AeroVironment, Inc.

Good day and thank you for standing by. Welcome to the AeroVironment fiscal year 2023 fourth quarter and full year 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 the session, you'll 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 Teter-Baylen with AeroVironment. Please go ahead.

Thanks and good afternoon, ladies and gentlemen. Welcome to AeroVironment's fiscal year 2023 fourth quarter and full year earnings call. This is Jonah Teeter-Balin, Senior Director of Corporate Development and Investor Relations. 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. These statements involve many risks and uncertainties that could cause actual results to differ materially from our expectations. Further information on these risks and uncertainties is contained in the company's 10-K and other filings with the SEC, in particular in the risk factors and forward-looking statement sections of each such filing. Copies are available from the SEC on the Air Environment website or from our investor relations team. 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 under Events and Presentations. The content of this conference call contains time-sensitive information that is accurate only as of today, June 27, 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 MacDonald. We will now begin with remarks from Wahid Nawabi. Wahid?

Thank you, Jonah. Welcome everyone to our fiscal year 2023 fourth 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 information related to our expectations for fiscal year 2024, after which Kevin, Jonah, and I will take your questions. I'm pleased to report that the fourth quarter results exceeded most of our expectations, and we set records across many key financial metrics. Our key messages, which are included on slide number three of our earnings presentation, are as follows. Fourth quarter revenue rose to $186 million, a 40% increase compared to fiscal year 2022 fourth quarter, while product revenue nearly doubled year over year to just under $142 million. Second, for the full year, revenue increased to $541 million versus $446 million last year, representing 21% growth. This makes it 6%. consecutive years of top line growth. Third, our funded backlog also doubled from fiscal year 2022 to set another record at $424 million. This backlog was driven by more than $750 million in bookings throughout fiscal year 2023, reflecting strong demand for our solutions led by our small UAS or SUAS and tactical missile systems or TMS businesses. And fourth, given recent performance trends and our visibility into coming quarters, we're providing fiscal year 2024 guidance that reflects nearly 20% growth in revenue, higher margins, and improved bottom line results. The fundamentals of our business are strong and we're well positioned for significant expansion and value creation in fiscal year 2024 and beyond. The improvement in the fourth quarter revenue was primarily due to higher SUIS and TMS sales, up 68% and more than 100%, respectively, compared to the prior year period. These results reflect ongoing demand for our Switchblade and PUMA products. Gross margin for the fourth quarter was $68.4 million, an increase of 41% versus last fiscal year's $48.6 million. Our gross margin as a percentage of sales was approximately 37% in both periods. As previously discussed, we expect gross margins to remain strong in fiscal year 2024 as our revenue mix continues to shift to more favorable product sales. As Kevin will cover in a moment, our pro forma bottom line profitability metrics were also much stronger this quarter. This improvement was primarily driven by higher revenues, which more than offset increased operating expenses. This quarter caps a record year for our environment. By carefully managing through challenges of the past few years, such as supply chain constraints, labor shortages, and inflationary pressures, we have accelerated our growth and success. Given our current backlog and robust demand for the company's broad portfolio of innovative unmanned solutions, we stand at the inflection point of a new phase of growth. I want to thank our investors for their continued support, especially as we enter this new chapter. As always, we're committed to delivering value to our shareholders and visibility into our progress. Finally, we're deeply honored and extremely proud of the growing level of assistance we have provided to our country and allies, including Ukraine. Before we discuss each segment, I want to address the recent news that AeroViman was not selected by the U.S. Army to proceed further with Increment 2 of the Future Tactical Unmanned Aircraft Systems, otherwise known as FT-UAS. While we're disappointed, we have fully assessed the U.S. Army's evaluation process and submitted a request for further clarification. We remain confident that the Jump 20 UAS is the most versatile and cost-effective solution in the Group 2-3 UAS market today and will continue to focus on meeting the current needs of our customers. We're humbled and honored to support the Ukraine defense efforts as the only Group 2-3 UAS solution named in the recent USAID package. The FTUS increments we had been awarded to date did not comprise significant