance and value proposition. Our Jump 20 system is also a leading candidate for the U.S. Army's Future Tactical UAS, or FTUAS, program. In February, we participated in the Army's FTUAS Rodeo Showcase and successfully demonstrated the advanced capabilities of the Jump 20 to Army officials. We remain confident in our positioning for the FTUAS program and expect the customer to announce prototype awards in calendar year 2022 and procurement awards as soon as government fiscal year 2023. Third, our tactical missile systems product line represented 22% of fiscal year 2021 revenue, or $87 million. During the fiscal year, we secured a new Switchblade 300 procurement award of $45 million under the U.S. Army's $146 million LMAMS contract and a separately funded logistics support award worth up to $41 million over three years for that program. Importantly, the U.S. government granted its first export approval for Switchblade 300 procurement by an allied nation, an order we expect to deliver before the end of fiscal year 2022. We continue to work with additional allied customers who are interested in Switchblade 300's unique capabilities. During the fiscal year, we also introduced the Switchblade 600, The U.S. SOCOM awarded Air Environment a $26 million contract for Switchblade 600 in April. This award is for integration of Switchblade 600 into specialized naval vessels, highlighting the multi-domain capabilities of this unique solution. While we do not win the Marine Corps OPFM Phase II RDT&E Award, We are continuing to track and pursue this and other U.S. DOD programs. Additionally, we will be delivering Switchblade 600 units this fiscal year to another customer who continues to move forward with low-rate initial production and operational deployment of this capability. We're confident in our potential to continue to grow and succeed across our portfolio. In adding to the multi-domain applications for our TMS product line, the U.S. Navy announced their intent to order up to 120 of our Blackwing reconnaissance systems for the submarine-launched unmanned aerial systems, or SLUAS program, as part of its ongoing effort to adopt Blackwing across its submarine fleet. In other platform integration opportunities, we continue to work with General Dynamics land systems on the integration of small UAS and switchblade into their next generation armored vehicles. The recent conflict between Azerbaijan and Armenia highlighted the game-changing capability of armed UAS and loitering missiles to neutralize traditional armored assets. Air environment remains at the forefront of this disruptive capability. and stands ready to support our military and our allies with patented battle-proven loitering missile solutions. Fourth, our new unmanned ground vehicles for UGV product line represents Telerob, the German leader in ground robotic solutions that we acquired in early May. Since we have not closed the transaction prior to the end of our fiscal year 2021, We're not reporting Telerob's financial results for the fiscal year. We retained all Telerob employees, including their leadership team, and we're actively pursuing a number of new programs and cross-selling opportunities in the U.S. and internationally. We're still waiting for the U.S. Air Force to announce a decision on its large EOD robotics contract. Fifth, our HAPS product line represented 11% of fiscal year 2021 revenue, or $42 million. We recently entered into a new five-year master design and development agreement with SoftBank to transition to the next phase of Solar HAPS development and build a third aircraft that will benefit from the learning gained in our five successful test flights. Under this new agreement, Air Environment received a new $52.1 million order to continue our work on the program. We also received an additional $4.7 million order related to the completion of the previous design development agreement. We've made tremendous progress on this potentially transformative development program. In less than three years, we designed the SunGlider solar HABs. established an innovation center and flight test facility, produced two SunGlider Solar HAFs aircraft, conducted five successful low- and high-altitude test flights, and demonstrated broadband LTE communication from the stratosphere. We remain committed to creating value in our HAFs product line and are confident that our recent advancements represent an important step toward the ultimate commercialization of solar haps technology for global connectivity. In our sixth product line, McCready Works Advanced Solutions expanded its capabilities with the acquisition of the Progeny Systems ISG team, a leader in the development of artificial intelligence-enabled computer vision, machine learning, and perceptive autonomy technologies. We plan to introduce new AI capabilities into our small UAS product line this fiscal year with a roadmap for continued enhancements into the future. Also part of McCready Works, we recently celebrated the historic and highly successful flights of the Mars Ingenuity Helicopter, much of which our team designed and built for JPL and NASA. With eight flights completed, JPL has transitioned Ingenuity from a technology demonstration to an operational demonstration. The achievements of Ingenuity speak not only to the ability of our team to develop first of their kind robotic systems for the most extreme environments, but also highlight our culture of partnering with our customers and suppliers to achieve incredible results. We look forward to continued success with Ingenuity on Mars as well as supporting emerging opportunities in the new category of robotic aircraft for planetary exploration. Beyond the business achievements we've made in our six product lines, we have also focused on the diversity of our team and have instituted programs aimed at furthering our culture of inclusion for all team members. Our Diversity and Inclusion Committee has established a series of programs designed to raise awareness of critical issues and implicit biases. Our recruiting team is working with organizations that help us reach more underserved populations, including minority-serving institutions and minority professional organizations. We're focused on finding the best team members based on their skills, experience, and ability to live our values, purpose, and promise while contributing to our customers' success and to AeroVironment's growth. Now I will turn the call over to Kevin MacDonald for a summary of the quarter and full year financials. Kevin?

