This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Ladies and gentlemen, thank you for standing by and welcome to the AeroVironment Fiscal Year 2022 Second Quarter Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will 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 zero. I would now like to hand the conference over to Jonah Peter-Balin. Thank you. Please go ahead, sir.
spk08: Thank you, and good afternoon, ladies and gentlemen. Welcome to AeroVironment's fiscal year 2022 second quarter earnings call. This is Jonah Peter-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 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 December 7th, 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 this conference call. Joining me today from AeroVironment 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?
spk09: Thank you, Jonah. Welcome to our fiscal year 2022 second quarter earnings conference call. I will start by summarizing our second quarter performance and discuss recent achievements. Next, Kevin will provide a more detailed summary of our financial performance for the quarter, and then I will follow up with a discussion of our goals for fiscal year 2022 before Kevin, Jonah, and I take your questions. Let me emphasize three key messages, which are included on slide number three of our earnings presentation. First, we delivered solid financial results in our second quarter and first half of fiscal year 2022 in line with our expectations. Second, we are experiencing stronger macro hit wins this quarter. These hit wins include supply chain constraints due to the global COVID-19 pandemic, delayed awards of several customer contracts due to an uptick in pandemic-related travel restrictions, and lack of approval of National Defense Authorization Act for government fiscal year 2022, resulting in continuing resolutions and a tight labor market. All of the above factors are impacting our outlook for the second half of fiscal year 2022. And third, with a solid backlog and enduring long-term demand for our portfolio of solutions, we remain confident in our vision for the company and ability to create long-term shareholder value. Before going through these themes more in depth, let me summarize our financial results for the second quarter. We delivered revenue of $122 million compared to $92.7 million last year, a 32% increase year-over-year. The revenue growth was primarily due to increased sales, particularly in our medium unmanned aircraft system segment. These, along with other organic and acquisition increases, offset the negative impact from lower small unmanned aircraft systems product line shipments. We achieved solid backlog of $252 million driven by new wins across multiple business segments and in part by recent strategic acquisitions that are already yielding strong results. Gross profit for the second quarter was $42.5 million, an increase of 4% year over year. Gross margin percentage fell to 35 percent from 44 percent, reflecting product mix and supply chain effects. We reported net income of $2.5 million, or 10 cents per diluted share, as compared to $2.1 million, or 9 cents per diluted share, for the second quarter of fiscal year 2021. While we're pleased with our results this quarter and still expect year-over-year growth across our business, we're adjusting our guidance for the full fiscal year 2022 to account for the headwinds we expect in the second half of the fiscal year. On last quarter's call, I touched on three global issues that could impact our business. The U.S. withdrawal from Afghanistan, the COVID-19 pandemic, and the global supply chain disruptions. Today, I would like to provide an update on the latter two as well as additional headwinds affecting our business and the broader industry and economy. These additional headwinds include contract awards due to the global pandemic and current continuing resolution environment and labor shortages. As we mentioned last quarter, current supply chain constraints are impacting our business. There are two aspects of this. First and foremost is our ability to manufacture and deliver products to customers in a timely manner. Supply chain bottlenecks have hindered our ability to do this, even as our dedicated teams have focused on mitigating the situation to the best of their abilities in the last 12 months by working with new and existing suppliers to find component parts. The other aspect of this predicament is increased costs. reflecting higher material costs, shipping expenses, warehousing costs, inventory costs, and overall working capital management as we continue to build inventory to meet current and future demand for our innovative solutions. With regards to COVID-19 pandemic, increased concerns over the Delta and Omicron variants of the virus have resulted in further domestic and international travel restrictions. This, along with other pandemic-related delays, negatively impacts our ability to secure new contract wins in a timely manner, both domestically and internationally, even though our backlog remains robust. Additionally, due to the current U.S. DOD's continuing resolution budget environment in Washington, certain awards have also been negatively impacted. We expect