revenue for our environment. We recorded a non-cash charge of $190.2 million in the fourth quarter related to the MUIS business, and Kevin will discuss its details further shortly. Importantly, the Army's decision will not have a material impact on near-term revenue growth. As we look ahead, we will focus on areas where we can improve to ensure we meet our customers' needs. Further, we'll remain focused on winning other key programs by continuing to leverage the strength of our robust portfolio of innovative unmanned solutions. Despite our exit from F2 UAS Increment 2, we remain bullish on our medium UAS or MUAS product line. The Jump 20 stands apart in its ability to perform in contested environments with an unmatched capacity to carry on payloads, and we believe it's the best Group 2-3 solution on the market today. There are multiple domestic and international opportunities which we are currently pursuing that presents significant growth potential in the coming years. Now shifting gears to other product lines, our SUAS business delivered a record year of performance on the back of our largest ever foreign military sales award in support of Ukraine. We're proud that our Puma systems have again and again proven themselves on the battlefield and are providing scouting and support for all U.S. supplied artillery weapon systems deployed in Ukraine. We expect SUAS revenue to remain strong in fiscal year 2024. We have also launched several new products and additional enhancements to our SUIS portfolio and expect sales of these solutions to be a meaningful component of future revenues. Our TMS business product line represents a significant growth opportunity for the company. Total TMS revenue for the quarter more than doubled year over year, but this is only the start. The conflict in Ukraine and our switchblade success on the battlefield has accelerated the global trend towards increased adoption of loitering munitions. We now have orders from four allied nations. More importantly, the U.S. government has recently approved us to market and sell switchblades to nearly 50 allied countries, up from 20 countries last year. Given the current level of global interest, record backlog, and growing demand in switchblade, we expect our TMS business to be a leading growth driver for the company moving forward. Our unmanned ground vehicles, or UGV product line, achieved record levels of performance in the fourth quarter. Similar to our TMS segment, UGV revenue more than doubled year over year, resulting in the unit's best year since its inception. We're also marking solid progress providing Telemacs and Theodore ground vehicles to Ukraine under an accelerated schedule, and these vehicles are performing well on the battlefield. We expect another growth year for this business in fiscal year 2024. Our HAPS product line continues to make solid progress in the development of Next Generation Sunglider, the successfully commercialized stratospheric-based telecommunication services in partnership with SoftBank. We also recently received our first contract from the U.S. DoD for this unique capability and are actively pursuing multiple other defense opportunities. Given the current conflicts around the world, we believe that the defense market for HAPS represents a multi-billion dollar long-term growth opportunity and we're well positioned to supply this large market with our highly differentiated solar HAPS solution. And finally, our McCready Works Advanced Solutions continues to establish our environment as a leading global supplier of AI, machine learning, and autonomy-powered unmanned systems. With the support of this team, AAV is designing systems that will anticipate and evolve with the needs of our military. These include expandable autonomous capabilities that allow our UAS to continue operations without persistent radio link and advanced artificial intelligence and machine learning algorithms that can sense, analyze, and navigate the battle space. We have deployed some of these capabilities within our product lines already and expect more in the future. This segment also continues to pursue new and exciting lines of business, such as space robotics and contested logistics that could become new business segments of their own for our environment. But creating works grew significantly in fiscal year 2023, and we expect to see additional top line growth in fiscal year 2024. Before turning the call over to Kevin, I would like to note that starting in Q1 of this fiscal year, AeroVironment will define our segments differently to reflect the larger, broader nature of our products and services and their associated end markets. Going forward, we will provide color on three segments. Combining our SUAS, MUAS, and UGV product lines, will be combined into a new unmanned system segment. Our tactical missile systems will now become loitering munitions systems, and our McCready Works segment will include the current McCready Works operations along with HAPS and other customer-funded R&D programs. We look forward to sharing more on this new segmentation next quarter. With that, I would like to now turn the call over to Kevin McDonald for a review of the fourth quarter financials. Kevin?