Thank you, Waheed. Today I will be reviewing the highlights of our fourth quarter and full year financial performance. I'll be referring to both our press release and earnings presentation available on our website. Revenue for the fourth quarter of fiscal 2021 was $136 million, a slight increase from the fourth quarter FY20 revenue of $135.2 million. Slide six of the earnings presentation provides a breakdown of revenue by product line for the quarter. The headlines here are that the newly acquired a tourist business, which now becomes our medium UIS product line, contributed approximately $6 million of revenue to the quarter and the year. This additional revenue was more than offset by a $16.3 million decline in our house revenue versus last year's fourth quarter, which included the build-out of the Joint Ventures Flight Test Facility. TMS revenue was strong in the quarter at $39.2 million, but down slightly versus a very, very strong fourth quarter in FY20. Small UAS also ended the year strong with $70.9 million of revenue, which is a 7.8 million or 12% revenue increase year over year. Other revenue in the quarter was down $3.5 million from the prior year. Revenue for the full fiscal year 2021 was $394.9 million, an increase of 7.5% from the 2020 revenue of $367.3 million. Reflecting continued leadership in our core products, we experienced strong year-over-year organic growth of 12% for the combined TMS and small UAS product lines. However, this was largely offset by a $21.7 million decline in HAPs and other revenue, As a consequence, overall grant revenue growth netted to 3% for the year. The contribution of newly acquired businesses boosted the overall growth to 7.5% level, as previously noted. Turning to gross margin. Gross margin for the fourth quarter was $59.7 million, or 44% of revenue, compared to last year's fourth quarter of $53.2 million, or 39% of revenue, revenue. Gross margins were and will continue to be negatively impacted by intangible amortization expense included as part of cost of sales, which was $2.6 million for the quarter versus just over $600,000 in Q4 of FY20. Excluding the intangible amortization, overall gross margins were strong at 45.8% for the fourth quarter versus 39.8% in last year's fourth quarter. Also excluding intangibles, Product gross margins were very strong at 52% versus 42% a year ago. I should note that we talk about intangible amortization under cost of sales. This also includes other non-cash purchase accounting adjustments. Gross margin for fiscal 2021 was $164.6 million, or 42% of revenue, compared to $153.1 million, which was also 42% of revenue for fiscal 2020. The total margin dollars increased by 7% year-over-year. Total intangible amortization included as part of cost of sales was $4.5 million for fiscal 2021 versus $2.4 million for FY20. Excluding the intangible amortization, overall adjusted gross margins for the year were 43% versus 42% last year. Adjusted product gross margins remained strong for the year at 47%, which is in line with fiscal 2020. Our mix of product to service revenue has been roughly 70% product and 30% service over the last two years. As we move forward, we expect this mix will shift to closer to 60% product and 40% service as a result of our medium UAS product lines COCO ISR operation, which is classified as service revenue. As a result, overall full year gross margins excluding intangible amortization will decline a few percentage points as a result of this mix shift. Including intangible amortization, we expect the drop will be between 5 and 6 percentage points. Accounting effects aside, we expect full-year product margins before intangible amortization to remain fairly stable year-over-year and in the high 40% range. We expect program and product revenue mix in the first quarter to drive lower quarterly margins, significantly below our full-year gross margin expectations. This should normalize in the second quarter. Now I'll turn to operating expenses. SG&A expense for the fourth quarter was $24.8 million compared to $16.3 million for Q4 FY20. Included in SG&A for the quarter were intangible amortization and deal integration costs of $6.7 million compared to just over $600,000 in Q4 FY20 which represented most of the year-over-year increase in SG&A. The remainder of the increase in SG&A for the quarter was a result of newly acquired operations offset by lower travel and other expenses impacted by the pandemic. In terms of the full fiscal year, SG&A expense was $67.5 million compared to $59.5 million for fiscal 2020. SG&A for the full fiscal