AeroVironment, Inc.

Good evening, and thank you for standing by. Welcome to the Arrow Environment Fiscal Year 23 Second Quarter Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentations, there will be a question-and-answer session. To ask a question during the session, you need to press Star 1-1 on your telephone. Please be advised that today's conference is being recorded. I will now turn the conference over to your speaker for today, Jonah Teter-Baylen. Please go ahead.

Jonah Teter- Thanks, and good afternoon, ladies and gentlemen. Welcome to Air Environment's fiscal year 2023 second quarter earnings call. This is Jonah Teeter-Baylen, Senior Director of Corporate Development and Investor Relations for Air Environment. Before we begin, please note that certain information presented on this call 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, which 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 presentations to the investor section of 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 6, 2022. The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after this conference call. Joining me today from Air Environment are Chairman, 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 Wahid Nawabi. Wahid?

Thank you, Jonah. Welcome to our fiscal year 2023 second quarter earnings conference call. I'll start by summarizing our performance and recent achievements, after which Kevin will review our financial results in greater detail. I will then provide a summary of our expectations for the remainder of fiscal year 2023 before Kevin, Jonah, and I take your questions. Let me first emphasize a few key messages which are included on slide number three of our earnings presentation. First, second quarter and first half results were largely in line or slightly better than our expectations, while we continue to experience solid demand across nearly all our product lines. Second, solid first half performance coupled with growing order volume gives us confidence to increase our revenue guidance for fiscal year 2023. We're also slightly reducing our profitability outlook for fiscal year 2023 due to increased R&D investments to capture additional growth opportunities and accelerated medium UAS or MUAS asset depreciation related to a shift in USDOD funding priorities. And third, We experienced funded backlog of $293 million at the end of the second quarter and record funded backlog of $388 million through November. With this record backlog, revenue visibility, and increasing order flow, we are well positioned for profitable double digit top line growth in fiscal year 23 and beyond. Now let me summarize our financial results for the second quarter. We delivered second quarter revenue of $111.6 million compared to $122.0 million last year, a decline of approximately 9% year-over-year. This decrease was primarily due to lower SUAS sales, although we posted higher revenue within our Tactical Missile Systems, or TMS, product line related to increasing international demand for our switchblade loitering munitions. Gross profit for the quarter was $25.9 million compared to $42.5 million in the prior year period. Our gross margin decreased to 23% from 35% last year, primarily as a result of unfavorable product mix and accelerated depreciation charges related to the anticipated reduction in MUIS service revenue due to changing USDOD budget priorities. We expect gross margins to increase during the remainder of the fiscal year 2023 and anticipate a return to historical levels in fiscal year 2024. We reported adjusted EBITDA of $6.8 million compared to $21.9 million in the second quarter last year. Finally, non-GAAP EPS was 0 cents per diluted share as compared to 78 cents per diluted share for the second quarter of fiscal year 2022. The decrease in adjusted EBITDA and non-GAAP EPS were primarily driven by lower revenues, unfavorable product mix, and higher R&D investments. Non-GAAP EPS decrease was also due to accelerated depreciation of MUIS assets as I explained earlier. Looking ahead, recent contract awards and increasing demand for our portfolio of intelligent multi-domain robotic solutions gives us confidence that we are positioned for strong long-term performance and value creation. While the budget for the government's fiscal year 2023 has yet to be finalized, we maintain broad bipartisan support for our innovative solutions across the USDOD and our allies. In addition, we remain diligent in managing the ongoing global supply chain constraints, inflationary pressures, and a tight labor market. While the entire industry is dealing with these issues, we believe AeroVironment has taken the right actions to minimize their impact. So far this year, our company-wide continuous improvement initiatives have delivered significant cost savings while positioning us for growth and scale. The flexibility of our manufacturing operations has enabled us to meet the planned and unplanned needs of our customers. We continue to work directly with the Office of the U.S. Secretary