AeroVironment, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the AeroVironment fiscal 2022 first quarter conference call. At this time, our participants' lines are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded for replay purposes. If you require any further assistance, please press star 0. I would now like to hand the conference over to Jonah Teeter, Balan, thank you. Please go ahead, sir.

Thanks, and good afternoon, ladies and gentlemen. Welcome to AeroVironment's fiscal year 2022 first quarter earnings call. This is Jonah Teeter-Balin, Senior Director of Corporate Development and Investor Relations for AeroVironment. 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 Air Environment's periodic reports on Form 10-K and other filings with the SEC, along with the associated earnings release and 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 8th, 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 AeroVironment, our 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, Jonah. Welcome to our fiscal year 2022 first quarter earnings conference call. On today's call, I will summarize our first quarter fiscal year 2022 performance and discuss our achievements during the quarter. 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 of our goals for fiscal year 2022 before Kevin, Jonah, and I take your questions. Let me emphasize four key messages, which are included on slide number three of our earnings presentation. we achieved strong quarterly results in line with our previously communicated expectations. Second, we have secured another record backlog, which included both organic and inorganic growth in our business. Third, we continue to successfully integrate the three recently acquired businesses. And fourth, as a result of this strong momentum, we remain on track to achieve our fiscal year 2022 plans while delivering on another year of profitable top line growth. Now let's summarize our financial results for the first quarter. We delivered revenue of $101 million compared to $88 million last year, which is a 16% increase year over year. The revenue growth was primarily due to incremental sales, particularly in our medium unmanned aircraft system segment. These, along with other organic and acquisition-led increases, offset the negative impact from lower core product line shipments, which we expected in the first quarter, especially from our small unmanned aircraft system segment. We achieved yet another record backlog of $258 million, driven by new wins across multiple business segments and in part by our recent acquisitions. Our backlog increased more than 20% sequentially from the fourth quarter of fiscal year 2021. This record backlog will enable us to achieve our financial objectives and ensure we are on our path for continued strong growth and value creation. Finally, please note that we now provide increased financial visibility across four reportable segments, including revenue, gross margin, and income. While this extra data will provide more insights for investors, segment performance will significantly vary quarter by quarter. For that reason, this data would be better assessed on an annual basis. Moving on, now I would like to provide some color regarding current developments within our various segments. I'll start with our small unmanned aircraft systems, which is our largest product line and where AeroVironment is positioned as the leading global player. We recently announced the award of two firm fixed price orders totaling $15.9 million from the U.S. Air Force for Puma 3AE unmanned aircraft systems and spares, as well as Raven UAS spares. In addition to these wins, our innovation continues with the recent introduction of our Chrysalis Next Generation Ground Control Station solution. This is another advanced cutting-edge offering, which positions AeroVarmin as a leader in tactical and covert control systems for UAS and related payloads. Chrysalis was designed to make operating robotic systems easier than ever. Chrysalis is available in both modular elements and complete turnkey systems, making it adaptable to meet specific mission requirements. Compatible with all major operating systems, Chrysalis features an intuitive user interface to reduce cognitive load and training burden while enhancing situational awareness and battlefield collaboration. Chrysalis standardizes the user experience across all air environment small UAS platforms, simplifying the training requirements and operations of PUMA, RAVEN, and WASP. It's an exciting development that we believe will streamline command and control decision-making and improve overall effectiveness in the field while opening new opportunities for growth and value creation for our environment. Next, in our tactical missile systems segment, we made solid progress on our strategy in the quarter. We continue to deliver Switchblade 300 to our key domestic customers while gaining traction with those overseas. We're also making strong progress on our Switchblade 600, which is becoming a larger contributor to this segment's revenue and profitability. We continue to produce low-rate initial production quantities for operational fielding of the ground-launched Switchblade 600, while also developing the maritime version through its integration into naval vessels for the U.S. Special Operations Command. Moving on to our medium unmanned aircraft system segment, where we have continued to successfully integrate that business into our portfolio and operations, we achieved a key milestone in the quarter when we secured another contract from the U.S. Special Operations Command for ISR services using Jump 20 medium unmanned aircraft systems. The initial task order of $22 million includes the first SAPCOM-enabled UAS for beyond line-of-sight operations as part of our NEUAS IV IDIQ contract, with multiple follow-on option years after the initial 12-month period. The Jump 20 