Thank you, Waheed. Today I will be reviewing the highlights of our fourth quarter and full year fiscal 2023 performance, during which I will occasionally refer to our press release and earnings presentation available on our website. We ended the year extremely strong in terms of bookings, backlog, revenue, adjusted gross margins, and adjusted EBITDA. Waheed will go over the guidance for FY24 next, but we are set up for strong revenue and EBITDA growth in FY24. However, as Waheed mentioned, we recorded non-cash charges in the fourth quarter related to our medium UAS business. I will cover these shortly. Let me begin by providing some more detail on the quarter, revenue on the quarter. Revenue for the fourth quarter of fiscal 2023 was at a new record level of $186 million. an increase of 40% from the fourth quarter of fiscal 2022. Slide 5 of the earnings presentation provides a breakdown of revenue by segment for the quarter. Our largest segment during the quarter was small UAS, with a record $94.6 million of revenue, up from last year's $59.2 million. We saw a healthy mix of business within small UAS, with Ukraine shipments just over 40%, and the remainder from new customers and upgrades to existing customers. In other words, we are seeing strong demand beyond just Ukraine. Haskell Missile Systems, or TMS, recorded revenue of $42.5 million compared to $20.2 million last year during Q4. It is also worth noting that we received $125 million of orders for our TMS products in Q4, bringing the total for the year to just over $230 million, showing the strength of domestic and global demand for the Switchblade products. Revenue from the other segment, which includes UGV, HAPS, and McCready Works businesses, increased year-over-year to $40.6 million versus $30.1 million in the fourth quarter of fiscal 2022. Our medium UAS segment finished with revenue for the quarter of $8.3 million, a 33% decrease compared to the fourth quarter of fiscal year 2022. The reduction of revenue was a result of the lower COCO service revenues. For the year, revenues hit a record $540.5 million, which is 21% higher than fiscal 2022. We also had record bookings for the year at over $750 million. This mostly organic revenue growth reflects the strong global demand for our products. Turning to gross margins, in slide five of the earnings presentation, we show a breakdown between product and service revenue. Specifically, during the fourth quarter, product revenues accounted for 76% of total revenues, an increase from 56% in the corresponding quarter of the previous year. The product mix shift was expected due to the substantial increase in sales of small UAS and TMS products. 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 the adjusted gross margins, which excludes intangible amortization expense and other non-cash purchase accounting items. In the fourth quarter, GAAP gross margins remained steady at 37%, identical to the fourth quarter of the previous year. On the other hand, the non-GAAP adjusted gross margin slightly decreased to 39% from 40% in the prior year. Adjusted gross product margins for the quarter were 47% versus 49% in the fourth quarter of last fiscal year. The year-over-year decline in adjusted product gross margin can be attributed to the higher mix of TMS revenue. In terms of adjusted service gross margins, the fourth quarter was at 13% versus 28% during the same quarter last year, primarily due to the accelerated appreciation charges related to our COCO service assets of $4.4 million. For the full year, GAAP gross margins ended at 32% in fiscal 2023, the same level as last fiscal year, and adjusted gross margins decreased to 35% from 36%. The decrease in adjusted gross margins was primarily due to the $14.5 million of accelerated depreciation from our medium UAS COCO assets. We expect adjusted gross margins to improve to the high 30s in FY24 with the shift to more product revenues and transition of service margins to a more normal level. In terms of adjusted EBITDA, slide 13 of our earnings presentation shows the reconciliation of the gap net loss to adjusted EBITDA. In the fourth quarter of fiscal 2023, adjusted EBITDA was $46 million, representing an increase of over 60% from last year. The main factor contributing to this increase was higher sales volumes, which was partially offset by increased SG&A expenses and investments in R&D. For the full fiscal year 2023, adjusted EBITDA was $90 million, representing the increase of 43% from last year. SG&A expense, excluding intangible amortization and acquisition-related expenses, for the fourth quarter was 13% of revenue and 15% of revenue for the fiscal year 2023, compared to full fiscal year 2022 of 16% of revenue. R&D expense for the fourth quarter was 9% of revenue and 12% for full fiscal year 2023. We will continue to run R&D in the 10% to 12% range as we invest in new products and upgrade to existing products to meet the evolving needs of our customers. Now turning to gap earnings. During the fourth quarter, the company encountered a net loss of $160.5 million, of which $190.1 million was a result of non-cash charges related to the medium UAS business. Of the total non-cash charge, $34.1 million was the acceleration of intangible asset amortization related to a particular customer. This accelerated amortization was accorded as SG&A expense in the quarter. The remaining $156 million of the total non-cash charge was a goodwill adjustment from the revaluation of the medium UAS goodwill from the Acturus acquisition as a result of recasting of the future cash flows as a result of the FTOS increment to loss. Although we remain optimistic about the medium UAS business in both the short and long-term, current business conditions dictate these adjustments. Slide 10 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. GAAP EPS loss was $6.31 per share in the quarter and a loss of $7.04 per share for the year, both reflecting the non-cash charges discussed previously. In terms of non-GAAP EPS, the company posted adjusted earnings per diluted share of $0.99 for the fourth quarter of fiscal 2023 versus $0.12 per diluted share for the fourth quarter of fiscal 2022. Full-year adjusted EPS was $1.26 per share versus $1.06 per share in fiscal 2022. Turning to our balance sheet, total cash, restricted cash investments at the end of the quarter was $156.5 million. which is an increase of $51.9 million from the third quarter of fiscal 2023. In addition, we reduced our debt by over $50 million during fiscal 2023. We did see an increase in working capital during the fourth quarter, driven primarily by increased accounts receivable related to the higher sales volume. As indicated in prior quarters, we expect to see continued increases in inventories and other working capitals support a higher level of business and minimize exposure to supply chain issues and long lead times. We continue to have a strong balance sheet with over $150 million of cash, restricted cash and investments, and $100 million working capital facility with no outstanding balance. Now I'd like to turn things back to Waheed.

