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spk01: Good day and thank you for standing by. Welcome to the AeroEnvironment fiscal year 2023 third quarter conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jonah Teeter-Baylen. Please go ahead.
spk10: Thanks and good afternoon, ladies and gentlemen. Welcome to AeroVironment's fiscal year 2023 third quarter earnings call. This is Jonah Teeter-Valen, Senior Director of Corporate Development and Investor Relations for AeroVironment. 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 statements that may predict, 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 presentation 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, March 6, 2023. 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 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 Waheed Nawabi. Waheed?
spk09: Thank you, Jonah. Welcome to our fiscal year 2023 third quarter earnings conference call. I will 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 updated expectations for the remainder of fiscal year 2023, before Kevin, Jonah, and I take your questions. Before I jump into the quarter, let me be clear about one thing. The fundamentals and underlying demand drivers of our business remain very strong and robust across all our product lines. Our business's core operating metrics are clearly trending in a positive direction, including record backlog, significantly better gross margins, and over 50% improvement on our adjusted EBITDA. Our industry trends should continue to drive long-term sustainable and profitable growth for our business. In short, I believe the prospects for our environment have never been better. Now I will highlight a few key messages on the quarter, which are included on slide number three of our earnings presentation. First, third quarter results were in line with or slightly ahead of our expectations. As we continue to successfully execute against our plan with solid, enduring demand across our portfolio, as evidenced by our record-funded backlog at the end of Q3 of more than $400 million. Second, given our strong backlog, we are narrowing our revenue guidance range and increasing our adjusted EBITDA guidance, with the midpoint of our adjusted EBITDA range representing more than a 50% improvement over last year. And finally, we expect fiscal year 2024 to be another year of double-digit, top-line profitable growth for our environment, supported by our solid backlog and robust global demand for our innovative and best-in-class portfolio of intelligent, unmanned robotic solutions. Now, let me summarize our financial results for the quarter. We delivered third quarter revenue of $134.4 million compared to $90.1 million in fiscal year 2022, representing an increase of nearly 50% year-over-year. The improvement was primarily due to higher SUAS sales, which nearly tripled compared to the prior year period. This increase reflects strong PUMA 3 AE and PUMA LE shipments tied to our record foreign military sales, or FMS, contract that we announced last quarter. Gross margin for the quarter was $45.5 million, more than double last year's $21.4 million, and our gross margin percentage rose to 34% from 24% last year. The improved gross margin was primarily a result of higher volumes and favorable product mix. As we have previously discussed, we expect gross margins to further improve in Q4, excluding asset acceleration, and remain elevated in fiscal year 2024 as our revenue mix shifts to more favorable product sales. We reported adjusted EBITDA of $23.7 million compared to $5.4 million in the third quarter last year. We ended the third quarter with a record backlog of $414 million, an 83% increase year over year, reflecting the increasing robust demand for our solutions. Finally, non-GAAP EPS was $0.33 per diluted share as compared to $0.31 per diluted share for the third quarter of fiscal year 2022. This increase was primarily driven by higher revenues and favorable product mix, more than offsetting increased operating expenses, interest expenses, and lower tax benefits. For comparison purposes, fiscal year 2022 third quarter included a $15 million tax benefit. Looking ahead, recent contract awards and increasing demand for our portfolio of intelligent multi-domain robotic solutions gives us confidence that we're positioned for strong performance and value creation beyond this fiscal year. The conflict in Ukraine over the last year has showcased the unique value of our innovative solutions and the critical role they play in giving Ukraine, the US, and its allies an advantage on the battlefield, especially against near-peer adversaries. As our solutions continue to play an essential role in Ukraine's defense, we expect to capitalize on opportunities directly related to this conflict while simultaneously helping the US and its allies prepare for the future. Despite shifting U.S. DOD funding away from medium UAS COCO operations, air environment remains well-positioned for U.S. DOD's key budget priorities. Demand for our products and services has resulted in a new record backlog. Further, proposal activity remains elevated, and we continue to hold productive discussions with domestic and international customers. And finally, we remain diligent in managing the ongoing global supply chain constraints and inflationary pressures in a tight labor market. Our prudent actions have allowed us to meet the needs of our customers while continuing to invest across our portfolio for growth and scale. I would now 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 lines. where revenue rose nearly 200% compared to the prior year period. This primarily reflects our recent record FMS award for PUMA LE and PUMA III-AE systems. We announced last quarter that this FMS contract had a maximum ceiling value of $176 million, and we now have current funding of $132 million. During Q3, we expedited production and shipped a solid portion of the initial funded amount. Additional funding up to the full value of this contract is expected, and we anticipate deliveries to remain at the current pace in the fourth quarter with remaining shipments occurring in fiscal year 2024. This year has been pivotal for our SUIS product line. with strong growth, new product introductions, and system upgrades that will set the foundation for