delivers an unmatched level of versatility and performance, providing expanded reach in situational awareness, which bodes well for winning future opportunities with our customers. Additionally, the Jump 20 system is also a candidate for the U.S. Army's Future Tactical UAS or F2UAS program. The U.S. Army's proposed government fiscal year 22 budget calls for over $140 million of funding for progressing this potential program of record. We remain well positioned and look forward to updating you on this exciting growth opportunity. Our new unmanned ground vehicle product line was created through our most recent acquisition of Telerob, a German leader in ground robotic solutions with a global footprint. This transaction closed at the beginning of the first quarter and marks a significant expansion into the ground domain for our portfolio of intelligent multi-domain robotic systems. We're successfully integrating the company, and while we did not win the previously discussed U.S. Air Force EOD robot program, we continue to actively pursue new cross-selling opportunities domestically and internationally. We remain excited and optimistic about the future of this business as part of the air environment portfolio. In our HAFS product line, we are moving ahead in designing the next generation aircraft under the terms of our new five-year master design and development agreement with SoftBank. With the initial $51 million order secured last quarter, we are transitioning this program to its next phase, in which we expect to build a third aircraft and continue extensive flight testing and certification. We're also starting to engage with various domestic defense customers who have shown interest in SunGlider's unique capabilities. While these engagements are early in nature, our solar HAF's performance characteristics represent a significant market opportunity in defense applications for both counterinsurgency and near-peer conflicts. And finally, our McCready Works Advanced Solutions Group continues to lead the industry in AI and autonomy. We remain engaged in multiple advanced customer-funded R&D projects, which are paving the way for AIV's continued leadership in multi-domain robotic system solution. Additionally, the Mars helicopter Ingenuity, which our MacReadyWorks team helped design for NASA, continues to amaze the world. Exceeding all expectations, Ingenuity has been withstanding extreme Martian environmental conditions for over six months now. It just completed its 12th successful flight in Mars' atmosphere. Ingenuity is now being sent out to scout the way for perseverance. This is yet another testament to one of AeroVironment's core competencies, which is designing and delivering solutions with high reliability and ruggedness for extreme environmental conditions. Now I would like to discuss three important global issues that could directly affect the company. the situation in Afghanistan, COVID-19 pandemic, and global supply chain disruptions. As I'm sure our listeners are aware, the U.S. just completed its withdrawal from Afghanistan after 20 years on the ground. First and foremost, I'm pleased that we were able to safely evacuate our employees from the country. We thank the U.S. forces for their sacrifice during this incredibly challenging time and keep the people of Afghanistan in our thoughts. The US service members and Afghan civilians lost in these recent tragic events will remain in our hearts forever. While the withdrawal of allied forces was anticipated, the rapid pace of the Taliban's takeover was not expected. However, we do not anticipate these events will have any material impact on the markets we serve or our operations. While our products were used in various local missions, as well as throughout the region, we believe that strong bipartisan support for our products will continue. The proposed U.S. government fiscal year 2022 defense budget includes $68 million of continued funding for Army LMAMS procurement, where our Switchblade 300 is the incumbent solution. Additionally, our current record backlog also provides adequate visibility into the company's future growth. We will continue to closely watch the situation. As the world continues to battle COVID-19 and its variants, so far we have successfully mitigated and minimized material impacts to our business. Our operations are running smoothly. International travel still remains a challenge, but we believe our environment is well positioned to post top-line growth and solid financial results this fiscal year and beyond. Of course, this is a fluid situation, and we are closely monitoring it. We remain prepared to react quickly. Further, supply chain bottlenecks and shipping constraints exacerbated by the pandemic continue to impact global OEMs and their ability to get products to market. We continue to monitor our supply chain and are working to mitigate any risks that materialize. While we have had some supply chain challenges due to shortages of leading-edge semiconductor microprocessors, we remain on track to achieve our objectives for the full fiscal year. During the quarter, we also strengthened our board with the appointment of Cindy Lewis. Cindy has more than 30 years of leadership experience at several aerospace organizations. including most recently as CEO of Airborne Consolidated Holdings. Given her expertise and acumen, we're thrilled to have her on board. At the same time, we announced that Arnie Fishman has decided to retire and not stand for re-election of the company's annual meeting of its shareholders on September 24th. On that day, both he and Chairman Tim Conver will retire after several decades of service to the company. We thank Tim and Arnie for their dedication and numerous contributions and wish them well in their future endeavors. With that, I would like to now turn the call over to Kevin McDonald for a detailed review of first quarter financials. Kevin?