Thanks, Kevin. The macro environment continues to support greater adoption of unmanned solutions. The Ukraine conflict has accelerated existing trends towards greater adoption of distributed solutions, such as small drones and loitering munitions, by demonstrating their effectiveness against well-equipped adversaries. These solutions are highly impactful, but typically far less expensive, have shorter lead times, and enable an agile force structure compared with larger traditional manned systems. Further, these solutions enable countries with smaller defense budgets to secure effective defensive capabilities and provide a deterrent to adversaries. We believe these global trends combined with our market-leading technology-driven unmanned solutions will support our growth in fiscal year 2024 and for years to come. I'm now pleased to provide our guidance for fiscal year 2024 shown on slide number seven as follows. We anticipate revenue of between $630 million and $660 million. We forecast net income between $50 million to $58 million, or $1.91 to $2.21 per diluted share. Non-GAAP adjusted EBITDA of between $110 million and $120 million. and non-GAAP earnings for diluted share, excluding acquisition-related costs, amortization of intangible assets, and other one-time expenses of between $2.30 and $2.60. We expect to deliver adjusted EBITDA of between 16% and 18% of revenue for the full fiscal year, while R&D investment is anticipated to remain between 10% to 12% of revenue. Our funded backlog at the end of fiscal year 2023 was a record $424 million. As a result, visibility to the midpoint of our fiscal year 2024 revenue guidance range is at 78%. This visibility sets us up for a strong fiscal year 2024. We expect first half revenue to represent almost 50% of the full fiscal year. Further, Q1 revenue should account for nearly 40% of first half revenues. Before turning the call over for questions, let me once again summarize the key points from today's call. First, we delivered record fourth quarter performance and met or exceeded our expectations. Second, full year revenue was also a record, marking our sixth consecutive year of top line growth. Third, our funded backlog is at record levels, reflecting strong global demand for our solutions. And fourth, the fundamentals of our business are as strong as they have ever been, and we expect fiscal year 2024 to be yet another record-setting year for the company. I'm also excited to inform you that Admiral Phil Davidson recently joined our Board of Directors. Admiral Davidson's outstanding qualifications and credentials speak for themselves. His guidance, informed by his extensive and relevant military expertise, will be key in enabling us to better support our customers while capitalizing on the significant opportunities in front of us. I would like to thank our talented team for their dedication and hard work in helping our customers achieve their vital missions. Based on their perseverance, the faith entrusted in us by our customers, and the ongoing support of our investors, we believe we're in the best shape ever for a record-setting fiscal year 2024. We remain committed to delivering superior returns for our investors. And with that, Kevin, Jonah, and I will now take your questions.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. We respectfully ask that you stick to a two-question limit and return to the queue to ask further questions.