year 2021 included intangible amortization and deal integration costs of $11.1 million compared to $1.9 million in fiscal 2020. Backing out the increase to intangible amortization deal costs, SG&A expenses actually declined year over year. So when you exclude intangible amortization deal costs, SG&A as a percentage of revenue in fiscal 2021 was 14.3% versus 15.6% in 2020. The year-over-year improvement can be attributed to lower travel and trade show expenses as a result of the pandemic. As business conditions return to normal, we anticipate our SG&A expenses or percentage of revenue before intangibles and deal costs will return to pre-pandemic levels in 2022. As a point of reference, intangible amortization and integration costs are expected to be a combined approximately $18 million for fiscal 2022. Our D expense for the fourth quarter was $17.1 million. or 13% of revenue compared to R&D expense of $15.5 million or 11% of revenue for the fourth quarter of FY20. R&D expense for fiscal 2021 was $53.8 million or 14% of revenue compared to $46.5 million or 13% of revenue in 2020. Looking at the bottom line, GAAP net income from continuing operations for the fourth quarter of fiscal 2021 was $10.9 million or $0.44 per diluted share, compared to net income of $17.8 million, or $0.73 per diluted share for the fourth quarter fiscal 2020. The $6.8 million decrease in net income was largely a result of illegal accrual related to our former EES business of $9.3 million, as well as an additional $8 million of acquisition-related expenses partially offset by higher gross margin lower taxes, and lower equity method investment activities expenses. For the full year of fiscal 2021, net income from continuing operations was $22.3 million, or $0.96 for diluted share, compared to $41.3 million, or $1.72 for diluted share, for fiscal 2020. The $18 million reduction in net income was primarily due to $11 million of additional acquisition-related expenses 9.3 million legal accrual mentioned previously, the $8.4 million loss from our portion of the HAPS mobile impairment of its investment in Loon, partially offset by higher gross margins and lower taxes. In terms of adjusted EPS, slide 11 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. Non-GAAP diluted earnings per share for the fourth quarter of fiscal 2021 was $1.04 per diluted share versus diluted earnings per share for the fourth quarter, of fiscal 2020 of 75 cents. For fiscal 21, non-GAAP diluted earnings per share was $2.10 versus non-GAAP diluted earnings per share for fiscal 2020 of $1.84, a 14% increase year-over-year. Turning to the balance sheet, total cash investments at the end of the quarter was $201.2 million, a decrease of $116.5 million from the end of fiscal 2020, as we deployed our balance sheet for strategic growth opportunities. Total cash flow from operating activities for the fiscal 2021 was $87.2 million, of which $23.8 million was a result of working capital improvements and the remainder from operating activities. The working capital improvement came primarily from the collection of accounts receivables. During fiscal 2021, we spent $12 million on capital expenditures. During the fourth quarter, we had total cash outlays from existing cash related to two acquisitions that closed in February of approximately $189 million. In addition, in conjunction with the Arturis acquisition, we entered into a $200 million term loan facility and a $100 million revolving credit facility with a group of banks. At the close of the Arturis transaction, we drew down $200 million on the term loan facility, which was used to fund the acquisition. the $100 million revolving credit facility remains unused. We had an additional $55 million of cash outlays related to the Telerob acquisition early in May following the close of that acquisition. Also at the close of the Arcturus transaction, we issued approximately 574,000 shares of AV stock to the selling Arcturus shareholders. Now I'd like to highlight some of our backlog metrics. Our funded backlog at the end of 2021 was $211.8 million, an increase of $107 million from the third quarter of fiscal 2021, and an increase of $3.7 million from the fourth quarter of fiscal 2020 backlog of $208.1 million. Page 8 of the earnings presentation provides a summary of our current FY22 visibility. We picked up over $100 million of bookings since the end of Q4, bringing our total visibility to the midpoint of the guidance range to 61%, which is the highest level for our fourth quarter in the past five years. Now I'd like to turn things back to Waheed.