Thank you, Waheed. Today I will be reviewing the highlights of our first quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on our website. I would like to note before I begin that now we have four reportable segments, small UAS, medium UAS, tactical missile systems, and other. The other segment is comprised of our newly acquired unmanned ground vehicles business, HAPS, and our engineering services business, which includes the acquired progeny ISG business. In our Form 10Q and press release, we will continue to report revenue, gross margin, income from operations, and adjusted operating income for each segment. For the investors, this will provide improved transparency, but as Waheed mentioned, I would caution that our segment performance will vary greatly quarter to quarter as a result of business mix and volume, so it would be better analyzed on an annual basis. Revenue for the first quarter of fiscal 2022 was $101 million, a 16% increase from the prior year's comparable period. Slide five of the earnings presentation provides a breakdown of revenue by product line for the quarter. Our small UAS business segment generated $39.9 million of revenue versus last year's first quarter revenue of $56.2 million. The year-over-year decline reflects the timing of orders, particularly after a very strong fourth quarter of almost $71 million in revenue. Our newly acquired medium UAS segment had a solid first quarter at $22.4 million, which was in line with our expectations. The tactical missile assistance business, or TMS, business contributed $19.2 million, of revenue during the quarter up from $9.5 million versus the prior year period. We remain positive on the continued growth of the TMS business. Revenue from the other segment, which includes HAPS, declined slightly year over year to $19.5 million versus $21.7 million in the fiscal 2021 first quarter. The decrease was largely a result of a decline in HAPS revenue of approximately $6 million partially offset by revenue from the acquired progeny ISG and UGV businesses, both of which were on track with our business plan. The HAPS variance year-over-year was largely attributable to the fact that in the fiscal 2021 first quarter, we were ramping up to a flight test driving additional service revenue. In summary, newly acquired businesses contributed just over $29 million in the quarter, more than offsetting some of the timing challenges in our small UAS business. Consequently, our base business slowed significantly at 18% in the first quarter from the prior year's first quarter. On an LTM basis, our core small UAS and TMS businesses combined grew just over 12%, or just under 12%. Before I jump into gross margin numbers, the big picture is that intangible amortization of the three acquisitions has had and will continue to have a negative impact on our GAAP margins. But our core product and service margins remain strong and consistent with our historical business model. We now have a chart in the earnings presentation slide which shows product and service gross margins without intangible amortization. When you adjust out the intangible amortization, it becomes a product versus service mix analysis, as well as the normal product mix issues impacting gross margins. As a reminder, historically there have been a 10 to 15 percentage point difference between our product and service margins. In the short term, there will be some drag on the service margins as we absorb the project ISG contract, and to some extent, take on the median UAS service business, which has lower gross service margins than the historical AV business. With that said, let's turn to the numbers. Our gross profit for the first quarter was $28.7 million, representing the gross margin of 28% of revenue, compared to last year's first quarter gross profit of $35.4 million, or 40% of revenue. When you back out intangible amortization of $4,600,000 from the current and prior year period, respectively, overall gross margin was 32% in 2022 versus 41% in 2021. The lower gross margin was anticipated, as mentioned during our fourth quarter conference call. This is primarily due to the high proportion of service revenue in the quarter, as well as the product mix in the pipelines. The quarter consists of 53% product revenue versus 47% service-related, compared to a historical 70-30 split. Our aggregate gross margin without intangible amortization was 42% in the first quarter versus 46% last year, reflecting the negative impact of lower mix of small UAS revenue, which historically has higher margins. We continue to expect product gross margins, excluding intangible amortization, to be in the historical mid-40s percent range for the year. Service gross margin, again, backing out intangible amortization, was 22% in the quarter versus 31% in fiscal 2021. The decline was largely attributed to a project mix and slightly lower margins from the project ISG and Arturis acquisitions, which both have substantial service component but provide AV with very strategic capabilities. Over the past two years, our service margins have been in the low 30% range, and we'd expect the same for fiscal 2022 in total. As explained on prior calls, our product and service mix, along with our product and service margins, will vary quarter to quarter. Next, turning to operating expenses. SG&A expense for the first quarter was $27.1 million compared to $12 million in the first quarter of fiscal 2021. Included in SG&A for the current year quarter were intangible amortization and deal integration costs of $8.3 million compared to $86,000 last year. The $7 million remainder of the increase in SG&A year over year was a result of the newly acquired operations, partially offset by lower travel and other expenses impacted by the pandemic. When you exclude intangible amortization and deal costs, SG&A expenses, the percentage of revenue in fiscal 2022 was 19% for the first quarter versus 14% last year. However, SG&A excluding intangibilization should normalize in the 15% to 16% range for the full year. R&D expense for the first quarter of fiscal 2022 was $13.7 million, or 14% of revenue, compared to $11.1 million, or 13% of revenue, for the first quarter of fiscal 2021. Again, the increase in R&D reflects the newly acquired operations. R&D as a percentage of revenue should be in line with our guidance in 9% to 10% for the full year. Looking at the equity method loss activity in the quarter, we recorded a loss of $1.1 million related to our HAPS Mobile JV. As disclosed earlier, we are in the process of finding additional financial partners to carry the HAPS Mobile joint venture to full commercialization. In the interim, AV and SoftBank are advancing funds in the form of loans that cover the administrative costs of the venture. For accounting purposes, the loans are considered investments that require AB to record its proportional losses of the JV. Under the terms of the agreement, the loans are guaranteed and will be repaid when financing is obtained or by SOCBA. Upon repayment, any previously recognized losses up to the amount of the loan will be recorded as equity method income. We expect to continue to record equity method losses during Q2 and Q3, but the net impact to our full year earnings should be minimal. Looking at the bottom line, our GAAP debt loss for the first quarter of fiscal 2022 was $14 million or $0.57 per diluted share compared to net income of $10.1 million or $0.42 per diluted share for the first quarter of fiscal 2021. The $24.1 million decrease in net income was due to $12.4 million of acquisition-related expenses, $7.3 million of incremental SG&A from acquired businesses, 3.3 million of unfavorable gross margin mix, and 1.5 million of higher net interest expense. These were partially offset by a tax benefit during the first quarter versus the tax provision in fiscal 2021. In terms of adjusted EPS, slide 10 of our earnings presentation shows the reconciliation of GAAP and adjusted or non-GAAP dilute EPS. The company posted an adjusted loss for dilute share of 17 cents for the first quarter of fiscal 2022 versus earnings of 44 cents per dilute share for the first quarter of fiscal 2021. The adjusted loss was slightly better than our expectations, as outlined on the fourth quarter conference call, and we are still on track for the guidance we have outlined. Turning to the balance sheet, total cash investments at the end of the quarter was $123.9 million, a decrease of $77.3 million from the end of fiscal 2021, as we deployed our balance sheet for strategic growth opportunities. During the first quarter, we had total cash outlays related to the Telarob acquisition, which closed in May, of approximately $46 million net of cash acquired. We continue to have a strong balance sheet with over $120 million of cash and investments in a $100 million working capital facility. Now I'd like to highlight some of our backlog measures. Our funded backlog at the end of the first quarter of fiscal 2022 was $257.7 million A SEQUENTIAL INCREASE OF $45.9 MILLION FROM THE FOURTH QUARTER AND AN INCREASE OF $103.3 MILLION VERSUS THE FIRST QUARTER OF FISCAL 2021. SLIDE SEVEN OF THE EARNINGS PRESENTATION PROVIDES A SUMMARY OF OUR CURRENT FISCAL 2022 VISIBILITY. AS OF TODAY, TOTAL VISIBILITY TOWARD THE MIDPOINT OF OUR $560 MILLION TO $580 MILLION REVENUE GUIDANCE RANGE IS 66%. NOW I'D LIKE TO TURN THIS BACK TO WAHID.

