Q2 2020 Earnings Call
Good afternoon, ladies and gentlemen, and welcome to Aerovironment second quarter fiscal year 2020 earnings call.
This is Stephen given vice President of Investor Relations for Aerovironment.
At this time all participants are in listen only mode. We will conduct a question answer session. After management's remarks.
As a reminder, this conference is being recorded for replay purposes before we begin. Please note that on this call certain information presented contains forward looking statements within the meaning of the private Securities Litigation Reform Act at 1995 forward looking statements include without limitation any statements that may predict forecast indicated or implied.
Hi, future results performance or achievements and may contain words, such as believe anticipate expect estimate intend project plan or words or phrases with similar meeting.
Forward looking statements are based on current expectations forecasts and assumptions that involve risks and uncertainties, including but not limited to economic competitive governmental and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward looking statements.
Further information on these risks we encourage you to review the risk factors discussed in Aerovironments periodic reports on Form 10-K , and Form 10-Q filed with the FCC and the form 8-K filed today with the FCC along with the associated earnings release, and the Safe Harbor statement contained therein.
This afternoon, we also filed a slide presentation with our earnings release and posted a presentation on our website at Avi I N C dot com any events and presentations section.
The content of this conference call contains time sensitive information that is accurate only as of today December Threerd 2019. 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 join.
Let me today from Aerovironment, our President and Chief Executive Officer, Mr., Wahid, Nawabi, and Vice President and interim Chief Financial Officer, Mr., Brian shall.
We will now begin with remarks from Wahid Nawabi <unk>.
Thank you, Steve and welcome to our second quarter fiscal year 2020 earnings Conference call.
Today I would refer to the supplemental charts, we filed with our earnings release and posted to our website to highlight important messages.
On today's call I will discuss in three key topics that are outlined on slide number three of our earnings presentation.
First our teams track record of delivering excellent quarterly results continues.
Second we're successfully executing our plan and remain on track to achieve our fiscal year 2020 objectives.
And third we continue to make great progress on our strategic growth initiatives.
I will start by summarizing our strong second quarter fiscal year 2020 performance, while highlighting our key achievements during the quarter.
Next Brian Shockley, our interim Chief Financial Officer will provide a more detailed summary of financial performance and the core.
We will then discuss our goals for fiscal year 2020, before Brian Steve and I take your questions.
Once again, our financial results reflect the sustained strong demand for our solutions and continued successful execution by our team.
Key highlights of our second quarter results summarized on page number four of our supplemental presentation include the following.
Revenue of $83.3 million increased 14% over last year.
Gross profit of $35.2 million increased 24% over last year.
Gross margin of 42%, what three points higher than last year, primarily due to more more favorable mix in revenue and higher volumes.
Slide number five illustrates the product versus service revenue trend for the past five quarters.
GAAP earnings per diluted share of 31 cents increase two cents from second quarter fiscal year 2019 diluted GAAP EPS of 29 cents.
non-GAAP earnings per diluted share of 35 cents increased five cents from second quarter fiscal year 2019 diluted EPS of 29 cents.
Funded backlog of $146.7 million was 10% lower than last year, but remain high compared to historical averages.
With respect to operations our team continues to make.
Important achievements in several areas of our business as highlighted on slide number six.
Our small U.S. business continues to lead the market for fixed wing defense solutions with the largest share of U.S. Dior D market and it continues to grow globally.
We recently announced the contract award from the U.S. Army for Raven systems radio frequency modification worth up to $55 million.
The Army reverse the this award as the flight control systems domain or Fcs.
The army requires this frequency modification because the U.S. government auction the frequency spectrum for the do you de small your way us to commercial interest several years ago.
Aerovironment was awarded this contract by the U.S. Army under a full and open competition.
The FCS contract was originally awarded in June 29 team, but a protest delayed its commencement until the recent resolution of the protest.
Just contract award for FCS as one of six domains awarded as part of the Army's 248.5 million dollar small UAS program announced in April 2018.
In total Aerovironment has won for up to six domains associated with this program and as the only supplier to the army for FCS Raven spare parts Puma spare parts and other major components.
We compete for individual delivery orders on the new Raven and Puma systems domain.
Since 2013, we have won more than 90% of the dollar value of all delivery orders for the Army's small UAS IDI Q program.
As a pioneer and cereal innovator and small U.S., we're continuously working with customers to identify valuable new capabilities that can help them achieved their mission objectives.