Our first question comes from Ken Herbert with RBC Capital Markets.

You may proceed.

Yeah, hey, good afternoon, Waheed and Kevin and Jonah.

Good afternoon, Ken. Hi, Ken.

Hey, nice end of the fiscal year, Waheed. I wondered if you could provide a little more granularity on the revenue guidance for fiscal 24, and specifically, can you comment on the implied assumptions for growth within sort of the current TMS and SUAS segments?

Thanks, Ken. Of course, our team did a fantastic job. We're proud of the achievements, especially given the challenges that we've had in a large quarter, a record year in terms of backlog, revenue, all across the board, pretty much very strong results for fiscal 23. And more importantly, as you mentioned, it sets us up really, really well for fiscal year 24. with, again, another record-funded backlog and 78% visibility toward the midpoint of our guidance. In terms of growth, we expect both TMS and unmanned systems or SUAS product lines to have significant growth in the coming year. The demand for our systems and our products are pretty broad across the board, and not just the United States, but also internationally. So it's a pretty diversified set of customers, opportunities, and product portfolio that's driving and fueling our growth. We obviously expect to grow very significantly next year, close to almost $100 million on top of a very strong growth year. And the other thing that's really important also to note is that the strong backlog and visibility is allowing us to level load the quarters. which allows us to have a roughly evenly first half, second half, maybe first half is slightly lower than 50%, but close to it. And then the first quarter being almost 40% of the first half's revenue. So all those things, as a result of really strong demand for our products across the market and a change in the paradigm. I see an inflection point here in the market where small unmanned systems, as well as loitering munitions, is really changing the way that militaries think about getting prepared to defend themselves and fight wars in the future.

Thanks, Waheed. And I think you mentioned that you've gotten approval now to sell the switchblade into, I think, 50 countries. Can you just comment on actually how many countries you've been selling the system into and what's the runway as you think about sort of capturing or obviously getting sales eventually into all 50 of those countries?

Sure. So, Ken, as I mentioned, we have orders so far that we have booked from four allied countries to date. However, the list, you're right, has grown. The list of countries that the U.S. DOD and the State Department has given us an approval to market and eventually sell to basically more than doubled from 20 before last year to close to 50 countries now. We're actively involved. So that by itself is a very large increase, and it shows, A, that there are lots of countries that are in need of this and they would like to have this capability, and, B, our track record and performance in Ukraine and with the U.S. military has demonstrated the capability and the value of this system. And so U.S. DOD has been very encouraging and positive in supporting us to increase that list to 50 countries. In terms of how many countries do I think it's going to happen, I think this is going to follow a very similar trend, although it might be a little bit faster, as our small UAS has gone through over the last decade. Over the last decade, if you recall, our small UAS has grown from a very small number of countries to well over 50 countries now. And I think that the TMS business, or loitering munitions, as we're going to call it in the future, has a similar potential. We're actively engaged with several countries, several countries across the world, both Europe and Asia, and many of them have interest in acquiring and getting this capability. So I think over the next year or two, we're going to continue to increase the number of countries, and this business is set up for very healthy growth in the years to come.