THANKS, KEVIN. As I mentioned earlier, we're strengthening our leading market positions, achieving critical milestones, expanding our offering, and delivering on our commitments to our customers. Supported by 66% visibility to the midpoint of our guidance range and summarized on slide number eight of our earnings presentation, now I would like to provide some updates to our guidance for this fiscal year. We are reaffirming our full fiscal year 2022 guidance for revenue of between $560 million and $580 million, and adjusted EBITDA of between $105 million and $110 million. We have revised our GAAP EPS guidance to $1.15 to $1.35, reflecting the final purchase accounting for our Telerob acquisition. As we communicated last quarter, Our prior GAAP EPS guidance was contingent upon completing this effort. We're also reaffirming our guidance for non-GAAP earnings for diluted share, which excludes acquisition-related expenses, amortization of acquired intangible assets, and other non-cash purchase accounting adjustments to be between $2.50 and $2.70. Before turning the call over for questions, let me sum up the quarter with these three key messages. We delivered top-line growth and solid results as we built our backlog to yet another record level. We're making good progress in successfully integrating our recent acquisitions, and we're on track to meet our annual guidance with gross margins and underlying profitability expected to increase as the fiscal year progresses. In short, our goals remain the same as before, to expand the company's base of business, strengthen our leading position across the unmanned robotic systems landscape, and deliver solid returns for our shareholders. Looking ahead, our record backlog, strong balance sheet, and the enduring demand for our products and solutions position us to have our best year ever. But we won't stop there. We continue to execute on a strategy to broaden our capabilities, integrating robotics, data analytics, and intuitive user interface to provide more effective tools than ever before for our customers. I am confident we have the staff, technology, and key customer relationships to build the air environment of tomorrow. We have enjoyed the opportunity to meet and speak with our investors over the past quarter, and thank you for your continued interest in air environments. We have been increasing our visibility and speaking with investors as much as possible and look forward to connecting at our upcoming conferences and our virtual annual stockholders meeting on September 24th. I want to say thank you to our customers, our team members, and our shareholders for your ongoing engagement and for challenging us always to deliver excellence. We continue to focus on delivering on our promise to help you proceed with certainty. Kevin, Jonah, and I will now take your questions.