this uncertainty to persist throughout the rest of this fiscal year. We have worked diligently to meet the administration's mandate to have all employees vaccinated by January 4th, 2022. However, this has led to increased challenges in hiring within an already tight labor market. The staffing challenge, to an extent, is hindering our ability to hire adequate, qualified engineering professionals across our growing business. It is important to emphasize that our commitment to air environment and delivering value for our shareholders and other stakeholders remains stronger than ever. So these challenges in aggregate, namely global supply chain constraints, ongoing pandemic-related constraints, U.S. DOD's continuing resolution in tight labor markets, have led to a slower contract avoid environment in general and is hindering our ability to achieve the expected full year results we initially intended. Due to these headwinds, we find it appropriate to adjust our guidance for fiscal year 2022 as follows. Full year revenue is now expected to be between $440 million and $460 million. Net loss from continuing operation, is forecasted to be between $12 million and $8 million. Adjusted EBITDA is anticipated to be between $59 million and $65 million. Our diluted loss per share will be between 47 cents and 33 cents. And non-GAAP diluted EPS is forecasted to be between $1.23 and $1.37. While these results differ from our initial expectations, rest assured our team is dedicated to mitigating the issues. Some of these issues may be transitory in nature. However, supply chain constraints and tight labor markets in particular do not appear to be short-term, and we've already begun working to mitigate their impact this fiscal year. We're optimistic that such issues will also eventually work themselves out but we currently lack visibility in terms of when that may occur. Before turning the call over to Kevin, I'd like to provide some updates on current developments within our individual product lines. I will start with our small unmanned aircraft systems, our largest product line, where we are pleased to see growth opportunities ahead. We continue to see strong demand for our Puma AE and Raven systems, both domestically and abroad, and recently showcased a sensor-to-shooter demonstration, including chrysalis integration. This took place in September as part of NATO's robotic experimentation and prototyping augmented by Maritime Unmanned Systems 2021 event, Europe's largest maritime unmanned systems experimentation exercise. hosted at the Portuguese Navy Center in Troia, Portugal. The successful maritime demonstration of APUMA-3AE small UAS and Switchblade 300 tactical missile system was part of a U.S. and NATO interoperability to interchangeability initiative. It showed that our sensor-to-shooter solution dramatically elevates operator situational awareness and and reduces the chances of mistargeting, which we believe should help with broader adoption of these intelligent systems for naval applications worldwide. In September, we announced that the U.S. Army exercised its third and final option under the Flight Control Systems, or FCS, domain of a multi-year small UAS contract. The value of this option was approximately $11.7 million, including flight control system kits, ground control stations, and various spare parts for the Army's existing fleet of air environment systems. Delivery of this contract award is scheduled to be completed by September of next year. Next, within our tactical missile systems segment, we continue to see growing demand for our products and believe there is a great opportunity to replace traditional munitions on ground, air, and sea vehicles. In the quarter, we successfully demonstrated the integration of our Switchblade 300 loitering missiles in Jump 20 medium UAS for increased mission autonomy and efficacy. This air launch effects proof of concept demonstration took place in August, launching an inert Switchblade 300 from the Jump 20 and successfully recovering both air vehicles. This end-to-end integrated solution provides customers with greater time on station than if they were to deploy a switchblade on its own, resulting in the ability to conduct more real-time surveillance, increasing the probability of identifying correct targets and minimizing collateral damage. We continue to make progress on our Switchblade 600. we are actively manufacturing low-rate initial production quantities for operational fielding of the ground version while developing the maritime variant under our existing customer-funded R&D contract through its integration into naval vessels for the U.S. Special Operations Command. I will now move on to our medium unmanned aircraft system segment, which has been quite active this year. Following our recent success with SATCOM, we submitted a Jump 20 proposal for the U.S. Army's Future Tactical UAS, or FTUAS, Increment 1, and will soon submit a proposal for Increment 2 opportunities. In aggregate, the U.S. Army's FTUAS program is expected to be worth over $1 billion in potential opportunity over a 10-year period. As a reminder, The U.S. Army's proposed fiscal year 2022 budget calls for over $140 million of funding for progressing