Thanks, Kevin. We're planning for the return of many of our team members to our work sites as soon as next month, which is also when we will celebrate Air Environment's 50th anniversary. Our growth portfolio is rich with opportunity. Our intelligent robotic systems in the air on the ground and in the water will work together to achieve mission success faster, safer, and more cost-effectively than otherwise possible. And that intelligence will be bolstered by our expanded AI and autonomy capabilities. In terms of the U.S. DoD budget environment, the President's interim national security strategic guidance provides strategic direction to the U.S. DoD and informs the Department's priorities as reflected in the fiscal year 2022 budget request. This guidance states, quote, new technologies like artificial intelligence, autonomy, and robotics will change the character of warfare resulting in a faster, more lethal, and more distributed battlefield, unquote. Additionally, Proposed U.S. Government Fiscal Year 2022 funding for Defense Procurement and Research Development Testing and Evaluation, or RDT&E, for unmanned technologies exceeds $7 billion. This includes $68 million for Army LMAMS procurement, where our Switchblade 300 is the incumbent solution. $69 million for Army FTUAS RDT&E, which we are well positioned for with our MUAS Jump 20 solution. Additionally, the Army added $73 million to their unfunded list in order to accelerate the FTUAS program by two years. Beyond UAS and TMS, Army ground robotics funding requests total $124 million. In summary, our expanded portfolio of solutions gives us potential access to as much as $450 million in the GFY 2022 budget request, a much larger set of DOD opportunities than ever before. Importantly, we have seen no decrease in demand for our solutions as a result of the military drawdown in Afghanistan. This is consistent with the manner in which small UAS and TMS solutions have become institutionalized into the way our customers plan, train, procure, and operate. Our three acquisitions significantly expand our revenue profile along with our growth portfolio, contributing to a significant increase in our revenue expectations for fiscal year 2022. Looking ahead, we have very good visibility into fiscal year 2022 with strong funded backlog and total visibility of 61% described on slide number eight of our earnings presentation. This gives us confidence in our ability to achieve our annual revenue and earnings objectives. As summarized on slide number nine of our earnings presentation, for fiscal year 2022, We expect to deliver a fifth consecutive year of profitable top-line growth with revenue of between $560 million and $580 million, adjusted EBITDA of between $105 million and $110 million, and earnings per diluted share of $1.31 to $1.51. We expect non-GAAP earnings per diluted share, which excludes amortization of acquired intangible assets, to be between $2.50 and $2.70. This guidance represents a 44% increase in revenue and a 50% increase in adjusted EBITDA. Because of the impact of the pandemic on contract timing, we expect first half revenue to account for approximately 40% of total fiscal year 2022 revenue. We also expect first quarter revenue to represent about 40% of the first half revenue and a first quarter non-GAAP EPS loss of approximately 25 cents to 35 cents as a result of volume and mix effects. We expect research and development investments to be about 9% to 10% of this fiscal year's revenue. We expect a decline in fiscal year 2021 overall gross margin to about 35% to 37%, as Kevin described in his comments. We are monitoring our supply chain carefully for any risks that could affect our business. As an example, the ongoing global semiconductor chip shortage may impact some of our programs. In summary, to reiterate our main message for today's call, Air Environment again delivered on its financial, operational, and strategic commitments despite the continued macroeconomic challenges. As I look ahead into the new fiscal year, I see the potential for continued growth and success for our company. Our confidence in the future has never been stronger. We look forward to meeting with many of you in person in fiscal year 2022 and with many others virtually. I would like to express my deep appreciation to our customers for trusting and working with us as well as we all adapted to the pandemic. Thank you to our incredible expanded air environment team and all its team members. Your dedication to our purpose and to serving our customers has always inspired me, but even more so this past year. You have delivered once more and positioned us for continued momentum in fiscal year 2022. A special thank you to Chairman and former CEO Tim Conver, who will retire from our Board of Directors effective at our next annual meeting. Air Environment would not be the market leader it is today without Tim's vision and perseverance, and we're all grateful for his contributions. I am grateful for Tim's guidance and mentorship throughout the last decade. The entire Air Environment team and I wish Tim and his family the very best. I would like to also express my great appreciation to Steve Gitlin, who is leaving us at the end of this month to pursue opportunities outside of air environment and the robotics industry. Throughout the last two decades, Steve has made significant contributions to air environment success. Among his many roles and responsibilities, including chief marketing officer, strategic planning, internal communications, and investor relations, Steve has always honestly and candidly represented the voice of our shareholders inside air environment. Steve has been instrumental in defining and achieving our future state strategy, which positions our environment as an intelligent, multi-domain robotic solution provider. We could not have achieved what we have achieved so far without Steve's visionary leadership throughout the last two decades. I wish him well in his future endeavors. With that, Kevin, Steve, and I will now take your questions.