And thank you. As a reminder to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by. We compile the Q&A roster. And once again, that is star 1 if you'd like to ask a question. And our first question comes from Peter Skibiski from Albit Global. Your line is now open.

Hey, good afternoon, guys. Thank you. Guys, it looks like we'll have a continuing resolution, certainly for the federal government for fiscal 22 starting in October. Just was wondering if you'd give us a sense of the level of that's factored into your guidance for fiscal 22. And then just any more color you could provide maybe on small UAS for this quarter in terms of it being down. Was that due to maybe a gap between either production or upgrade cycles or something else? And would you expect small UAS to ramp the balance of the year? That's it for me. Thank you.

Hi, Pete. Thank you for the questions. Yes, I could shed some light on both items. In terms of the continuing resolution with the U.S. government's budget, We have considered that into our guidance. Obviously, the situation is fluid and it could change, but we believe that despite a continued resolution, I believe that we're on track to achieve our fiscal year results as we said earlier on the call. And then obviously, our record backlog sets us really well for that as well going into the second and third and fourth quarter. In terms of the small UAS business being down for the first quarter, as I mentioned on my remarks, it's really important to make sure that we keep an eye on the longer-term optics and picture of these businesses. The lower revenue on Q1 for small UAS was specifically because of timing of some specific contracts. That's it. Because the business is made up of pretty large chunks of individual contracts, the timing of any one of those, either previous year or this quarter or next quarter, could have a significant sort of change in those optics for the quarter. But if you look at the longer-term picture, you will see that we have growth in all of our core businesses, especially in small UAS and TMS. As Kevin mentioned in his remarks, in the last several quarters, the trend line roughly looks a little bit less than 12% growth in our core businesses. LTM basis. LTM basis, that's right. And this year, in our guidance, we expect both our TMS and small UAS businesses to grow this year over last year. So overall, I feel actually really good about it. We're engaged in a lot of opportunities, both domestically and internationally, and we'll keep you updated on that.

I appreciate the comment about guidance in particular. That's helpful. And is international travel restrictions and COVID, is that, you know, is that still any kind of meaningful, you know, headwind to closing sales for, I guess, for any of your products at this point?

Yes, Pete. That has remained to be a challenge. We have, as I said on the remarks, we have addressed those challenges extremely well so far. We are able to get into these countries, and they are able to travel, but they are very limited and very difficult still. Many of the countries in the Middle East, the process is extremely sort of long and challenging, and as well, a lot of customers are still hesitant to allow their teams to travel as well as to allow visitors to come to their country or their sites. That's also true in many of the U.S. government sites. Many of the sites are still very careful and cautious in terms of allowing folks to get in, but we expect that to change, obviously, over time as vaccination becomes more and more a requirement across U.S. DOD.