growth for years to come. The transformation of this product line has been the result of consistent prudent investment, which has resulted in improved technology that kept us ahead of the competition, especially as the U.S. DoD and our allies turned their focus to near-peer threats and contested environment operations. I also want to note that our team recently visited Ukraine again, where we have people continually on the ground to ensure the success of our products. We've received excellent feedback that our Puma systems are scouting targets for every weapon system that the US Department of Defense has provided to Ukraine. This speaks volumes to the capability and reliability of our solutions. Suffice to say that our PUMA systems are one of the most effective assets that the U.S. has provided to Ukraine throughout this conflict. Switchblade-loading munitions and other U.S. DoD-supplied weapon systems are even more potent when combined with PUMA for ISR, targeting, and battle damage assessments. Our products are proven to be essential to the country's defense efforts and we are honored to continue our support for the people of Ukraine. We are proud of how important our SUAS products have become for the U.S. DoD and its allies across the globe who rely on them for their safety and security while we continue to invest in the future of this product line. Moving to our Tactical Missile Systems or TMS product line, we continue to experience strong demand. Total TMS revenue is up roughly 30% year-over-year, which reflects the continued orders of our Switchblade 300 and 600 systems to support Ukraine, including the latest $2 billion security assistance package announced on February 24th and backfill-depleted U.S. DOD stockpiles. On our team's recent trip to Ukraine, we reaffirmed that our Switchblade 300 and 600s are performing well in combat operations, and Ukrainian military officials are requesting many more of them. Order activity remains elevated given the high degree of visibility these systems have received over the past year. This past December, the Lithuanian Minister of Defense announced the country's intent to purchase our switchblade-loading munitions for their forces. Disagreement with the U.S. DoD for the delivery of Switchblade 600s would make Lithuania the second country outside of the United States to procure this battle proven capability. We have yet to receive this contract from the U.S. DoD, and it is not reflected in our backlog, but it is expected to be worth approximately $45 million. Given the current level of interest and demand in Switchblade, we expect significant growth in our TMS business going forward. As with our Puma SUAS products, AeroVarmin remains a leader in loitering munitions with unmatched reliability and performance, setting us apart from the competition while driving strong demand. I will now discuss our medium UAS or M UAS product line. We continue to work on the increment one of the U.S. Army's future tactical UAS or FT UAS programs. training personnel in Germany while undergoing flight testing at the U.S. Army's Redstone Arsenal in Huntsville, Alabama. We're also excited to share that the U.S. Army recently selected AeroVironment for Increment 2. During this phase, we will compete with several other vendors, which will allow the Army to select the best system for its needs. We are the only company to have secured sole source awards for increments zero and one of this contract. Additionally, we also remain the only company who has been selected and awarded contracts for all three phases of the FDUIS program. As we enter this phase of the competition, we're confident that our Jump 20 system is the most mature and capable solution in its class and will continue to work closely with the U.S. Army to ensure we meet or exceed their performance needs both today and in the future. As part of our selection for Increment 2, we received an initial award from the U.S. Army and there are additional opportunities for funding throughout Increment 2. Since Ukraine has been the near-term priority for U.S. defense spending, Programs outside of this priority, including those that typically utilize the Jump 20 aircraft, are simply not seeing as much activity. With that said, Jump 20s have been included in the latest security assistance package for Ukraine, and we believe long-term outlook for MUIS remains bright. International interest in the Jump 20 platform continues to grow, and there are other large U.S. DOD programs on the horizon. With a potential $1 billion program record and multiple international and domestic opportunities, we are optimistic about MUIS growth potential in the years ahead. Moving to our unmanned ground vehicles or UGV product line, our team has been making progress on our previously announced contract to provide Telemacs and Teodor ground vehicles to Ukraine. We have already delivered eight Telemacs EVO robots under an accelerated schedule. Our rugged TELEMEX models are known for their advanced specialized precision manipulation, autonomous functionality, and intuitive operation. In addition, while UGV sales were down slightly year over year, we received a record number of orders this quarter, totaling more than $25 million. We've also recently released several new accessories, including a CBRN kit, 360-degree camera, and a mini Bluetooth controller. Proposal activity remains solid, and we anticipate sequential growth in this product line as well. Within our HAPS product line, we continue to execute on our current contract with SoftBank for the next generation SunGlider with the goal of developing and commercializing stratospheric-based telecommunication services. At the same time, we remain fully engaged with the U.S. DoD across multiple fronts that could lead to contracts in the coming quarters. There is a growing need for high-altitude, ultra-long-endurance, persistent ISR capabilities for defense and security applications, potentially even against foreign-based, unidentified flying objects. Sunglider provides unique benefits compared to satellites and ground-based infrastructure. We now expect HAPS revenue between $35 million to $40 million this fiscal year. And finally, I'll share some exciting developments at McCready Works Advanced Solutions. In February, our Ingenuity Mars helicopter reached a