Having identified a need to expand in doing so small UAS, we introduced our newest small UAS product in October the Puma Lee its name, reflecting its long endurance.
Offering five and a half hours a flight time with the ability to carry two separate payloads Puma lead delivers group to capabilities and a group one footprint and for a fraction of the upfront as well as total cost.
This means significantly more mission capabilities the troops on the front line to help them proceed with certainty.
Puma Lee has generated strong interest from multiple U.S. government customers as well as a number of Allied nations.
And as the market continues to evolve we believe there are several emerging opportunities to expand on our growth and success and the near term, including through the U.S. armies SBS and as our programs.
Our expansion from fixed wing small UAS into unmanned helicopters is also showing progress.
We have generated interest in our vapor products from multiple customers.
We have successfully integrated all core business processes between our Kansas and Simi Valley operations.
We are on track to move the vapor product line manufacturing from cancers store Simi Valley operations by the end of our third fiscal quarter.
This manufacturing consolidation as driving incremental capital expenditures for tooling and fixtures. Our team is making great progress with this new addition to our family of small your way yes.
And the international market, we continue to generate significant demand for our family of small you I guess.
And the quarter, we received multiple awards from existing customers and southeast Asia in the middle east totaling more than $20 million.
Beyond the defense market, we received a 5 million dollar Puma contract award for the Us border patrol.
This represents another procurement of our fixed wing systems by the us border patrol.
We believe additional border patrol procurement opportunities will be forthcoming.
And our tactical missile systems product line, we submitted our proposal for the three year sole source elements award, we have been addressing and recent quarterly earnings call.
This hardware production contract to Aerovironment would cover government fiscal years 2020 through 2022.
The performance period includes 112 month base period, and two additional 12 month options.
We anticipate receiving this contract award by our fourth fiscal quarter and therefore is not included in our current funded backlog calculation.
We anticipate this award would be worth up to $160 million over that time period.
Once awarded this will be the single largest sole source multiyear award ever for innovative Switchblade solution.
We've made significant progress with U.S. government export authorities on the possibilities of exporting switchblade to our allies.
Multiple allies of expressed strong interest in switchblade, and we stand ready to help them protect their forces with its unique and disruptive capabilities. Once we received appropriate approvals and compete complete the associated negotiations.
We also continue to advance the development of our larger version of Switchblade, which is capable of significantly longer flight endorphins and far greater mission effects.
This larger variant of Switchblade will address a much larger potential market opportunity.
And another application of our groundbreaking technology, we are partnering with general dynamics land systems to integrate Aerovironment small youre, yes, and Switchblade systems and two Ngls. This next generation armored combat vehicle for upcoming US Army and Marine Corps programs.
Gls is the only qualified better for the Army's potentially large next generation armored combat vehicle program and we are the sole provider of switchblade and small UAS tujia less for the specific opportunity.
Turning to perhaps business apps mobile Inc., which is our joint venture with Softbank Corp is positioning itself as a leader and catalyst for the global half's opportunity.
Aerovironment is softbank established our apps mobile joint venture to bridge, the global digital divide and we welcome all other participants in this exciting emerging market to join with us.
We completed the first and second test flights of our Hawk 30 solar helps during the second quarter with flying colors.
Noted on slide number eight we continue to make progress positioning aerovironment to manufacture supply and support solar Hep C way us perhaps mobile Inc.
As we have previously stated our contract with apps mobile offer significant flexibility to grow with the program.
Early in 2018, when we initially sign that design and development agreement the contract value was $65 million.
Today, we announced a new $14 million increase and the value of this contract.
This brings the total value of the apps project to 145 $49 million since its inception.
We anticipate our hubs program bookings and revenue beyond fiscal year 2020 will be similar to this year as the program transitions from the design and development to the testing and certification phase.
We look forward to updating you as we continue to make progress and this exciting and large growth opportunity.
Now Brian will provide a detailed financial overview of our second quarter Brian .
Hey, good afternoon, everyone. Our team delivered a strong financial performance in the second quarter fiscal 2020.
Revenue from continuing operations for the second quarter fiscal 2020, $83.3 million, an increase of $10.3 million or 14% from the second quarter fiscal 2019 revenue of $73 million fee increase was due to an increase in product deliveries of $10.3 million.
Second quarter fiscal 2020 revenue by major product line or program is as follows.
Small your way us was $59.2 million or 71% of total revenue.
Half of $13.4 million or 16%.
<unk> was $7.9 million or 10% and other with $2.8 million or 3%.