Thank you, Waheed.

You're welcome, sir.

We will now begin the question and answer session. If you have a question, please press star and then one on your touch tone phone. If you wish to be removed from the queue, press the pound or hash key. If you are using a speaker phone, you may need to pick up your handset first before pressing the numbers. We respectfully ask that you limit your questions to two and please re-enter the queue to ask further questions. Once again, to ask a question, please press star and then one on your touch tone phone. Our first question today comes from Pete Skibitsky of Alembic Global.

Pete? Hey, good afternoon, guys. Hope you're doing well. Quick question. Quick question on fourth quarter revenue. It seemed a little soft versus expectations. And just by my model, excuse me, it seemed almost completely due to HAPs. I thought the expectation was for HAPS revenue to be kind of stable year over year, but it looks like it was maybe down about $18 million year over year. Was that a surprise to you guys? Was it due to the contract kind of change? And then into fiscal 22, I know I'm going on, but should we kind of extrapolate the contract awards to think that HAPS will be up to $55 million in fiscal 22? No.

So, Steve, this is Waheed. Thanks for the comment. In regards to your question, obviously, we're very pleased with a record fourth consecutive year of profitable top-line growth, both organically as well as inorganically. And we're also positioned extremely well for fiscal year 2022 with another year of consecutive growth expected. In terms of the fourth quarter, you know, we faced a few – challenges on supply chain, which we addressed most of that throughout the entire year extremely, extremely well. Given the fact that we were in a pandemic, we addressed all those issues quite well, but there were some specific minor issues that caused some delays and a few revenue items that addressed our fourth quarter specifically. Again, record quarter, record year, record backlog, record visibility, and also record the sort of top-line growth for the past year and next year. And we're looking forward to another very high-growth year, both organically and inorganically, and we'll keep you updated on that. In terms of the HAPs, HAPs revenue should go up a little bit more next year, but really it depends on that's a customer-funded R&D program. And that program is really – the fluctuations are not significant. But you're right. Year over year, the HAPS program was slightly slower. And, again, that was affected to some extent by the global pandemic, which we have not been able to travel internationally. And our customer or partner has not been able to travel either. So there's been some effect of that as well on the fourth quarter.