milestone of 47 flights on its extended support of the Perseverance rover, helping NASA search for evidence of ancient life in the Jezero crater. Ingenuity's original manifest called for only five flights, but the mission has continued due to the helicopter's remarkable reliability and endurance as evidenced by the helicopter's recent awakening from the Martian winter. Ingenuity has become an important partner in scouting ahead for Perseverance, so much so that NASA and the European Space Agency have altered their future Mars sample return plans to include two new helicopters. Air Environment has recently received an initial award for the development of this next-generation helicopter, and we are optimistic about future larger contracts as this program moves forward. McCready Works is experiencing steady demand across federal and defense agencies for programs which value artificial intelligence, machine learning, and contested environment logistics as we continue to integrate many artificial intelligence and machine learning-powered capabilities into our product portfolio. We anticipate that the McCready Works product line will see increasing internal and external demand as we move into fiscal year 2024. In summary, we're seeing positive traction across all our product lines and the future looks bright. In particular, the past few quarters have clearly set us apart and elevated our company to a new level. During the year, we've positioned Switchblade as a best-in-class solution for loitering munitions in near-peer conflicts, won the largest ever Puma FMS order, providing unmatched surveillance and reconnaissance in Ukraine, and we were selected for U.S. Army's FTOS increments 0, 1, and 2. Air Environment's broad portfolio of unmanned solutions is utilized every day across the globe to help defend the lives of millions and move humanity forward through innovative breakthroughs and advanced engineered solutions. As an example, all four of our largest product lines, SUAS, MUAS, TMS, and UGV, are playing a critical role by giving Ukrainian forces an advantage against their much bigger adversary. This is a testament to how relevant and meaningful our innovative solutions are in today's conflicts. We believe we're well positioned to benefit from this macro trend as all militaries adopt more unmanned systems as part of their force structures. Whether it be on Earth or Mars, we're building products that nations, leaders, and scientists rely on to make better decisions going forward. 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'll be reviewing the highlights of our third quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on our website. Revenue for the third quarter of fiscal 2023 was $134.4 million, an increase of 49% compared to the third quarter of fiscal 2022, revenue of $90.1 million. Slide five of the earnings presentation provides a breakdown of revenue by segment for the quarter. Our largest segment during the quarter was our small UAS business, which finished the quarter with 69.4 million of revenue, up from last year's 24.4 million. As Waheed mentioned, the increase in revenue in the quarter was primarily a result of the large FMS Ukraine order received at the end of the second quarter. Tactical missile systems, or TMS, contributed 24 million of revenue compared to $18.6 million last year during Q3. This increase was driven by a higher level of PMS manufacturing activity in the quarter, which was recognized based upon revenue over time accounting. The medium UAS segment finished the quarter with revenue of $15.4 million, a 27% decrease compared to the third quarter of fiscal 2022. The reduction of revenue was a result of lower COCO service revenue which in turn was caused by a decrease in the number of MEUAS sites operated. Our half segment contributed $8.9 million in Q3, a decrease from $9.5 million in the prior year's third quarter. Revenue from the other segment increased year over year to $116.7 million versus $16.4 million in last year's third quarter. Turning to gross margins, slide five of the earnings presentation shows the mix of product versus service revenue. During the third quarter, product revenues represented 68% of total revenues versus 47% in the same quarter last year. This is in line with our expectation that product mix shifts back to closer to 70% for the second half of fiscal 2023 as a result of significantly higher sales of SUIS products and a slight decrease in MUIS service revenue. Slide 6 of the earnings presentation shows the trend of adjusted product and service gross margins, while slide 12 reconciles the GAAP gross margins to adjusted gross margins, which excludes intangible amortization expense and other non-cash purchase accounting items. For the third quarter, GAAP gross margins increased to 34% from 24% year over year, and adjusted gross margins increased to 36% from 29%. The rise in both GAAP and adjusted gross margins can be attributed to a boost in overall revenue and the higher product mix from the increase in product revenue in both small UAS and TMS segments. However, this decrease was partially offset by a $4.3 million accelerated depreciation of medium UAS COCOA assets, which had a negative impact on service gross margins. We expect another $6 million of accelerated depreciation of cocoa acids in Q4 related to MUAS site reductions. Even with the accelerated depreciation of medium UAS cocoa acids in the last two quarters and in the fourth quarter, our overall adjusted gross margins for the year will be in line with our FY22 overall adjusted gross margins as the favorable product mixes offset the negative impact from the accelerated depreciation. Adjusted product gross margins for the quarter were 41% versus 38% in the third quarter of last fiscal year, primarily due to the higher SUAS product mix. In terms of adjusted service gross margins, the third quarter was 26% versus 22% during the same quarter last year, primarily due to improved service mix. In terms of adjusted EBITDA, slide 13 of our earnings presentation shows the reconciliation of the gap net loss to adjusted EBITDA. In the third quarter of fiscal 2023, adjusted EBITDA was $23 million, representing a significant increase of $17 million from last year. The main factor contributing to this increase was higher adjusted gross