Inception to date revenue under contract for the hub program, it's $103.2 million.
Total value of all contract with half mobile was $148.9 million, which consists of $140.3 million per the design and development agreement and $8.7 million for preliminary design and other related effort.
There is $45.7 million remaining on these contracts, which include the portion that apparently unfunded.
Gross margin from continuing operations for the second quarter fiscal 2020, or $35.2 million or 42% of revenue compared to $28.4 million for 39% of revenue for the second quarter fiscal 2019.
The increase in gross margin was primarily due to an increase in product margin of $6.1 million and an increase in service margin of their point $7 million.
Margin as a percentage of revenue increased to 42% from 39% primarily due to favorable product mix and an increase in the proportion of product revenue for the total revenue, partially offset by an increase in inventory reserve.
Product sales were 69% of total sales in the second quarter fiscal 2020.
There are 264% for the second quarter fiscal 2019.
Looking at the rest of the income statement.
<unk> expense from continuing operations for the second quarter fiscal 2020 was $16.3 million or 20% of revenue compared to restaurant expense of $13.6 million or 19% of revenue for the second quarter fiscal 2019.
The increase in SGN expense was primarily due to increases in commission expenses legal expenses and employee related expenses.
R&D expense from continuing operations for the second quarter fiscal 2020, $10.9 million or 13% of revenue compared to our the expense of $8.1 million or 11% of revenue for the second quarter fiscal 2019.
Income from continuing operations for the second quarter fiscal 2020 of $8.1 million compared to $6.6 million for the second quarter fiscal 2019.
The increase in income from operations were primarily due to an increase in gross margin of $6.8 million, partially offset by an increase in R&D expense of $2.7 million and an increase in western expense of $2.6 million.
Net other income for the second quarter fiscal 2020 $1.4 million compared to $2.4 million for the second quarter of 2019.
The decrease in net other income primarily due to a decrease in transition services performed for the buyer of our former efficient energy systems business.
The effective tax effective income tax rate from continuing operation was 11.7% for the second quarter fiscal 2020 compared to an effective income tax rate of 13.5% for the second quarter fiscal 2019.
Equity method investment activity net of tax for the second quarter fiscal 2020, what the loss of zero point $9 million or four cents per diluted share compared to loss of zero point $8 billion or three cents per diluted share for the second quarter fiscal 2019.
Net income from continuing operations attributable to Aerovironment for the second quarter fiscal 2020, $7.5 million or 31 cents per diluted share compared to $7 million or 29 cents per diluted share for the second quarter fiscal 2019.
non-GAAP diluted earnings per share for the second quarter fiscal 2020, or 34 cents per diluted share and excludes three cents per diluted share for intangible amortization expense and integration costs associated with the acquisition of pulp aerospace.
GAAP and non-GAAP diluted earnings per share for the second quarter fiscal 2000 2029.
Now moving through our first half fiscal 2020 recall.
Revenue for the first half of fiscal 2020 $170.2 million, an increase of $19.2 million compared to $151 million for the first half fiscal 2019.
The increase in revenue with due to an increase in product deliveries of $20.9 million, partially offset by a decrease in contract service printer $1.7 million.
First half of fiscal 2020 revenue by major product minor program as a follow.
Small your way up was $125.9 million or 74% the portal revenue.
With $25.7 million or 15%.
What $13.5 million or 8% and other was $5 million port 3%.
Gross margin for the first half of fiscal 2020 was $76.4 million or 45% compared to $61 million or 40% for the first half of fiscal 2019.
The increase was due to an increase in product margin of $16 million, partially offset by a decrease in service margin of zero point $6 million.
Gross margin as a percentage of revenue increased from 40%, 45%, primarily due to a favorable product mix and an increase in the proportion of product revenue to total revenue, partially offset by an increase in inventory reserve.
Looking at the rest of the income statement.
SGN expense for the first half of fiscal 2020 with $29.9 million or 18% of revenue compared the restaurant expense of $25.6 million or 17% of revenue for the first half of fiscal 2019, the increase in everyday of due to increases and commission expenses legal expenses and employee.
Related expenses.
R&D expense for the first half fiscal 2020 with $19.6 million or 11% of revenue compared to R&D expense up $14.5 billion or 10% of revenue for the first half of fiscal 2019.
Income from continuing operations for the first half of fiscal 2020 or $26.9 million or 16% of revenue compared to 20 $820.8 million or 14% of revenue for the first half of fiscal 2019.