of Defense and key suppliers when possible to expedite customer shipments and are optimistic about improving industry fundamentals in the quarters to come. Based on this recent progress, we now feel confident that we will have sufficient supply and labor to meet this year's financial objectives. Now I would like to switch gears and provide an update on current developments within each of our product lines. Let me begin with our small UAS or SUAS product line where we recently received the largest foreign military sales or FMS award in our company's history. This contract award has a maximum ceiling value of $176 million with an initial funding of $86 million and includes deliveries of PUMA LE, PUMA III AE systems, spare parts packages, and associated training and logistics support. Shipments are set to begin later this quarter and will continue for six to 12 months thereafter. Let me emphasize. Our Puma systems have proven to be very critical to Ukraine forces and its ongoing conflict with Russia, particularly when combined with our highly effective switchblade loitering munitions to scout enemy targets and provide battle damage assessments. This award is an amazing testimony to our entire Puma Small UAS platform. That said, and as indicated earlier, while such a significant order strengthens our outlook in reaching our goals, it was largely anticipated. We have carefully planned for this contract award and the requirements to execute it. These shipments also incorporate our latest anti-jamming software enhancements to enable successful operation in a highly contested battle space. In addition to this large FMS award, we announced in September that ARVARMEN had received two additional firm fixed price FMS awards totaling nearly $21 million for PUMA III-AE small UAS, initial spares packages, training, and support for two allied nations. There is an urgent need for such systems, and we are proud to continue helping the people of Ukraine and our allies abroad. Now I would like to highlight some of our SUAS team's recent new product introductions. In September, we announced the introduction of our next generation Vapor unmanned helicopter, the Vapor MX55. Vapor MX55 is a more rugged, reliable, and capable platform and includes a completely redesigned modular autonomy framework, enabling 25% increased endurance and 20% expanded payload capacity. Also in September, we announced the introduction of the PUMA VNS, a visual-based navigation system for PUMA 2AE and PUMA 3AE. PUMA VNS enables operators to navigate in highly contested GPS-denied environments using onboard computer vision algorithms and visual terrain information. Customers will also be provided with navigation capabilities features and functionality through future software and hardware updates. This solution provides unprecedented advantages in a contested battlefield environment. This is yet another example of how our investments in R&D, and especially in artificial intelligence and computer vision, further enhances our solution's capabilities for our customers. And finally, we introduced a new Raven gimbal called Mantis i23D. The solution will be offered as an upgrade to Raven's existing large global installed base of customers who will benefit from this new state-of-the-art sensor suite. It is also important to note that we have already secured initial customer orders from many of these innovative solutions already. As anticipated, we're seeing improving demand for our small UAS product line, while we continue to prudently invest in product advancements and features, positioning us for continued future growth. This year will certainly prove to be one of the best ever for our small UAS product line, and we are confident we will build on this strong foundation for years to come. Moving to our Tactical Missile Systems, or TMS, product line, we are experiencing solid demand and nearly doubled revenue this quarter versus fiscal year 2022. Our TMS product line performance this quarter largely reflects shipments of the Switchblade 300 and 600 to the U.S. Army in support of the Ukraine Security Assistance Initiative, or USAI, and to backfill depleted U.S. DoD stockpiles. Given Switchblade's strong applicability to current conflicts, we expect order activity to remain heightened for the foreseeable future. And we are now pursuing multiple opportunities with a wide range of domestic and international customers. Domestically, we are working with the U.S. DoD to backfill and expand existing Switchblade inventories. Overseas, we're seeking additional contracts to supply Ukraine while pursuing orders with new international customers that USDOD recently approved for sale. We continue to receive positive feedback that AeroVironment's solutions are highly effective and best in class. Our family of loitering munitions continues to expand through multiple strategic partnerships, such as with Northrop Grumman. This switchblade variant, called Jackal, is a turbojet-powered loitering munition with a range of more than 