Okay, great. Thanks for the update, guys.

You're welcome, Pete. Thanks, Pete.

Thank you. And our next question comes from Peter Arment from Baird. Your line is now open.

Yeah, thanks. Good afternoon, Waheed, Kevin, Jonah.

Hi, Peter.

Waheed. Hey, we get this question a lot regarding just as more boots come out of theater, how your kind of MUAS business is positioned to kind of perform for kind of services on demand. How do you characterize? I know you've won some recent awards in that business.

Sure. So, Peter, in terms of our MUAS business, we were very pleased with the results so far that we've delivered. The business has obviously grown already for the first quarter. We expect that business to continue to grow this year. The U.S. SOCOM's contract, the MEUAS4 opportunity, we're really gaining share and a very large position on that today. So I expect that to continue. The signs and signals from the U.S. SOCOM is quite positive. We believe that the drawdown could actually increase ISR services in that region and many other regions around the world, as the U.S. starts to have less boots on the ground, the need for intelligence, surveillance, and reconnaissance, data analytics, and those types of services is expected to some extent to actually do better in general. So we feel good about that for both our small UAS as well as for any UAS business in general.

Okay, that's helpful. And just... You know, last quarter you gave us an update on, you know, kind of TMS for export opportunities. Maybe what's the latest there that you can talk about?

Sure. So, as you know, we received our first export license. We're in the process of actually building that product and shipping it to our customer. We are engaged with multiple additional countries who not only have shown interest in that capability but also are starting the process of actually – making a request for acquisitions, and we have started that process with, as I said, multiple countries. As I said before, it is a matter of when versus if that we're gonna get more countries to join our international customers for Switchblade. That's specifically related to Switchblade 300. We've also now, since the announcement of our Switchblade 600, we've seen interest from international countries in the Switchblade 600 ground launched as well. While that's much earlier in its process, but that also represents a pretty significant opportunity for us long term. And with U.S. troops actually having less boots on the ground, Peter, we think that the international countries would be of more needs of this capability in order to defend themselves and keep themselves protected.

Okay. And just the last one for me, Kevin, just to calibrate this on guidance, you're still expecting kind of a 40% of the mix in the first half, 60% second half in terms of revenue. Thanks.

We haven't changed that. Okay.

Thank you. And thank you. And if you'd like to ask a question, that is star one. Again, ladies and gentlemen, if you would like to ask a question, that is star one. And our next question comes from Austin Moeller from Canaccord. Your line is now open.

Hi, Waheed. How are you? Hello.

Hey, Austin, pretty good. How about yourself?

Pretty good here. Just my first question, if we look at the backlog in the pipeline here, do you consider the most significant upcoming opportunity for you guys to be the SOCOM ME UAS 4 contract or the Army's future tactical UAS program?

So, Austin, both of those two opportunities are significant for us. They're both represented significant, both long-term opportunities for air environment. The NUAS, as you can see over the last several quarters, our acquisition of Arcturus has been the newcomer into that contract for the last two years. And they have consistently have gained share against the incumbents that are two major primary incumbents in that contract. And so we feel good about the fact that we're gaining share, and I expect that to either stay the same or continue. Obviously, it's very competitive, and I believe that the competition is going to get more and more aggressive in the future. But that's definitely a position that we enjoy, a market-leading position, and we continue to actually grow in that. Additionally, on the FDUAS side, that's a brand-new multi-hundred-million-dollar long-term program of record. The U.S. Army has close to over $140 million in the budget to sort of accelerate that program in the next government fiscal year, which is 2022 for the government. And we are one of the down selects, and we expect that to be a significant opportunity for us for growth. But regardless of that, we also expect our small UAS to grow, our TMS to grow, as well as our other acquisitions that we've done to grow this year and beyond.

Okay, great. And just when we think about TMS here, as the budget is sort of being pivoted, excuse me, towards Pacific warfare and potentially countering China, do you anticipate or have you guys been bidding more on either for Blackwing or for the ship-borne variant of the Switchblade 600 for more naval platforms?