Okay. Okay, gotcha. Okay, I'll get back into the queue. Thanks, guys. You're welcome.

Our next question comes from Peter Armand at Baird. Peter?

Good afternoon, Waheed, Kevin, Steve. Hey, Waheed, on the export for the Switchblade 300, could you maybe talk about, you mentioned that there was others that were interested. When do you expect to see potential orders there, and maybe what's the path forward with that program?

Sure, Peter. So obviously we're very pleased with the performance of our TMS business last year. It's been a growth year for us. and it will continue to be a growth year for us next year, as Kevin and I outlined some of that growth for next year. In terms of the export license for Switchblade 300, we did receive the first one, and we expect to ship that before the end of this fiscal year. We are talking to multiple other interested countries and allies, all of whom have an interest in this capability and its patented, very unique value proposition. The timing of receiving additional export licenses and awards is, again, very difficult to predict exactly. However, I think that the fact that we received the first export license does position us well and allows us to have a higher probability of success with additional allies. We consider the international markets for social aid 300 and 600 quite significant, and we believe that as we advance execute our strategy and progress throughout the next few years, we'll continue to expand our switchblade 600 exports internationally. 300, I'm sorry.

Yeah, just as a follow-up to the 600 comment, you mentioned that was being incorporated into some Navy vessels or at least the initial award. Can you talk about if there's other interest from other services within the DoD?

Sure. So, you know, we've made a lot of really great progress in fiscal year 21 on our TMS product line in general. We secured a number of awards for LMAAM's contract, which I mentioned in the tune of $40-plus million in my remarks, but also the export license for 300. In terms of the 600, we received a couple of key awards. One is our existing customer placed orders for us to deliver units for operational deployments downrange, which is very positive. That means they really believe in the maturity of the product and the differentiated capability of the solution set. Additionally, we secured another contract, over $20 million, for the development of an additional variant of this for the ability for Switchblade 600 to be launched off of maritime vessels. This is a maritime variant of Switchblade 600, which is a development contract which our customer is pleased with us so far and continues to work with us. This is obviously a development agreement which will take us a little bit of time, but It goes to show that the value proposition of this game-changing capability and the desire of our customers for this asset. Lastly, I would also mention that all the other branches of the services, including the US Army and the US Marine Corps and the Navy are looking at various types of loitering missiles to be basically embedded or integrated with other ground or maritime assets. So it's very consistent with our strategy and it supports our theory and our belief that this capability could be very, very game-changing long-term for the U.S. warfighters.

Thank you, Peter. Our next question comes from Joe Tenardi at CIFL. Hi, Joe.

Hey, good afternoon. And, Steve, I'm sorry to see you go. You're one of the good guys in the industry, and you'll be missed.

Thank you, Joe. That's very true. We will miss him as well, Joe.

I think Steve has been on every call since the IPO, if I'm not mistaken. But anyway, Waheed, can you give us the organic growth assumption embedded in the FY22 revenue guidance?

Sure. So we'll provide more color when we get to our first quarter earnings. We're still in the midst of the integration of the businesses that we've just acquired, which all are going really well. I'm not sure if we're going to be able to break out our specific product line growth by that time, but we will keep you updated. In general, what I can tell you is that for fiscal year 2022, we expect growth both on our acquisitions, on organic acquisitions that we've done, as well as on our core businesses. And our core businesses, TMS and SUAS, remain strong. The product growth margins going into next year also remain stable and healthy. And so we expect growth on both organic businesses as well as our inorganic businesses for the next year. And as you heard my comments, you know, this will be – fiscal 22 will be, if we achieve the outcomes that we've set for ourselves, a fifth consecutive year of top-line profitable growth.

Is the organic growth greater than 10% at least?

We will provide the specific details later on our first quarter earnings call, Joe, but we feel pretty good about the growth of our businesses. And another key point that I would mention is that by these acquisitions and the growth of our product line, we're really a very well-diversified portfolio company now. We've got assets and capabilities and ground in the air and on the water, and we have UGVs and UAVs that are different sizes. customers, and different geographies. So the diversity of our portfolio, customer base, and geographic footprint all allows us to have a better business and a higher growth business.