margins, and this was partially offset by higher adjusted SG&A expenses and investments in R&D. We expect adjusted EBITDA for the year to be very strong at $89 to $95 million, And as Waheed mentioned, this represents an over 50% year-over-year increase to the midpoint of this range. Now turning to gap earnings. In the third quarter, the company experienced a gap net loss of $0.7 million versus a net income of just above break-even recorded in the same period of last year. We had a significant increase in gap gross margins of $24.1 million versus last year. However, this was more than offset by a variety of factors, namely a $14.9 million increase decrease in the tax benefit, an increase of $3.2 million of unrealized losses on our equity and equity method investments, a $3.1 million increase in R&D spending, and a $2.2 million rise in SG&A expenses, and a $1.3 million increase in interest expense. Slide 10 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per diluted share of $0.33 in the third quarter of fiscal 2023 versus $0.31 per diluted share for the third quarter of fiscal 2022. I should note that our adjusted EPS calculation now excludes equity method gains and losses from the adjusted EPS calculation. This activity is clearly called out on the income statement and is non-operating. Turning to our balance sheet, total cash, restricted cash investments at the end of the quarter were $104.5 million. which is a decrease of $19.3 million from the second quarter of fiscal 2023. As indicated in prior quarters, we expect to see continued increases in inventory and other working capital to support our record backlog and expected bookings as we manage through supply chain shortages by buying inventory and critical components when available. We continue to have a strong balance sheet with over $100 million of cash, restricted cash investments, and approximately $100 million available under our working capital facilities. I'd like to conclude with some highlights of our backlog metrics. Slide eight of the earnings presentation provides a summary of our current fiscal 2023 visibility. That's why he mentioned our funded backlog at the end of the third quarter of fiscal 2023 was a record $414 million. Our visibility as of today to the midpoint of our revised guidance range is over 100%. In other words, we're fully covered by the existing backlog to achieve our full year revenue guidance. We also expect orders to continue to be strong for the remainder of fiscal 2023. Now I'd like to turn things back to Waheed.
spk09: Thanks, Kevin. As we approach the end of fiscal year 2023, we have enhanced visibility into our financial performance this year and next. With a record-funded backlog and increasing demand across the board, and given the recent MUIS site closure, we have adjusted our current year guidance. Our updated outlook for fiscal year 2023 is shown on slide number seven and is as follows. We anticipate revenue of between $510 million and $525 million. We're now expecting net income between $0.3 million to $5 million, or a gain of 1 cents to 21 cents per diluted share. Non-GAAP adjusted EBITDA of between $89 million and $95 million. and non-GAAP earnings per diluted share, excluding acquisition-related costs, amortization of intangible assets, and other one-time expenses of between $1.13 and $1.33. While we're raising revenue in adjusted EBITDA guidance, we have reduced our GAAP and non-GAAP EPS outlook as a result of the closure of our remaining MUIS COCOA site. I want to emphasize that that the primary impact from the closure is from the acceleration of the depreciation on certain of our MUIS assets and is a non-cash impact. As I mentioned earlier, this resulted from shifting USDOD priorities, and we expect these events to occur in the fourth quarter with no impact in fiscal year 2024 on our consolidated results. In addition, we have reduced net income guidance due to greater than expected unrealized losses tied to equity investments. This occurred as a result of mark-to-market accounting related to our investments in strategic partnerships and venture activities. However, we believe adjusted gross margins will strengthen going forward, driven by favorable product mix and higher volumes. We expect to deliver adjusted EBITDA of between 16% and 18% of revenue for the full fiscal year. R&D investments for this fiscal year is expected to remain between 11% to 12% of revenue. As I mentioned before, the fundamental demand drivers of our business remain strong and robust across the globe. As the opportunities in front of us have grown, we have continued to prudently invest in our people, products, processes, and inventories. These investments plus our elevated visibility bolstered by innovation, decades of battle proven experience, and incredible durability in harsh environments positions us well for the challenges of tomorrow. We have rapidly grown the company while maintaining a focus on efficiency and execution laying the foundation for even higher performance going forward. Before turning the call over for questions, Let me once again summarize the key points from today's call. First, we deliver third quarter performance in line with or greater than our expectations as evidenced by a record backlog of $414 million. Second, with our record backlog and key wins over the past few quarters, we have a high degree of confidence in our prospects for value creation in fiscal year 2023 and beyond. While labor and supply chain challenges persist, As we scale the business, we are overcoming these headwinds to meet the needs of our customers and are confident in our ability to deliver against our objectives and achieve another record year for the company. And third, as we look ahead, our portfolio is well positioned to take advantage of macro trends. Our solutions have proven vital in ensuring the safety of the U.S. and its allies, and we stand ready to continue to support them now and in the future. I would like to again thank our staff for their contributions this quarter. They have been instrumental in achieving these great results. We value our employees, customers, and shareholders who put their trust in us every day to make the best systems and solutions that protect and improve people's lives. And with that, Kevin, Jonah, and I will now take your questions.