this potential program. We're very focused in competing for this large growth opportunity and expect to be awarded a contract for the increment one opportunity soon. We're also engaged with international customers to bid on additional future potential opportunities and ensure strong growth in the years to come. It has been an exciting few months for our unmanned ground vehicles product line, which was created through our acquisition of Germany's Telerat. Telerat recently received a multi-million dollar firm fixed price order from the Latvian Ministry of Defense for Telmax Evo hybrid and Teodor Evo unmanned ground vehicles, along with engineering support. We also delivered a Telmax EVO hybrid to the U.S. Pentagon Force Protection Agency earlier this summer. Designed to be operated by EOD and HAZMAT technicians, the Telarod UGV can safely and effectively dispose of explosive ordnance, hazardous material, and chemical, biological, radiological, and nuclear threats. We're pleased with the expanding interest shown in these products since our purchase of Telerop earlier this year and believe in the significant value potential for our shareholders. In our HABS product line, we continue to move ahead in designing the next generation aircraft under the terms of our five-year master design and development agreement with SoftBank. As we said last quarter, we are progressing with phase two of our partnership during which we will build a third aircraft to perform further flight testing, demonstrate longer duration flights, and progress through FAA certification. At the same time, we continue to assess various USDOD opportunities that can leverage SunGlider's unique capabilities. As a reminder, our solar HAF's performance characteristics provide unique defense applications for both counterinsurgency and peer-near-peer conflicts. And finally, our McCready Works Advanced Solutions Group continues to develop new applications in autonomy and artificial intelligence. We are engaged in many customer-funded R&D projects in the area of autonomous multi-domain robotic solutions and have seen new levels of interest since the success of Ingenuity, the Mars helicopter which our McCready Works team helped design for NASA. We are very proud of these accomplishments which underscore our leadership in designing and delivering state-of-the-art solutions with high reliability and ruggedness for extreme environmental conditions. With that, I would like to now turn the call over to Kevin McDonald for a review of second quarter financials. Kevin?
spk06: Thank you, Waheed. Today I will be reviewing the highlights of our second quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on our website. Revenue for the second quarter of fiscal 2022 was $122 million, a 32% increase from the prior year's comparable period. Slide 5 of the earnings presentation provides a breakdown of revenue by segment for the quarter. Small UAS led the way with $54.7 million of revenue, which was down slightly from last year's second quarter of $58.3 million. Our newly acquired medium UAS segment had a strong second quarter with revenue of $26.5 million, a sequential improvement versus our first quarter of fiscal 2022. Our tactical missile systems, or TMS, segment contributed $18.4 million of revenue during the second quarter. The TMS was impacted by supply chain issues in Q2, and we expect these issues to continue at least for the remainder of the fiscal year. Revenue from the other segment, which includes HAFs, increased year-over-year to $22.4 million versus $15.4 million in fiscal 2021 second quarter. The increase is a result of revenue from the acquired progeny ISG and UGB businesses. Year-to-date, we saw a decline in organic revenue of 12%. As Waheed discussed his remarks, we continue to face headwinds on many fronts and expect organic revenue growth to be limited or decline in FY 2022. Turning to gross margins. Slide 5 of the earnings presentation shows the mix of product and service revenue. We saw some improvement in mix to 58% product, up from 53% product in Q1. For the full year, we are tracking towards a 55% product mix, down from our original expectation of 60% product. Our reduced revenue outlook has a disproportionate negative impact on product revenues. Slide 6 of the earnings presentation shows the trend of of adjusted product and service gross margins, and slide 12 reconciles the GAAP gross margins to adjusted gross margins, which exclude intangible amortization expense and other non-cash purchase accounting items. I will speak to our adjusted gross margins. Overall adjusted gross margins for the quarter were 39%, up from 32% in the first quarter of FY22. This positive trend was a result of improved product-service mix and improved product and service margins. Adjusted product margins of the quarter were 48% versus 42% in the first quarter. However, for the remainder of the year, we expect to see product gross margins in the mid to low 40s. In terms of adjusted service gross margins, we also saw sequential improvement to 27% in the second quarter versus 22% in the first quarter of the year. We expect the Q2 service margins to be indicative of what we will see for the remainder of the year. Now turning