Yeah, and the organic growth for the core products, as I mentioned, was 12% year over year in the combined TMS and small UAS business. What kind of dragged us down organically was the halves and other service revenue.

Thank you for your question, Joe. Once again, to ask a question, please press star and then one on your touchtone phone. And our next question comes from Ken Herbert at Canaccord. Hi, Ken.

Hey, good afternoon, Waheed, Steve, and Kevin. I wanted to dig first into Arcturus, and it seems like, the run rate for your fiscal first quarter, or I'm sorry, fiscal fourth quarter, consistent with what you guided to after the third quarter, but maybe a little bit lower than the run rate when you required the business. How should we think about that business now that, you know, you're just a few months into ownership, but is it on track to see organic growth in your fiscal 22? And maybe if you could discuss a little bit more detail, Wahid, on some of the timing there, around the FTUAS opportunity and how we should think about that. Is that anything this year or is that really a late 22, maybe 23 type opportunity?

Sure. So, Ken, in terms of the R2SUAV, we're very pleased with that acquisition. Obviously, the actual close of that deal happened quite late in the quarter, somewhat later in the quarter. And so the contributions on the revenue was, you know, not very significant. For fiscal year 22, we expect that business to grow, and it's really, really well positioned. As I mentioned in my comments, in the fiscal year 21, at the last quarter, we even received a renewal of one of our sites, and we're kind of gaining share in that MEUAS4 program against the incumbents that have been there for many years, and our customers really see the value of our solution very, very strongly. In terms of FTUAS, what I can tell you is that The timing of this is all in the hands of the U.S. Army. What they have mentioned is that in the government fiscal year 2022 proposed budget, there is additional line items for the F2UAS program, as I mentioned in my remarks. And those line items actually have been increased by the U.S. Army in order to sort of expedite or expedite the whole process a little bit. Now, these are all obviously in the future that needs to happen but the combined amount is like $69 million on the budget for RDT&E for FT-UAS, an additional $73 million. It's unfunded list in order to accelerate the FT-UAS program. We are, as you know, down selected on that FT-UAS program. We are very focused on making sure that we're positioned well and we compete in order to win, and we like our chances, but it is a very competitive program, and it's a very large program. Everything in that program for us is a gain-in-share and gain-in-market penetration, in addition to our MUAS SOCOM contract and other potential international customers that are interested.

I would add just that for that division, they'll have some bumps in revenue during the year as they have deployments. So that will also bump up the recurring revenue. Okay.

Okay, that's great. And if I could, on the fiscal 22 guide, the total guidance implies roughly sort of flat EBITDA margin in 22 over 21. As you get a greater contribution from some of the higher margin businesses like Arcturus, is it fair to say that much of the headwind would be coming from lower HAPS revenues, or is there something else we should be thinking about as a headwind of margins in 22?

I think, you know, we're acquiring these businesses. We're putting them together. I think we've tried to do our best on estimating what the margin percentage is. I think over time we'll see more leverage there.

Thank you very much for your question, Ken. Our next question comes from Louie DePalma at William Blair. Good afternoon, Louie.

Good afternoon, Steve, Waheed, and Kevin. And, Steve, good luck on your future endeavors.

Thank you, Louie. Thank you.

Waheed, you discussed how the three acquisitions significantly expanded your total addressable market. If you were to compare your bidding pipeline today and all the opportunities that you mentioned, such as FTUAS, if you were to compare that pipeline to what it was a year ago, how has that pipeline changed now with the three acquisitions?