Sure. So, Austin, we actually have secured a contract with the U.S. Navy for the Blackwing. We now are on contract. They have an actual official program of record for Blackwing to essentially increase the deployment of Blackwing into more and more of U.S. submarines. In the last two to three years, that adoption has gone extremely well. The Navy is very satisfied with our capability, and we expect that to actually continue over the next year or two. However, that business, because the size of the submarine fleet is not very large, is not a very significant or large opportunity. In terms of Switchblade 600 Maritime, as I mentioned in my remarks, that's definitely a large opportunity for us. We already have a contract with U.S. SOCOM, but there are several additional U.S. services that have an interest in that platform that both independently by itself as well as integrated with maritime vessels, small and medium-sized ships, as well as other ground assets. So we're going to continue to progress those and continue to actually work those aggressively, and I feel good about that for the long run because it's going to be a significant growth opportunity for us for the TMS business.

Okay, great. That's very interesting. Thank you for the color there. Thank you, Austin.

Thank you, Austin.

Thank you. And we have a follow-up question from Peter Skibitsky from Avaid Global. Your line is now open.

Yeah, thanks, guys. Just on HAPS. I want to make sure I understand where we're at. How much more financial backing is needed, if any, to finish development? Are you looking for more financial sponsors for development, or is it more so for a follow-on production? And when do you think you'll complete kind of the design and testing of the new design?

Sure. So I'm so glad that you asked that question, Pete, because it's a very critical growth opportunity for us and deserves some sort of color on it. We have already secured in the last quarter, very towards the end of last fiscal year, we secured a five-year master agreement with SoftBank. Essentially, this blanket master agreement allows for SoftBank to place multiple orders over the next five years with Air Environment. The first one of those orders, which we just recently secured also during the last few days of the last fiscal year, was about a $51 million contract that will essentially fund us for a good amount of a year to 15 months. The period of performance is roughly 15 months. The purpose of that contract is to essentially design the next generation airplane, basically take the learnings of the first set of five flights, and then incorporate that into the next design or the ultimate design that is going to be certifiable by entities such as FAA and other agencies around the world. That funding is sufficient, and regardless of whether we get another investor or not, SoftBank and AeroVironment is committed to pursue this opportunity on our own. In terms of additional investment, when we formed a business plan for HAPS Mobile with SoftBank, both parties agreed that after Phase 1, which we've now successfully completed, we will start to engage and look for additional investors to see if they want to come and join the HAPS mobile joint venture. The reason for that was primarily because we believe the HAPS mobile joint venture is an unbiased global entity that could service and connect billions of people around the world. So other telecom operators, other strategic investors, and financial investors will most likely have interest to invest in it. Both SoftBank and Air Environment stays open to that. Should there not be an investor, we're not eager to get one. If we don't, that's still okay, because both South Bank and Air Environment is committed to going at it the way we are. But that was the original plan, and we'll continue to go down that path. And so the last part of your question as to how long we will be done with it, we expect this design phase to be finished within another 12 to 15 months, and we also expect to build another airplane. This is the third airplane, which is going to be the basis of the certification with the FAA. And we've already started that process with the FAA, and we're working the materials and supply chain issues to make sure that we can build that airplane on a timely manner.

Okay, that makes sense. I appreciate all the color. Let me ask a follow-up. Can you give another program update? Switchblade 600, you're also trying to integrate that with the Kratos Valkyrie, if I recall. Just was wondering kind of how that's coming along and, you know, if there's a completion date that you're scheduled to hit for that.

Sure. So we're working with Kratos on both Switchblade 300 and 600 to be integrated with some of their platforms, especially the Valkyrie platform for multiple programs that they're pursuing. That engagement is going well, but it's still early. The reason why I say it's early is because, first and foremost, they have to win that program record, which they're obviously doing really well. And as they win that program, then a part of that development is for the U.S. Air Force to start integrating our drones, our loitering missiles, with that platform. Both Kratos and AeroVramin really believe in that capability. Their customer, based on their interactions, have had very positive feedback on that. But it is a slower process and a more long-term engagement rather than short-term. That's just one of many. We're also engaged with General Dynamic Land Systems to integrate Switchblade with their ground platforms for programs such as the OMFV, optionally manned fighting vehicle for the U.S. Army, and many other opportunities that we're going to be competing in the future.