spk01: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. We respectfully ask that you limit yourself to one question before returning to the queue for further questions. Our first question comes from the line of Peter Armnett with RB Baird. Your line is open. Please go ahead.
spk08: Yeah, thanks. Good afternoon, Waheed, Kevin, Jonna. Wahid, can you give us an update on just the supply chain, how things are evolving there? I know there had been some discussions in the past that things were starting to get a little better with chips, but there are obviously a lot of other components. And just related to how that's affecting both when we think of small UAS and then TMS.
spk09: Sure, Peter. In general, the supply chain constraints have spread. overall improved slightly, although it is still a challenge on a day-to-day basis. For fourth quarter, we have pretty much our supply chain well addressed and taken care of. But beyond fourth quarter for next fiscal year, there's still some areas where supply chain remains to be a constraint. The most important area for us remains the warhead for our tactical missile systems, the Switchblade 300 and 600. which we do not make that. We receive those from General Dynamics and Northrop Grumman's. Both of those two warheads are highly in demand, and supply is still a challenge on a quarterly and annual basis. Besides the warheads for small UAS, medium UAS, UGB, and other products, there are still some semiconductor supply chain constraints, but overall since last quarter has as improved to some extent, although it's still an ongoing challenge. We expect that to continue throughout next fiscal year, although the improvement that we've seen in the last couple of quarters gives me some hope and optimism that things are going to get better and better.
spk08: Yeah, and just as a follow-up, you mentioned the warhead. Is there alternative sources? Because it seems like you're being held back by you know, the demand for Javelin and some of the other products that use similar type warheads. Could you discuss that a little bit if that's an opportunity for you long term? Thanks.
spk09: Sure. Peter, great, great question. Certainly there is alternatives, but that takes a little bit of time. We have already started, even before the conflict in Ukraine, alternative paths to be able to source other warheads for Switchblade 300 and 600. The challenge with 600 is that it shares the same warhead that the government furnishes for both the Javelin missile as well as our Switchblade 600, the anti-tank Javelin missile. And so the production capacity on that takes a while for it to ramp up and increase. While that's going on, we are already working on multiple, not just one, multiple other options on how to source other warheads that are equivalent and even warheads that have different mission capabilities for both Switchblade 300 and 600. This is top of mind for us. We've been focused on that for a while, although the certification process and selection and qualification does take time, and it's a longer-term goal that we are making progress towards as we speak. Appreciate the call. Thanks. Thank you, Peter.
spk01: Thank you, and one moment for our next question. Our next question comes from the line of Austin Muller with Canaccord Genuity. Your line is open. Please go ahead.
spk03: Hi. Good afternoon, Waheed. Good afternoon. My first question here, are the Switchblade 600s that are being sent to Ukraine as part of the aid package, are those coming out of the DOD inventory, or have you been able to produce more in the fall?
spk09: So, Austin, we continue to produce switchblade 600s as we speak. There are some limited quantities in the U.S. DoD's inventory. Some of those have been supplied to Ukraine, but there's significant more numbers that we're producing that we have been delivering to the customer in the last couple of quarters. U.S. DoD's inventory of Switchblade 600 remains very low in general. It started out to be quite low because it's fairly new inventory for them. But we have plenty of capacity to produce more other than the warhead. The warhead is the main gating factor there. And, of course, the U.S. DoD contracts has been another one. So, in general, the latest package that was announced by President Biden's administration on February 24th,
spk03: included some switchblade 600s and or jump 20s those we would be delivering to the usdod and then they will be deploying them to the ukraine forces okay that's helpful and then uh just since the the announcement from lithuania what progress have you made on switchblade fms sales to other european countries and do you expect some of those to show up in in the fourth quarter and in the first quarter of 2024?
spk09: So, Austin, all Switchblade sales so far has been through the U.S. DoD's FMS office, Foreign Military Sales, so far. As I mentioned in my remarks, Ukraine has received them already, and then Lithuania publicly announced that they are going to be purchasing Switchblade 300 and 600. We expect that to be about $45 million worth of orders. FMS orders, that is, and that's not reflected in our backlog. All those sales plus many other countries, we have several other countries that we're engaged with, and over the next several quarters, not just several weeks or months, we will continue to convert those into contracts. Most likely, majority, if not all of them, will be FMS contracts so far, it seems like, and that is going to be a pretty large demand for Switchblade into the fiscal year 24 and beyond. I consider the Ukraine conflict and event a mind shift, a real seismic mind shift in the minds of political leaders and military leaders on what loitering munitions could do and specifically on switchblade. And as you know, we've gotten U.S. DOD's approval to be able to sell to 20-plus countries, and I see that more and more of those countries are are requesting Switchblade 300 and 600, and more of them will convert into contracts in the coming quarters and years to come.