Louis, so the three acquisitions really transformed our portfolio and position in the market. We now have access to a much larger total addressable market, which in the past we really didn't have the ability to be able to compete or participate in. An example of that is Arcturus UAV, the Jump 20 and T20 product line. addresses a billion-dollar-plus market opportunity alone on those two platforms. And we have also, you know, obviously ideas about integrating our solutions together, which even increases the value proposition further and opens up new opportunities for us that doesn't even exist today based on our customers' needs and requirements that we know of. And, of course, a similar thing could apply to – the UGV business that we have. Obviously, that's a smaller business today, but we're going to be a key player in that space, and we like our solution, we like our position, and a very disruptive capability that that product line offers to us. So in general, I would say it has really transformed our portfolio. It has dramatically increased our market size and opportunity in front of us. And what I'm also really pleased is that long-term, besides just giving us access to these specific markets, the integration of AI and autonomy with ISGs, artificial intelligence and computer vision technologies, we will be able to deliver even more value to our customers and open up more opportunities for us in the long run. So it's pretty quite transformative for us.

Great. Thanks, Fahid. You're welcome, Louie.

Thank you, Louis. Once again, to ask a question, please press star and then 1 on your touchtone phone. We have a follow-up question from Joe Dinardi. Joe, please go ahead.

Yeah, thanks. Waheed, just on OPFM, I mean, air environment doesn't lose very often, so I'd imagine that was a bit of a surprise for you. So can you just talk about what happened there and if you've learned kind of why you lost?

Sure, so Joe, as I mentioned, we have not won, we were not awarded this specific phase of the contract, which is the second phase, and my estimate is that that's roughly about a $20-ish million worth of an award that we did not receive. To our knowledge, the customer has not disclosed publicly the winner of that program, and we were very surprised by that, obviously. So we continue to seek the customer's feedback on why they think that we were not awarded. And we will continue to learn more from that and keep you updated as we learn more about it. Although the customer right now is in a position where they are sensitive to being able to communicate with different contractors until they make a public announcement probably somehow. I would also mention something else, which you're right. Our win rate is extremely high. We did, however, in other areas, win other opportunities, which does support our thesis on Switchblade 600 and the larger size market and adoption of it. While this was really a development activity for the U.S. Marine Corps, it does not rule out for our ability to come in and compete on this third phase, which is really the larger acquisition for deployment and operational production contracts. And the U.S. Marine Corps has not made any statements related to that yet. So that's one. Two is we've secured a contract to deliver units for operational use today with our existing customers. So our systems are, while this contract was a development contract, we're already deploying systems for operational use. And then lastly, an additional customer has seen a lot of value in our solutions, which they have placed an order for the tune of $20-plus million for the maritime variant of it. So there's also additional other opportunities that we're tracking. So like you said, we're disappointed with that. We were not awarded, but we have not given up on that, and we're keeping very close eye on it, and that war is not over yet.

Okay, that's helpful. And then... You mentioned briefly the semiconductor shortage may impact you. Are there certain programs where that's more acute, and is that embedded in your guidance? How meaningful could that be?

Sure. So let me state that because the company we are, we use the latest, greatest cutting-edge technology in all of our solutions in terms of the latest, greatest computer vision processors and graphics, microprocessors, and components that cross our portfolio. So far in fiscal year 21, we've really addressed a vast majority of those challenges quite well in advance and effectively. So far in fiscal year 22, we think that we have managed most of that so far as well. But as you know, there is a global shortage of these parts, and the timing of the shortage is really unknown, and how bad could it get is also still to some extent unpredictable. There's likely less impact of that on our production contracts, and more likely to affect our engineering development contracts or development activities for new products, because that's where we use a lot of these systems for development of new capabilities. But so far, we've managed it well, and that's already comprehended in our guidance. However, there's always a risk on that, and I wanted to make sure that I communicate that to all of you up front.

Thank you for the follow-up question, Joe. We have no further questions at this time. On a personal note, it's been a real privilege to represent AeroVironment and the entire team to the investment community for the past 14 years. I truly value the relationships I've developed here and with the investment community. Thank you for your attention and for your interest in AeroVironment. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website, avinc.com, We wish you a good day, and the AeroVarmin team looks forward to speaking with you again following next quarter's results.