Okay, great, great. And I promise, last one for me. Sounds like not a lot of guys are on tonight. Sure. The two competitive losses, the Air Force EOD competition with Telerob and then the Marine Corps OPFM, last time you reported out, you hadn't sort of gotten a debrief from the customer yet to get a feel for what they – or didn't prefer about the selected competition. Did you get a chance to get debriefed on those two programs yet? And has it, you know, without necessarily sharing, you know, too much with us, do you feel that you learned kind of what the customer set was looking for on those two competitions at this point?

Yes and no. To the best of our abilities, we've tried really hard to learn as much as we can. We have gotten some feedback. we are still in sort of assessment of that, learning more about it. The truth of the matter is that we have a very diversified portfolio now, and we're engaged in lots and lots of opportunities at any given time. So while we don't like any losses, the probability that we're going to have one or two or three losses here and there is obviously with our portfolio and our business growing, sort of changed the optics a little bit. In regards to those specific opportunities and lessons learned, absolutely there are lessons learned. There are several of them. We have a very thorough process internally that we go through that. We take them very seriously. And one of the things that actually has been a little challenging is because of the COVID situation, travel to the customer and having sit-down face-to-face meetings have been more difficult and challenging. However, we're going to continue that path. And regardless of that, we expect both of these two businesses to grow and this year, and they have been growing in the past. So we still feel good about the overall market opportunity there for us and for the rest of our portfolio.

Thank you. And our next question comes from Louis De Palma from William & Blair. Your line is now open.

Waheed, Kevin, and Jonah, good afternoon.

Hi, Louis.

How do you view... HAPS Mobile's business model compared to recent satellite startups such as AST Space Mobile trying to broadcast cellular signals from space directly to cell phones?

Sure. So we obviously keep a close eye on the developments in the entire broadband space, not only on terrestrial but also stratospheric and space-related things. SoftBank, who really is an expert in this area, who have invested in all different domains, whether it's space, near space, stratospheric and terrestrial, they are really a great source of sort of an opinion on this. Their opinion is that essentially there's not one winner takes all. The market is massive and all of the platforms play a role. However, HAPS Mobile and SunGlider's value proposition is extremely unique and very, very disruptive. There are lots of advantages to our SunGlider platform to any of the LEO and geosynchronous satellites. And while we do not expect to completely displace them completely and replace them, we do believe that SunGlider will play a very key role and a significant role in the long run in providing broadband. I can go through a list of specifics as to why SoftBank and we think that, but it's quite evident even from some of the satellite players that they consider solar sun glider as a complementary rather than an inferior solution. We believe it's actually got a lot of superior capabilities.

Great. And also on the topic of satellite connectivity, in July you announced that you won the SOCOM award. with the MEUAS4 program to put SATCOM connectivity on your JUMP20. Are you able to disclose whether it's L-band or KA-band satellite connectivity? And related to that, are you aware if any of your competitors in Group 2 also have this satellite connectivity capability?

So... Louis, I am not able to actually disclose that specific information about those contracts. As you know, they're very sensitive in terms of our customers' operations, and we're not allowed to talk about that. What I can tell you is that we were the first one, and we will be the first in the MEUAS IV agreement not only to win the site but also to potentially provide that. Are others going to try to provide that? I can't really speak to that openly because of the confidentiality of our customer and the sensitivity of the application for our customer's safety.

Sounds good. Thanks, Fahid.

You're welcome, Louis.

Thanks, Louis. Thank you. And our next question comes from Brian Rutenberg from Imperial Capital. Your line is now open. Yes, thank you very much.

I just wanted to clarify something that Pete Skibitsky had asked and just wanted to drill down a little bit on the HAPs. The third aircraft, and I heard a couple of numbers, and I'm just trying to narrow down what I just heard. Is it 24 months that you expect to order, or is it you expect to produce an aircraft, a third aircraft, within the next 24 months? I guess that number just stuck out to me.

Maybe you can just re-highlight that. Sure. Brian, this is Waheed. So we have already secured a $51-plus million contract award from SoftBank. The scope of that is to implement the learnings from the first two aircraft and the first five flights into the design of the third aircraft and also start the production of the third aircraft We expect to actually make the airplane, not to secure a contract in 24 months. Usually, the first two airplanes that we made, to give you a point of reference, we built the two airplanes in less than two years, less than two year time frame. Really, it depends on first getting the design completed and locked in, the configuration, and then engaging with FAA to make sure that that serves as the basis of the certification airplane, and then start building the airplane and buying material for it.

Great. Thank you very much.

You're welcome, Brian.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.