to operating expenses. SG&A expense for the second quarter was $24.8 million and includes intangible amortization and acquisition related expenses of $5.6 million compared to $0.5 million last year. When you exclude the intangible amortization and acquisition related expenses, SG&A's expense as a percentage of revenue in the second quarter of fiscal 2022 was 16%. We expect SG&A excluding intangible amortization and acquisition related expenses as a percentage of revenue for the year to be in line with the first half actual 17%. R&D expense for the second quarter was 12% of revenue and 13% year to date. We expect R&D as a percentage of revenue to be in line with our guidance of 11 to 12% for the full year. We also had a significant non-operating item in the quarter. We accrued an additional $10 million of legal settlement expense related to the claims by the buyers of our former EES business as part of a settlement agreement. This was recorded as part of the other expense in the quarter. Looking at the bottom line, our gap net income for the second quarter of fiscal 2022 was $2.5 million, or $0.10 per dilute share, compared to net income of $2.1 million, or $0.09 per dilute share, for the second quarter of fiscal 2021. The year-over-year increases in net income was primarily due to a $12 million increase in tax benefits and a $10.7 million favorability and equity investment income as the second quarter of fiscal 2021 includes a loss related to the HAPS loon write-down. This was largely offset by a $10.6 million decrease in operating income primarily driven by an increase in intangible amortization related to the acquisitions, and a $10.1 million increase in other expenses through the recording of the legal settlement discussed previously. The large tax benefit in the second quarter of fiscal 2022 is driven by a combination of our year-to-date and projected full-year pre-tax losses. In terms of adjusted EPS, slide 10 of our earnings presentation shows a reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per diluted share of 78 cents for the second quarter of fiscal 2022 versus earnings of 48 cents for diluted share for the second quarter of fiscal 2021. Year-over-year improvement in adjusted earnings is the result of increased adjusted gross margins offset by higher operating expense and positively impacted by the tax benefit in the quarter. Turning to the balance sheet, Total cash and investments at the end of the second quarter was $124.2 million, which is slightly up from the first quarter of this fiscal year. We continue to have a strong balance sheet with over $120 million of cash investments and $100 million working capital facility. Now I'd like to highlight some of our backlog metrics. Slide 7 of the earnings presentation provides a summary of our current fiscal 2022 visibility. As of today, total visibility towards the midpoint of our $440 to $460 million revised revenue guidance range is 90%. Our funded backlog at the end of the second quarter of fiscal 2022 was $252 million. Now I'd like to turn things back to Waheed.
spk09: Thanks, Kevin. As you can see, we continue to make progress in advancing our market-leading positions while achieving critical milestones. Before turning the call over for questions, let me sum up the quarter with three key messages. First, we delivered a solid quarter and first half in line with our expectations. Second, we're experiencing macro headwinds in the second half of fiscal year 2022, and to account for these challenges, we have adjusted our fiscal year guidance. And third, with a solid backlog and 90% visibility to the midpoint of our guidance range, We remain focused in delivering another year of top-line growth across our business portfolio while delivering long-term shareholder value. We continue to expand the company's base of business, strengthening our leading position across the unmanned robotic systems landscape. Our team remains committed to managing the near-term macro challenges while achieving the long-term vision of our company and creating shareholder value. Looking ahead, we continue to execute our strategy of broadening our capabilities, integrating multi-domain robotic systems, artificial intelligence, and an intuitive user interface to provide more effective solutions than ever before. We've enjoyed the opportunity to meet and speak with our investors over the past quarter, and thank you for your continued interest in our environment. We wish you and your loved ones a great holiday season, and Happy New Year. I want to say thank you to our customers, team members, and shareholders for your support and for challenging us 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.
spk03: Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Again, to ask a question, you will need to press star 1. We stand by while we compile the Q&A roster. And our first question is from Peter Arment of Baird. Your line is open.
spk05: Yes, good afternoon, Waheed, Mark, Jonah. Waheed, can you talk about whether you can parse out kind of the revenue change on the outlook, whether it's how much of it's kind of driven by the CR, how much is driven by maybe kind of supply chain, or maybe just give some additional color there.