100 kilometers, supporting multiple warheads and payloads, and can be launched from ground or air. This long-range precision munition, or LRPM, is meant to provide flexible, durable strike options for the U.S. Army's next-generation helicopters. The program is under a three- to five-year development cycle and could result in significant new awards for air environment over the long term. We're making solid progress on this new variant of Switchblade and have recently received initial funding to demonstrate this new disruptive capability. Going forward, we anticipate healthy bipartisan support for solutions as funding priorities are laid out for the government's fiscal year 2023. In addition, with the approval of Switchblade 300 and 600 sales to over 20 allies, there is ample opportunity for continued double-digit growth across our TMS product line for the foreseeable future. Just like with our SUAS product line, there is the potential for much larger orders going forward, and we're proud of developing such innovative solutions that help defend our country and our allies worldwide. I will now switch gears and discuss our medium UAS or MUAS product lines. As announced last quarter, we were awarded increment one of the U.S. Army's Future Tactical UAS or FDUAS program, which was greatly anticipated and is now fully underway. We continue to train U.S. Army personnel in Germany while activities are ongoing at Redstone Arsenal in Huntsville, Alabama. with flight testing expected to start in 30 to 60 days. We're pleased to be deepening our partnership with the U.S. Army, and we're working hard to prove our advanced capabilities on this next-generation program. For government fiscal year 2023, the U.S. Army's proposed funding for FTUAS is approximately $100 million. We expect the next phase of FTUAS, or Increment 2, to be awarded in the next six months. While FT-UAS is an exciting $1 billion potential program of record, our current fiscal year is now expected to be flat in terms of MUAS growth. Ukraine has been the near-term priority for the U.S. DoD spending, and programs outside of Ukraine that typically utilize the Junk 20 aircraft are not seeing as much activity. As a result of this, we have recorded some accelerated depreciation expenses, which are now reflected in our revised financial outlook for the fiscal year. In addition, we have completed the integration of our most recent acquisition, Planck AeroSystems, into our NUAS organization. Regarding our unmanned ground vehicles, or UGV product line, we have secured a contract to provide ground robots to Ukraine with deliveries this calendar year. Overall, UGV proposal activity remains solid, and we expect additional positive developments in the months to come. Within our HAPS product line, as announced last quarter, we're successfully executing against our current contract with SoftBank for the next generation SunGlider. Both Air Environment and SoftBank remain fully committed to the vision of developing and commercializing stratospheric-based telecommunication services. At the same time, we're engaged with the U.S. DOD in multiple fronts, which could lead to a new incremental contract in the coming quarters. There is an emerging and growing need for stratospheric ultra-long endurance persistent ISR capability for defense applications against near-peer adversaries. HAB solutions are ideal for these applications, and the performance capabilities of our SunGlider UAB stand well ahead of competitors. Overall, we remain on track for HAB's revenue to be between $30 million to $35 million this fiscal year. And finally, I'll share some exciting developments at McCready Works Advanced Solutions. Aside from the well-known contributions we're making to NASA with the Ingenuity unmanned Mars helicopter, McCready Works continuously experienced growth in customer-funded R&D. These efforts are focused in the areas of artificial intelligence, machine learning, and contested environment logistics. Recently, we received contracts from the U.S. Navy to continue R&D, testing, and evaluation of certain advanced image and video analytics capabilities in biometric target recognition. We've also completed several field experiments with customers to explore AI and machine learning-based solutions for GPS-denied environment operations. At the same time, we remain actively engaged with NASA's Jet Propulsion Laboratories, or JPL, on their next important Mars mission, now in the preliminary design phase. In summary, AeroViron remains on track for another year of profitable double-digit top-line organic growth and improved underlying results. I'm especially proud of how effectively and efficiently our team has executed so far, despite ongoing supply chain constraints. We are well prepared to deliver on the second half of our current fiscal year, while positioning AeroViron even more for even more growth beyond fiscal year 2023. With that, I would like to now turn the call over to Kevin McDonald for a review of second quarter financials. Kevin?