The increase in income from continuing operations, primarily due to an increase in gross margin of $15.5 million, partially offset by an increase in R&D expense of $5 million and an increase in that generic bent a $4.3 million.
Net other income for the first half of fiscal 2020 $3.1 million compared to $11.7 million for the first half of fiscal 2019.
The decrease in net other income was primarily due to a onetime gain from a litigation settlement of 26 cents per diluted share during the first quarter fiscal 2019.
The effective income tax rate from continuing operations with 10.8% for the first half of fiscal 2020 compared to an effective income tax rate of 11.6% for the first half of fiscal two of the 19.
Equity method investment activity net of tax for the first half of fiscal 2020, with a loss of $2.2 million or nine cents per diluted share compared to a loss of $1.4 million or six cents per diluted share for the first half of fiscal 2019.
Net income from continuing operations attributable to Aerovironment for the first half of fiscal 2020 $24.6 million or one dollar two cents per diluted share compared to $27.4 million or $1.14 cents per diluted share for the first half of fiscal 2019.
The first half of fiscal 2019 included onetime gain from a litigation settlement of 26 cents per diluted share.
non-GAAP diluted earnings per share for the first half of fiscal 2021 dollar an eight cents per diluted share and excludes six cents per diluted share for intangible amortization expense and deal and integration costs associated with our acquisition of full aerospace.
non-GAAP diluted earnings per share for the first half of fiscal 2019, 88 cents per diluted share and that were 26 cents per diluted share from a onetime litigation settlement gain in fiscal 2019.
Core funded backlog as of October 26, 2019, $146.7 million decrease of $17.2 million from the second quarter fiscal 2019, and a decrease of $18.6 million from the first quarter fiscal 2020 backlog of $165.2 billion.
Our funded backlog as of October 26, 2019 remained high compared to historical averages.
Turning to our balance sheet cash cash equivalents restricted cash and investments at the end of the second quarter fiscal 2020 totaled $310.9 million.
Decrease of $21.7 million from the end of fiscal 2019 of $332.6 million.
The decrease in cash was primarily related to our acquisition of pulp aerospace as well as our increased investment in the helped mobile joint venture.
Net accounts receivable, including Unbilled receivables and retention at the end of second quarter fiscal 2020 totaled $103 million.
Unbilled receivables and Retentions was $62.4 million inclusive of $21.7 million of related party amounts.
Total days sales outstanding from continuing operations for the second quarter fiscal 2020, with approximately 105 days compared to 87 days for the fourth quarter fiscal year two of the 19.
Net inventory at the end of the second quarter fiscal year, 2020, $52.8 million compared to $54.1 million at the end of fiscal year 2019.
Days in inventory outstanding for the second quarter fiscal year 2020, with approximately 102 days compared to 92 days for the fourth quarter fiscal year 2019.
Accounts payable at the end of the second quarter fiscal year 2020, what the $11 million compared to $16 million at the end of the fourth quarter fiscal year 2019.
Total days payable outstanding for the second quarter fiscal year 2020, with approximately 21 days compared to 24 days for the fourth quarter fiscal year 2019.
Turning to capital expenditures in.
In the second quarter fiscal year, 2020, we invested approximately $4.9 million and property improvements and capital equipment to support our growth strategy and new product launches.
And recognize $2.4 million of depreciation and amortization expense.
Now an update to our fiscal 2020 visibility as highlighted on page nine supplemental chart.
As of today, we have year to date revenue in fiscal 2020 of $170 million.
Second quarter, ending backlog that we anticipate to execute in fiscal 2020 of $125 million.
Q3 quarter to date bookings that we anticipate to execute in fiscal 2000 20-F $22 million.
And on funded backlog from incrementally funded contract that we anticipate to recognize revenue during the balance of the year of $2 million.
This adds up to $319 million or 89% of our fiscal year 2020 midpoint revenue guidance range.
We anticipate a for your effective tax rate of approximately 11%.
This is higher than the fiscal 2019 full year tax rate of 9%, primarily due to anticipated lower excess tax benefit from equity award and other tax credit estimate now I'd like to turn the call back to Wahid.
Thanks, Brian .
Our first half results closely match, our plan with 47% of full year revenue and our first and second quarters.
We're executing on our plan and are on track to achieve our fiscal year 2020 objectives and deliver a third consecutive year of profitable double digit topline growth.
We see an increasing likelihood of another continuing resolution to extend the government's operations beyond the current December twentyth deadline.