spk09: Sure, Peter. So overall, as I mentioned, we're experiencing those primarily three headwinds, the three categories. And I would say the supply chain and supply chain related constraints are a significant contributor to that headwind. You know, so we've been able to address that for the last 12 to 18 months very effectively so far. However, what's happened is that the length and duration of this pandemic and the restrictions that have gone along with it, no one really expected it to go this long. And so therefore, as a result, all of the preliminary and proactive measures that we have taken for the last 12 to 18 months essentially were exhausted, where the supply chain as a whole, even suppliers and distributors and manufacturers, were not able to help us anymore because we proactively planned so much of it. And so we adjusted our plans accordingly. And then the other two issues are really related to order delays. some of that related to the pandemic and travel, some of it related to supply chain, and some of it related to obviously the CR as well. And then lastly, but also tight labor markets, especially for highly, highly technically qualified engineering talent, which we have a strong desire and demand for because our business continues to grow, has been another contributor. We haven't really broken it down specifically to dollar amounts per, but those are the top three areas
spk05: areas that contribute to overall headwinds for us Peter okay and then just as a follow-up if I could on just is this does it feel like it's more timing related in you know when you think about kind of the order delays and that you would expect those to eventually come back to you or are you seeing any changes by your customers sure so as I said on my remarks some of these things are very transition transitory so they will most likely work their way out sooner rather than later
spk09: But there's, for example, the travel delays, we believe that it's going to start to get better, and it had gotten better, and now the Delta variant and the Omicron variant sort of threw a wrench at that. So those, I believe, that over the short term is eventually going to work its way out. But it is a very dynamic market. It is things are changing literally on a daily to the weekly basis in terms of the supply chain and the constraints that are out there. And so it's really difficult to predict that far ahead. However, there are certain issues, such as the global supply chain constraint itself in terms of high-performance, cutting-edge graphic processors, image processors, and semiconductor components that we use quite frequently in a majority of our products. and the labor market seem to be sustained for a little longer than we expect or we foresee. So we'll keep you updated as we get updates, but it's a very dynamic situation that we're watching very carefully and we're mitigating issues as they come up on a daily basis.
spk05: Appreciate it.
spk09: Thanks. You're welcome, Peter.
spk03: Thank you. And we would like you to limit your questions to one and one follow-up at a time. For any additional questions, please press star 1 again to return to the queue. And our next question is from Ken Herbert of RBC. Your line is open.
spk10: Hey, good afternoon, Waheed and Kevin and Jonah.
spk09: Good afternoon.
spk10: Hey, I wanted to just obviously follow up on the guidance question, but from an EBITDA standpoint, you've lowered the full year EBITDA significantly more than the full-year revenue outlook. Can you just talk about the puts and takes from an EBITDA standpoint, and are there any specific items impacting EBITDA or profitability disproportionately relative to the revenues?
spk06: Well, I mean, I think it's because, let me start and while you can wrap up. Basically, you're taking off some of the higher margin business when you take out that guidance, so that's one of the reasons why it has a disproportionate impact on EBITDA.
spk09: And we also have this adjustment throughout the second half of the year, Ken, where there are some fixed costs based on volume that affects that too. So having a lower volume in general would negatively more impact the profitability profile for this fiscal year. And so those are the two main effects. It's one driven by mix, which Kevin said. primarily the products, because we generally deliver a lot more products than services as a mix of our revenue. And so those products, with the shortcomings that we have in terms of the headwinds and supply chain and all that, gets affected. And that has a bigger impact on margins and profitability than services in general.
spk10: Okay. And if I could, just to follow up on that, on the revenue side, were any of the pushouts due to specific competitive losses or contract sort of setbacks relative to expectations on specific programs, Waheed?
spk09: Not so far that we know of. In fact, our team is making very good progress in general in terms of the markets and opportunities that we're pursuing. We, in fact, in many areas look better than we did before. As I mentioned, we did the interoperability, interchangeability demonstration with the NATO partners in Europe This is a very, very big milestone because it shows how a sensor-to-shooter concept of operation can be implemented, and we delivered that capability. We demonstrated it live with our Switchblade and our Puma AE-3s. Additionally, on our MUAS, the Jump 20 FTUAS program for the U.S. Army, we have already submitted our proposal. we like our chances. We believe that we're in a leading position, and that is a significant opportunity that we think we are positioned quite well on that as well. And similarly, in our tactical missile systems product line, we've made quite decent progress in a lot of different areas of our business. We continue to make products and deliver on the existing Switchblade 300, although at a lower pace because of the supply chain constraints. Switchblade 600 is progressing very, very effectively with the customer adoption and low initial production, and we're developing the next variant of it. So overall, our win rate in the market remains strong. It's just that these headwinds are pushing things to the right as it's affecting pretty much almost every company that I know of across the board and the entire macro level of the economy and industry.