spk03: Awesome. Great quarter, and thanks for all the details.
spk05: Thank you, Austin.
spk01: Thank you, and one moment for our next question. Our next question comes from the line of Louie DePoma with William Blair. Your line is open. Please go ahead.
spk02: Waheed, Kevin, and Jonah, good afternoon.
spk09: Good afternoon.
spk02: Hi, Louis. Hi. Slide 8 provided several backlog metrics. And in the 10Q, you disclosed how the unfunded backlog includes a $235 million contract with a third party that's pending an export license approval. That's obviously a very large total contract value. Are you able to shed any light in terms of the probability of receiving that export license and the potential timing of that?
spk09: Sure, Louis. You are absolutely right that on our unfunded backlog, there is about a $235 million roughly contract for switchblades. It's a DCS contract. for a foreign country and military. And the reason for that is because that military needs them and has asked for them and requested them. The reason why it's unfunded is because we were not sure about the U.S. DOD's willingness to allow for such a large contract value for Switchblade to be initially DCS. That's why you see more announcements from the U.S. Department of Defense on Switchblade FMS sales. So while that contract still exists in our unfunded backlog, I don't really count on it as much because I am less confident about USDOD giving approval for DCS sales for such a large contract for Switchblade. Whether or not that contract gets authorized for a DCF sale and approved through the State Department, I still believe that the demand is still there. The customer has already requested the same amount, if not more of them, through FMS Avenue and channels, and I expect that to actually convert to FMS sales or contract in the coming quarter. So, Either way, I think it's going to work itself out, but I'm less optimistic on DCS sales and far more optimistic on FMS sales, which we're gaining more and more traction with the announcements that have occurred in the last couple of quarters.
spk02: Great. That detail was fantastic. And on another topic, has there been an increase in interest for your sunglider aircraft in the wake of the Chinese balloon incident?
spk09: Louis, thank you again for a great question. The answer is absolutely yes. Even before the Chinese balloons on the U.S. airspace, there's been significant discussions that we've had over the last year plus with the U.S. DOD on SunGlider for defense applications. The recent events of the Chinese balloon really elevated that to a whole different level. And what it's done, it has increased its urgency. And I am, as I said on my remarks, I am more optimistic about the potential for securing some small contract amount to get us going on SunGlider for U.S. DoD needs and applications. Obviously, it will be a longer-term development and engagement in contracts, But the initial one, I expect that to happen within the next quarter or so. There's a lot of interest in that capability. Sunglider has an incredibly unique and powerful value proposition for stratospheric ISR and other types of mission for defense. And the events with China as well as the conflict in Ukraine and Russia and what's going on around the globe has really elevated the importance of this and the urgency of it has also elevated quite dramatically.
spk02: Great. Thanks, Waheed. Thanks, Kevin and Jonah. Thank you. Thank you, Louie.
spk01: Thank you. And one moment for our next question. Our next question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open. Please go ahead.
spk07: Yeah. Hi. Good afternoon, everybody. Good afternoon. Good afternoon. Hey, Waheed, maybe, or Kevin, just to start off, I wanted to see if you could provide a little more detail on the MUAS segment and specifically gross profit. I know you're investing significantly in this business. How do we think about maybe profitability in this business through the remainder of this fiscal year and in the next year? And maybe at what point or maybe at what revenue point should we start to see gross margins really inflect positively in this segment?
spk06: I'll start and then you can fill in. Well, basically, you know, they're getting a large order from Ukraine. As we've been talking about over the last several quarters, they're shifting more to a product business that was anticipated also with FQAS potential coming online here. So we see their gross margins improving as they become more of a product business over time. So you should see gradual improvement in the contribution.
spk07: Okay.
spk09: Yeah, and again, Ken, that business, as you know, it's primarily a COCO service today. Our strategy when we acquired that business was to transition it more to product sales. There are several sort of pathways that we're pursuing to achieve that. One was that we're relying less and less on the COCO operations. Two is to increase international sales and the potential Ukraine order that was announced by the presidential... latest aid package is a significant potential for Jump 20. And then this will be the first of its kind that the U.S. has given to Ukraine other than our Puma 3s and Puma LE systems. And by far, our UAVs are the workhorse of the Ukraine conflict today. And then lastly, we have several additional international customers that are interested in Jump 20 systems for product sales. What I forgot to also mention is that the Army FDUAS selection, that we just received a small incremental contract, is a potentially $1 billion program. After that, there are several other programs within the U.S. Marine Corps and the U.S. Navy that we're considering, although those are a little longer term than this next year. The U.S. Army announcement was now, and the selection should probably take place sometime by the end of our next fiscal year. And so all of those events will help improve the margins and the profile of that business, which was exactly the plan that we had when we purchased the company to begin with.
