AeroVironment, Inc.

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.

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?

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?