spk06: And the product TMS has shown a lot of good reception in the marketplaces. Out of the box. Absolutely.
spk09: Great. All right. Well, thank you very much. You're welcome, Ken.
spk03: Thank you. And our next question is from Austin Muller of Canaccord. Your line is open. Good evening, Waheed.
spk02: I just have a quick question here on the supply chain. Some other contractors that I've spoken with in the past few weeks, have sort of targeted and estimated resolution for a lot of the supply chain delays and disruptions for sort of mid-calendar year 22, which is, of course, in your fiscal year 23. I know you didn't say anything specific around timing, but does that sound like a reasonable estimate to you?
spk09: Good evening, Austin. In general, as I said, based on what we could see in the market, tight labor markets and supply chain constraints that are affecting both delivery of our systems and services as well as the ability to manufacture and make products and delay the orders, I think that those two are going to be a little more sustained. There's really, the situation is so dynamic that on a weekly basis, things do change quite significantly. And we've been, you know, from the beginning of this pandemic, We were very fortunate because our team proactively worked on a lot of these issues in advance. We diligently worked all these things proactively by buying parts in advance, by getting our suppliers to even carry inventory for us in advance and plan and build in advance. And so most, if not all of those, what I call contingency plans were exhausted in terms of the duration of this pandemic and the duration of this global disruption. And so essentially what's happening now, there's lots of different factors that are impacting it. What we're doing though, we are absolutely doing everything to control things that we can. Things that are out of our control, we really can't control, that's external. But there's a lot of things that we can control and we've impacted that. So I would say in some ways, the beginning of next, the middle of next calendar year, summer, sounds reasonable, but I don't have a very clear picture there to provide you that.
spk02: okay thank you that's very helpful and then just one follow-up uh if we look in the current drafts of the ndaa and the defense appropriations bills there's approximately 68 million dollars in there consistently for the army lman switchblade program uh and then around 70 million for future tactical uas i assume you you're you still have a high degree of confidence in that uh ending up in your fiscal year 23 just once the budget is actually passed and sent to the President's desk?
spk09: Austin, the two figures that you mentioned are accurate. Yes, those are in the proposed NDAA and the government fiscal year 22 budgets request. We're in contact with those two customers, the U.S. Army for LMAMS and FTUAS. and we really like our position. I am not in a position to comment about the fiscal year 23 activities. We are really focused on executing this year, but we do believe that the long-term prospects for our businesses and our product lines remain intact. We continue to be a leader in the space and the markets that we're in, Overall, the demand for our products and solutions and our innovative capabilities are certainly there and enduring, and we're working hard to make sure that we capture those. It's just these headwinds that we're faced with, multiple of them, of course, due to the external factors that are going on that we're mitigating as we go.
spk02: Okay, thank you.
spk09: You're welcome, Austin.
spk03: Thank you. And our next question is from Pete Skibitsky of Olympic Global. Your line is open.
spk01: Yeah, good afternoon, guys. Can we delve into the revenue guidance reduction by product line a bit? I would imagine you're seeing the most pressure, you know, out of the total and small UAS and TMS. Is that fair?
spk09: So, Pete, this is Waheed up. Generally speaking, as you know, a significant portion of our revenue comes from product sales and product shipments. And many of the issues that I described in terms of the headwinds impact the ability for us to manufacture product and deliver product, and also to secure contracts related to that. So in general, the product business overall will be affected in a large extent. Now, at the same time, since our product business is more favorable in terms of profitability profile, that impacts the bottom line a little additionally. And in addition to that, there's also additional expenses and expediting fees and material costs and warehousing costs, et cetera. So overall, the reductions are impacting all of our businesses, but products are getting impacted slightly higher.