Thanks, Waheed. I'll pass it back there. You're welcome, Ken. Thanks, Ken. Thank you. Our next question comes from Louis DePalma with William Blair.

You may proceed.

Waheed, Kevin, and Jonah, good afternoon.

Hi, Louis. Hi there, Louis.

Waheed, at your analyst day, you discussed how you were working on development of several new products, including a vertical takeoff and landing Puma, a vapor helicopter capable of carrying a small munitions payload, and also the Jackal turbojet air-launched loitering munition. Can you provide an update on the development of some of these new products?

Sure, Luis. That is very much accurate what you just mentioned. We have introduced several new products in our last analyst day, and we are here to please report that we've actually started to ship some of those products to our customers and received orders for them as well. And so, as I mentioned in my remarks, a decent portion of our future SUIS product line revenue will be based on these new enhancements and new products that we're launching to the market. Obviously, it's going to take some time for that to ramp up because of the customer's acquisition cycle and timeframes. But so far, the feedback from our customers has been very strong. The products also are category industry bests. In terms of their performance, the Vapor MX55 that we just launched, it is a helicopter, electrically powered. That is, we have even demonstrated its capability to launch switchblades off of it. So that by itself is a pretty critical capability that is so far, to my knowledge, is not really matched in that size and shape and form. The Jackal, of course, is a product that we're partnering with Northrop Grumman for a specific opportunity with the U.S. Army, a program, a record name called Long Range Precision Munition, LRPM. And obviously, we're making solid progress. That is in the years to come. It's not immediate. And it is a large program that we're going after that. And that's obviously a great a version of Switchblade, roughly the size of the Switchblade 600, that is more of a sprint lawyer. So it actually travels on high speeds, and then when it gets to the destination or target, it slows down, which gives it a significant other set of capabilities and advantages in the battlefield. And obviously, the Puma VTOL allows us to launch Pumas without runway and without hand launching them. So these products, amongst many others, is where we've been investing in the years ahead and will continue to invest because we see the need for these systems and our customers' demand for them going up, not down. And we're in a great position to capitalize on that, especially given a very large install base of customers. So, I also want to mention that another area that we've been investing over the last several years that I mentioned on my remarks is our AI autonomy and software analytics. allowing these systems to work in GPS-denied operations without communications at all, and being able to find targets and do automatic target recognition, and in fact, work cohesively as a team where a Puma can identify a target, pass on that information to a switchblade operator, automatically work for the switchblade to be launched. So these capabilities is really, to some extent, unique and gives us an advantage against our competitors because we have the largest family of system solutions that is integrated and inoperable and intelligent as a whole. So that's really where our investments have been going, and we look forward to reporting more progress in these areas in the quarters to come.

Thanks, Waheed. And Kevin, you mentioned that I think there were $230 million worth of TMS orders for fiscal 2023. Are you able to share roughly how much of that was related to the Switchblade 600, as there's obviously a lot of investor excitement over the 600, and investors are looking for data points in terms of how that product is progressing?

Thanks. Thanks for the question, Louis, but we don't really break out the orders or backlog by the particular product.

products i think you know both products have different uh markets and uh we hope they both sell really really well yeah and we have had very strong success so far with our both all three models of our switchblade variants switchblade 300 switchblade 600 as well as the blackwing as you know it's a Fairly well-received product within the U.S. submarine community. But Switchblade 600, you know, we feel very good about it. The market for that is very large. We have shipped that product to our customers, and they're quite happy with it, and we continue to increase capacity and production to meet the growing needs of our customers. Sounds good. Thanks, Bahid, and thanks, Kevin.

Thank you. Thank you, Louis. Thanks, Louis. Thank you.

Our next question comes from Greg Conrad with Jefferies. You may proceed.

Good evening and nice quarter. Thank you, Greg. Maybe just to start on TMS, you called out revenue doubling in the quarter and only being the start. How are you thinking about supply chain into fiscal year 24 and how is that balanced with demand and the ability to ramp and given the commentary around international, does that have any impact on profit mix within the segment going forward as those international awards do ramp?