spk07: Yeah, thanks, Waheed. And as we – and I apologize if you went through this, but as we look at the aircraft you've delivered as part of Increment 1 on the FTUAS contract, can you comment on how those are performing and any maybe lessons learned and how you think specifically – the results of Increment 1 are positioning or helping you as obviously you move into Increment 2 opportunities?
spk09: Sure. So that's a really important point that you bring up, which is that we're the only one who has been selected sole source for Increment 0 and Increment 1, and we're the only one that has been selected for all three phases. Increment 1 is still early. The reason I'm saying early is because we've delivered the hardware. We're in the process of training the U.S. Army personnel both in Germany and in the United States and Huntsville, Alabama. The Army is taking a slower, it's not going as fast as we expected it to go, meaning that they now have to deploy it out there and go through an extensive set of testings. From our perspective and based on our experience and based on our engagement with the customer, so far their experience with us has been extremely good. We believe that we have the advantage in that competition so far based on our track record of performance and our quite considerably more compelling and differentiated solution. The requirements that the U.S. Army has for FDUIS on increment two and the final selection are things that we can deliver now. Most other vendors are not even close to that yet. And we're at least a few steps ahead of those folks in terms of delivering the capabilities and the reliability that the U.S. Army is looking for on Army FDUIS. So overall, we feel good about it, but we also remind ourselves every day that we're competing with multiple serious players, and we take nothing for granted, and we're going to continue to work and execute as we have done in the past.
spk07: That's great. And just finally, is it fair to assume that the inventory level on the balance sheet, a significant portion of that is in the MUAS or with the Jump 20, considering the you know, the amount of aircraft you got in process as you prepare, obviously, for this round?
spk09: We have some inventory, but no, the overall level of inventory increasing is intentional for two reasons. Because of the supply chain issues, number one, we've been buying ahead because we are expecting these customers to take deliveries quickly as soon as the contracts come in. And number two has been we've been experiencing significant growth this year, and we expect even more growth next year. And so for those, in order to secure our inventory on our products for our customers, and most of these situations are very urgent and high priority for the U.S. DoD and for our allies. That's why the inventory is up. So it's a mixture of both small UAS, TMS, MUAS, and even some UGB business as well. All those businesses are growing. And we're going to require inventories to support those businesses for fourth quarter and fiscal 24. Yeah.
spk06: Remember, the Ukraine contract was over $170 million. So they only delivered a portion of that here in the third quarter.
spk07: Excellent. All right. Nice quarter. Thanks, Kevin. Thanks, Waheed.
spk06: Thank you, Ken.
spk07: Thank you.
spk01: One moment for our next question. Our next question comes from the line of Brian Wittenberg with Imperial Capital. Your line is open. Please go on home.
spk05: Yes, thank you very much. Very good quarter. First of all, in terms of cash, where do you anticipate ending the year in terms of cash? You had a big drop from quarter to quarter, obviously, but I wanted to get your perspective on that.
spk06: Well, I mean, we don't necessarily predict the cash balance at the end of the year, but I would expect inventories to continue but at the same time we're going to be moving the cycle on some of these Ukraine billings, so we should be bringing some of the receivables down. But we're, again, going to end the year with a large quarter. So you could see some working capital usage fill into the fourth quarter.
spk09: And generally speaking, Brian, our cash position, our balance sheet is very strong and healthy. We watch that and we keep an eye on it. Our ability to be able to fund the business operations is not going to be an issue in our mind.
spk05: Absolutely. It should normalize. The cash positions should normalize. I know when you're growing fast like that, a lot of moving parts, but should normalize within the next two or three quarters. Is that what you anticipate?
spk06: Yeah, it normalizes to a certain extent, but we do continue to grow. We're expecting to grow, as I think Waheed said, at least double digit next year. So that would imply a significant growth year over year. And so you'll continue to have some working capital usage. But there is some potential efficiencies over time as some of these supply chain issues ease, and we don't have to do as much pre-buying as we're doing right now.
spk05: Great. And then just last question, since you mentioned the double-digit growth in fiscal 24, can you talk a little bit about what you expect to see going to the bottom line in terms of the growth? Obviously, much – well, I'm making the statement, obviously, but greater growth on earnings and EBITDA. Can you give us any kind of parameters around that?
spk09: So, Brian, we obviously have a very large fourth quarter in front of us right now. We're executing against that. We will be updating you with all of our financial guidance for next fiscal year on our next call. Overall, what I could say is that we expect another year of improvements in pretty much almost all of our metrics. I think our top line will grow. I think our gross margin will sustain or even grow slightly more as we gain scale. Our mix between hardware and product sales versus services will improve. And all that would also mean that we will get some scale and leverage, which means the bottom line will improve significantly as well. So I think that we have executed extremely well this year against very, very difficult challenges and tough sort of headwinds. and position the company for multiple years of growth and prosperity. I think that it's going to be a shift in the way people realize and look at small UAS and tactical missile systems and loitering munitions in general. Pretty much the future conflicts is going to be about unmanned systems on the air, on the ground, and with all with lethal precision capabilities such as switchblades. I think we're getting ourselves positioned for that. We've worked really hard for that. We're going to have a great year, and I think we're going to continue to have even a better year of 24 and beyond.