spk01: Okay, and I think in your release you guys mentioned slower decision-making in D.C. I wasn't sure if that solely meant the budget. I want to ask you if you've had any trouble getting, you know, FMS approval, export approvals for any of your product, given, you know, so much is now shipped overseas, both for small UAS and TMS.
spk09: So, Pete, that's a very good point. In general, the slowdown, there's some slowdowns, multiple factors that are impacting that. Number one, the global pandemic still serves as a deterrence for the ability of our customers and our teams to travel both domestically and internationally as we used to do before the pandemic. That's one. Number two, besides the travel, the continuing resolution that is happening right now in the U.S. defense budgets and Washington and government continuing resolution does also have an impact in our ability to actually process these things and move them through the sales cycle as we expect it. So in terms of the FMS office, yes, the overall impact of international shipments also are affected, not just by the ability for the government to allow us to ship those things via FMS, but also in actually securing and processing the paperwork to secure those contracts and get the permission to get them through. Overall, you know, it's just a very large overall impact that the whole industry faced that are multifaceted.
spk01: Okay, thank you.
spk09: You're welcome.
spk03: Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star 1 on your telephone. And our next question is from Brian Rottenberg of Imperial Capital. Your line is open.
spk07: Yes, thank you very much. A lot of my questions have been asked, but I did have a question on solar apps. Can you give us an update on that? Where are we? Are we on track? Has anything gotten delayed because the pandemic pushed to the right? Can you give us a general update there? Thanks, Brian.
spk09: Of course, this is Waheed. So in terms of our HAPS business, as I mentioned, we're making really, really steady progress in that program in general. As you know, the business plan for that is a three-phase business plan. We have completed successfully the first phase of this, which was design, develop, demonstrate, and deliver to airplanes. Now it's phase two, which is to make the final version of the airplane and then get this through certification and testing and flight testing with FAA and other agencies. We've begun that process. We have a very detailed project plan that we have been executing. We're at the initial phases of that. The program is on track in terms of overall deliverables to our customer, our partner, SoftBank and AppsMobile. However, the shortages of resources of tight labor markets for the engineers that we need to expand and also to prepare for the next flight season, which is going to be upon us coming this summer, Those two have been impacted because of this, including some supply chain and lead times for material. So nothing's gone sort of untouched or unscathed in this area. But overall, relative to our plans with our customer and our partner, we're on track in meeting those milestones because we had already adjusted those based on the pandemic. However, this labor markets and supply chain is throwing another challenge at us at this stage of the game.
spk07: Okay, so there is some delays, but nothing really new in the last quarter on HAPS. Is that the summary? That is correct. Great. Thank you very much. You're welcome, Brian.
spk03: Thank you. And our next question is from Louis de Palma of William Blair. Your line is open.
spk04: Waheed, Kevin, and Jonah, good afternoon. Good afternoon. I just have one question. Of the $100 million in guidance reduction, are you able to quantify how much of that $100 million is still in your pipeline versus how much you'd be able to deem has been canceled outright by the customers?
spk09: So, Louis, the majority of that is still in our pipeline. I don't break them down specific line by line because the line items are very, very extensive and large and long. Overall, in general, vast, vast majority of those have shifted to the right, either because of one or the other or multiple headwinds that I described earlier in general. There are some level of sustainment orders. that what we call it a little bit perishable. So if you don't have the ability to provide products or secure those orders, that they will be reduced or may not come back or you may not recover from that. The dollar amount of that, the extent of that is difficult to quantify specifically. However, you know, we have a very large install base and we believe that over time that's going to work itself its way out. And we're also, as you know, developing new generation solutions that helps us generate new demand. So I would say in general, majority is shifted to the right one way or the other. Some could be considered perishable that may not be recovered primarily because of just time that goes by related to some of the sustainment orders.
spk04: Great. And of that $100 million, was there any specific – contract concentration such that there might have been a very large Raven order or a very large Switchblade 300 order that you anticipated? Or would you say that it was evenly distributed and it wasn't abnormally large relative to your normal contracts?