So, Greg, yes, we're very pleased with the progress we've been making on TMS. As I said, I consider this to be also an inflection point for loitering munitions in general. Our loitering munitions product line is the most battle-proven product product in the market. There's nothing out there that can match its track record and success and battle-proven sort of performance so far, number one. Number two, we do expect significant growth in fiscal year 24 on TMS, even though we had a very strong year last year, and our backlog is very, very strong for TMS, but that's just the beginning in my view. I think over the next several years, the TMS business is going to continue to grow. Really, we're at an inflection point in this market. We've got a lot of customer indicators and engagements that tells us that their demand for this could be very large. It's a multibillion-dollar market, in my view, worldwide, and it's going to continue to grow. And we haven't even addressed the market so far or penetrated the market for air launch effects, the capability of Switchblade to come off of such as helicopters, next-generation helicopters, next-generation fighter jets. as well as from ground vehicles, such as the optionally manned fighting vehicle. In terms of the lead times, that continues to be a slight challenge. The lead times for some of our products for the supply chain is a little long. And we constantly are working on that. But that does put some limitation into how much growth we can have this year versus next year. So nonetheless, you know, we expect a very strong, healthy growth this year, fiscal 24. And I believe that that's going to continue beyond fiscal 24. And we're on an infection point in our business. And we're very excited about the opportunities for growth in the coming years.

And we think we have a lot of sight on the supply chain necessary to meet our guidance levels. For this year, yes. Yes.

And then, you know, we've seen the advances around AI, and I think you've called out, you know, a number of areas of progress. I mean, how do you think about monetizing that going forward, either through selling more systems or is there upgrade opportunities? Just trying to get a sense of what that can mean for the portfolio as that advances.

Sure. So that's a really, really critical and important question, Greg, that you're asking. I'm glad you're asking it because I think that there's a lot of hype in the market with a lot of different players who claim that they have a lot of capability in terms of autonomy and all this. Aaron Ryman has been somewhat what I call quiet and humble in this area in terms of actually developing the capability and making sure that we deliver the capability in real world with our solutions. One of the first products that we launched in this space this past year was called Puma Visual Navigation System. It's essentially a modular kit that you can buy that can be installed on all of our existing Puma systems, essentially. And it allows a Puma system to not rely on GPS signal at all. It can literally find its location in space. and chart a way to get to where it needs to go to based on an operator's instructions without reliance on GPS. So that's just the beginning, and we have the ability to do a lot more in this area. I expect us over the next several years to continue to grow this capability and announce additional enhancements and new products, both hardware and software, in this space. Today, as you know, our business is primarily made up of hardware and services. We expect that to change over time, and in fact, it eventually includes software as a selling item. Whether that could be a subscription or a license, TBD, it depends really on our customer's acquisition process. But I feel really good about it, and we really have a lot of good positive momentum in this area that I think sets us apart from our competitors.

Thank you.

Thank you. Our next question comes from Jan Friends. Engelbrecht, with Baird, you may proceed.

Good afternoon, Waheed, Kevin, and Jonah. I'm on for Peter today. Good afternoon. Good afternoon. Hey, good afternoon. Great. Yeah, congrats on a great quarter. So just wanted to get a quick, get a question on the switchblade 300 and sort of can you give us an indication of where you sit in terms of the DOD replenishment? I know you initially sent 700 drones with the majority being 300 variants. And we just saw that $65 million order come in a couple of months ago. Can you sort of give us a sense of has that fully been replenished? Because we don't really know the full breakdown of how much France will be getting and also the other unnamed allied nation in that latest order.