spk05: Great. Thank you.
spk09: You're welcome, Brian.
spk01: Thank you. And again, if you would like to ask a question at this time, please press star 1-1 on your telephone. Our next question comes from the line of Pete Skibiski with
spk04: olympic global your line is open please go ahead hey good afternoon guys um guys hey guys one thing that's difficult to track is um you know this ukraine funding as it grows i think you know more than 100 billion dollars is just kind of the total amount that you're expecting so i'm sure you kind of track it with a fine-tooth comb but could you give us any kind of an estimate in terms of you know In terms of the Ukraine funding initiatives that have been announced so far, how much of that is as yet to make it into your backlog, even if it's just a rough order of magnitude?
spk09: Sure. So, Pete, it is a very fluid situation, number one, because the war is an ongoing thing. And on a regular basis, the U.S. DOD keeps giving our systems to Ukraine. And the efficacy of those systems are phenomenally good. and the demand for it continues to increase. While that's happening, U.S. DOD also is starting to realize we have to have more of these systems for their own backlog and for their own stockpiles of weapon systems and unmanned systems. And in addition to that, there are other international allies, we look at this on the neighborhood and even outside the neighborhood of Ukraine, that are requesting and demanding the same systems, similar capabilities. So far, I would say we're probably getting maybe half to a third of what's been announced into our bookings and our backlog. I think that that's going to continue to grow and show more and more of it in our backlog. The biggest beneficiary so far has been our small UAS with Puma AE and Puma LE systems, which is, by the way, the workhorse of the U.S. DOD's assets that they've given to Ukraine. We are... told that every weapon system the U.S. DOD has given to Ukraine has one of our Pumas or Puma LEs flying in front of them. So it is the workhorse of the Ukraine conflict against Russia and their defenses. It scouts targets. It sweetens targets for HIMARS and other weapon systems. It then actually helps them to shoot it. And then once it's done and it does a battle assessment. So a variety of different missions have been achieved by PUMAs and PUMA LEs very effectively and very cost effectively for Ukraine and for U.S. I think that trend is going to continue. I think we've only seen small portions of that reflecting on our backlog so far and more of that to come in the fiscal year 24 and beyond.
spk06: And the recent announcement is not in our backlog.
spk09: None of the recent announcements, Pete, that you heard from the 24th of February are is reflected on our backlog. Neither is the Pumas, the Switchblade 300 and 600s, or the Jump 20 systems. All of those we expect to convert into backlog in the next one or two quarters.
spk04: Okay. Yeah. I mean, one-third to one-half implies a lot more to go, it seems like. And just let me follow up on your comments on fiscal 24 growth. A lot of people, I think, believe we could have a full year CR for DoD in the government fiscal 24 or at least an extended CR. Is that factored into your thinking, your double-digit growth thinking for fiscal 24? And does that matter? Does that potential long-term CR matter less given your ending backlog here, funded backlog?
spk09: So, Pete, CRs always do matter to some extent. But given our backlog, our backlog at the end of Q4 three was over $400 million. Same time last year was much lower than that, significantly lower than that. Even last quarter was about $293 million at the end of Q2. So we're talking about almost a two times increase in our backlog compared to third quarter of last fiscal year. Going into fiscal 24, that gives us a lot of confidence in our ability to be able to achieve that year Obviously, the big factor is going to be supply chain and availability of products and lead time of components. But overall, I think that the CR always has some impact, but not as much to our business as other businesses. Like I said, one is the backlog reason. Another reason is the fact that the system is a high priority and high urgency for both U.S. and Ukraine. And I don't see that actually decreasing over time. whether there is or there isn't a CR in general. I think that the macro-level demand drivers for our business is very, very, very healthy. And let's not also forget, vast majority of our sales now, shouldn't say vast majority, a significant portion of our sales come from international demand, both for small UAS as well as for now tactical missile systems, whereas many countries that are interested in them. So I think all those combined, net-net, we're looking forward to a really strong year in 2024 and even beyond.
spk04: Okay, great. Thanks, guys. You're welcome, Pete. Thank you, Pete.
spk01: Thank you, and I would now like to turn the conference back over to Jonah Teeter-Muhlen for any further remarks.
spk10: Thank you all once again for joining today's conference call and for your interest in our environment. An archived version of this call, all ACC filings and relevant news can be found on our website at www.avinc.com. We wish you a good evening and look forward to speaking with you again following next quarter's results.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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