spk09: Luis, well, it depends on the product line specific because in certain categories we have a lot of different variety of things that we offer. So small UAS, it's across the board, Puma parts, Raven parts, and various different components that goes into designing the subsystems. On our tactical missile systems, you know, the product line primarily is switchblade 300 and 600. Those are the two primary drivers of our revenue for switchblade and tactical missile systems. I would say those are the primary ones, but there's not one single specific opportunity or product because we use these advanced processors and semiconductor components across our entire product line. So if there's a shortage of a specific chip or semiconductor component, it affects more than one product of ours in general. We've taken a number of actions to address that, like I said. by even swapping components and redesigning the boards. We've gone to other sources. We have bought in advance. We are exhausting all the possibilities that is in our control. But there are certainly large macro level headwinds that we can't control and that's the reason for the adjustments that we made in our guidance. Overall though, I could tell you that Our 90% visibility to the midpoint of our guidance and a very strong backlog, $252 million, gives us confidence that we're going to be able to execute this year, but the situation is very dynamic. Things change on a daily basis.
spk04: Thanks. Thanks, Wahid.
spk09: You're welcome, Louie.
spk03: Thank you. And as a reminder to ask a question, you will need to press star 1 on your telephone. Again, that is star 1. And our next question is from Pete Skibitsky of Olympic Global. Your line is open.
spk01: Yeah, thanks, guys. One or two follow-ups. Guys, a lot of people are talking about the potential for a full year continuing resolution for fiscal 22, so we just don't really get a budget. So, you know, in light of that, you know, you're halfway through your fiscal year. Should we, you know, how are you guys thinking internally about fiscal 23, just directionally? You know, is it reasonable to keep it kind of flat year over year or, I don't know, maybe even down considering the lack of visibility on the budget and in the supply chain? What's the right way to think about that?
spk09: Yeah, so, Pete, obviously I'm not an expert in predicting the government's continuing resolution situation. I will not speculate on that. But what I can tell you is that we believe that based on the current environment and based on the visibility and the backlog and the availability the visibility we have within our customers and markets and opportunities and our operations that we're confident about our ability to execute and deliver a fifth consecutive year of growth this year. And we are a growth company. The demands for our systems and solutions in the long run remain strong. We believe that our tactical missile systems is disrupting a very multi-billion dollar large market opportunity, which we're just at the beginning of that. And our MUIS Jump 20 system sort of presents a very large short-term and long-term growth opportunity for our business and our company. And then, of course, long-term, our small UAS, as well as our HAPS business, sort of present large step function growth opportunities for us. We're a growth company. We believe we can grow, and we believe the demand for our solutions long-term is going to stay strong. And we will provide you more updates on fiscal 23 when the time comes close to that on our fourth quarter.
spk01: Okay. Last one for me on FTUAS. I think you said increment one award could be soon. Just correct me if I'm wrong. But for increment one, is that a competitive down select, or will all three of the competitors get an award for kind of further refinement?
spk09: So that's a great question, Pete. I'm glad you asked the question because I alluded to that in my remarks, which was we have submitted our proposal to FTUAS Increment 1. Increment 1 is strategically very important because Increment 1 sets the stage for the future program of record acquisition plans and requirements. The customer initially indicated to us, that they have not determined whether they're going to award it only sole source to one vendor or multiple vendors. We believe we are a very strong position. We have submitted a proposal for that, and we like our chances and our profile for success there. However, there's still work to be remained. It is a very large opportunity. There's lots of competitors that's competing for that, and we remain committed to making sure that we win in that opportunity because we believe our solution is extremely compelling and extremely differentiating compared to all the other options on the table. Now, the reason why increment one is important is because that sets the stage for the government and the U.S. Army to inform its future deployment and acquisition planning. And while the dollar is small for increment one, the strategic importance is significant.
spk01: Okay. Thanks for the call. I appreciate it.
spk09: You're welcome.
spk03: Thank you. And there are no further questions on queue. Do you have any closing remarks?
spk08: No, thank you. We're ready to wrap up the call.
spk09: We are ready to wrap up the call. Operator, thank you all for your interest in AeroVarmin. And we look forward to talking to you again in the near future. And happy holidays.
spk03: Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you again for participating, and we look forward to speaking with you again next quarter. You may now disconnect.
Disclaimer