So, Jens Frans, thank you for that question. So far, we have not really fully replenished the U.S. DOD's inventory. There's a few dynamics that's happening there. Number one, we have delivered so far quite a lot, a number of switchblades to USDOD, who in turn has been provided them to the Ukraine forces. And they've been very happy with them, and they're asking for more and more of them. So we continue to do that. The process to replenish the USDOD is most likely going to be more than a one-year process. It's going to continue beyond our fiscal year 24, in my opinion, and we're working on several fronts with the U.S. DOD to fulfill that need. A, the need will be bigger than before. B, they have really exhausted their inventories, and we need to replenish them. And C, there's also additional demand from several additional countries. And so as those countries grow and they get to use the product and their adoption grows, I think that our Switchblade family products is going to benefit and experience very healthy growths this year as well as next couple of years. Obviously, this year, to some extent, is limited based on lead times of primarily the warhead as to how many warheads we can get. We have secured our needs for this year, but for beyond this year's needs, we're still working on that. So I think overall, both Switchblade 300 and 600 is going to benefit from several demand drivers, replenishment, continue to deploy to Ukraine more. U.S. inventories will go up. The number of variants is now two of them versus one, and the one that has a higher average selling price. And then, of course, all the international demand. And then lastly, other platforms such as LRPM or OMFV with the GDLS, all those other programs and platforms are going to be an additional layer of demand for our Switchblade family of systems.

Perfect. Thanks, Wade. That's really helpful. And if I could just have a quick follow-up. So just in terms of the Jump 20 system and the MUA segment as a whole. So 2024 wouldn't have had material revenue contribution from FTUAS, but sort of by all accounts, the Jump 20 system has been highly durable, a lot of hours flown. So obviously a surprising decision there, but can you just give us a sense of how you're thinking beyond 2024 for that system and the MUA segment as a whole in terms of sort of plugging the shortfall with any FMS orders, and it seems like there's a lot of interest from foreign nations, but if you could just tell us how you're thinking sort of in 2025 onwards for that segment and product.

Sure, Jens-Franco. Absolutely. We're still very bullish on our medium UAS category, the Group 2-3 UAS. Number one, this was one opportunity. We respect our customer's decision, but we're already engaged in asking them to provide more clarification as to why. We're really, really surprised by that. But we have several other potential opportunities internationally that we're currently engaged in. USDOD specifically has selected jumped 20 to the only Group 23 UAV to provide to Ukraine for their conflict. And we have several other programs of record that we're chasing as well besides the U.S. Army's program. So while we're disappointed with that outcome of that competition, We're going to continue to invest in it because we believe it's the best capability in the market. We believe Group 2.3 UAS actually is going to be a very strong growth market, specifically given the kind of conflicts that are going on around the world. Ultra-long endurance and persistent ISR as a whole is a very large market and is going to have even a greater multibillion-dollar total addressable market. The TAM for Group 2-3, especially the Jump 20 system, is fairly large, and it's actually growing faster than many other UAS markets. There's even an opportunity on the Group 2-3 category for us to conduct missions of Group 4-5 UAS at a fraction of the cost and at a fraction of the logistical footprint. So overall, our investment thesis is, And Group 2.3 UIS and in our medium UIS business still is intact and it's very bullish. We're going to continue to invest in it. We have a series of enhancements and improvements and upgrades that we have planned to do in this space. And we're also engaged with multiple customers internationally to capitalize on those opportunities. And as you said, many of them have experimented and evaluated all the competitive offerings. And they do believe that the Jump 20 is the best in class when it comes to its capability and value proposition against all competitors. So we feel bullish about that still.

Okay, great. Thanks for the detail. I really appreciate it. I'll jump back in the queue.

You're welcome, Jans.

Thank you. And as a reminder, to ask a question, you will need to press star 1-1 on your telephone. And I'd now like to turn the call back over to Jonah Teeter-Balin for any closing remarks.

Thank you, and thank you once again for joining today's conference call and for your interest in air environment. As a reminder, an archived version of this call, all SEC filings and relevant news can be found on our website at avinc.com. We wish you a good evening and look forward to speaking with you again following next quarter's results.

Thank you, everybody. Thank you. This concludes today's conference call. Thank you for participating.

You may now disconnect.