A continuing resolution would likely hamper any new program starts and could impact funding for the procurement of our solutions depending on its Len.
With 89% of full year visibility to the midpoint of our revenue guidance range as described on slide number nine we reiterate our guidance of $350 million to $370 million in revenue, one dollar and 35 cents to $1.55 cents.
And diluted EPS, and $1.47 cents to $1.67 cents and non-GAAP diluted EPS.
We expect gross margin to decline and the third and fourth quarters as a shift and revenue mix will compress margins.
We continue to expect full year internal R&D spending to be about 11% of revenue.
We have summarized our full fiscal year 2020 financial expectations on slide number 10 of our supplemental charts.
We have higher SGN investments planned for the second half of the fiscal year 2020 in order to support our pipeline of opportunities and business growth.
We plan to invest 5% to 6% of revenue and capital expenditures this fiscal year to support our growth strategy.
We also anticipate third quarter revenue will represent about a third of second half revenue.
Before we take your questions I would like to reiterate our key takeaways from Aerovironment second fiscal quarter.
Our teams track record of delivering excellent quarterly results continues.
We are successfully executing our plan and remain on track to achieve our fiscal year 2020 objectives.
And we continue to made great progress on our strategic growth initiatives.
I would like to take this opportunity to thank our employees for their focus and dedication our customers for continuously challenging us to deliver the most effective solutions to support their mission success and you are stockholders for your confidence and our team and our plans.
We are dedicated to helping you proceed with certainty.
Brian Steve and I will now take your questions.
Thank you Wahid, we will now begin the question and answer session. If you have a question. Please press star and then one on your Touchtone phone if you wish to be removed from the Q you May press, the pound or hash Cree Pesky. If you are using a speaker phone you may need to pick up your handset first before you press the numbers we respectfully.
We ask that you limit your questions too and please reenter the queue to ask any further questions.
Once again to ask your question. Please press Star then one on your Touchtone phone.
Our first question comes from Peter Arment at Baird Peter.
Yes, good afternoon, Brian Steve.
Just I guess first questions.
Wahid on on the 89% visibility could you maybe just give us a benchmark how that compares with previous years, where you've had.
I guess the first six months I mean, it seems certainly pretty high compared to previous periods.
Sure. So Peter good afternoon first of all our visibility and backlog numbers as.
Brian and I highlighted is.
Strong and higher relative to historical averages of multiple years, however, compared to last fiscal year at the same time period at the end.
Second quarter in our earnings call we had a.
97% visibility versus our 89% visibility today. So both of those two percentages, although this year a slightly lower than last year. It is fairly high compared to historical averages.
And we are on track with our plans as we spoken to you before we've delivered excellent results. So far in the first half and we're focused on executing our long term growth strategy in delivering the outcomes that we expect out of ourselves for the remainder of the year.
Got it and then just just as a follow up if you could just.
You mentioned that you're working on a larger switchblade variants.
When when would we expect to for you to have a product.
In that category. Thanks again.
Sure Peter So I have mentioned this in the last quarterly earnings call as well basically saying that.
Our customers are looking at us to expand the family Vars Tactical missile systems.
Product line similar to what we've done on our small unmanned systems.
Fixed wing, you ABS and we've been working actively with a funded customer for sometime now to develop a much larger variants of our existing switchblade this larger variance.
Goes a lot further in terms of flight indoors and it also could carry a much larger mission effect and payload.
What it does it is essentially opens up a much larger market opportunity for us as an addressable market for Tms business and product line.
We are not in that position to be able to disclose the specific timing of when we're going to be.
Launching got in releasing it to the market, but we're making great progress. We believe that were onto our very compelling solution and we'll keep you updated as we progressed through that process in the coming quarters.
Thank you Peter and our next question comes from Ken Herbert at Canaccord Genuity Ken.
Hi, good afternoon everybody.
And then Wahid I just wanted to start out.
Appreciate the incremental color you provided here on the Omams process, and where you stand you sound very confident in doing this in this award by the end of your fiscal year for the potential to 160 million can you talk about sort of the next steps in terms of this getting from here to this potential award and and what.
We're still sort of the risks outstanding or how you can handicap this in terms of.
In terms of the prospects specifically for four Aerovironment.
Sure. Thanks, Ken So as I appreciate your feedback on.
The colors that we provided we tried to do the best we can based on information available to us to keep you guys inform and essentially we are already engaged in a sole source.
Negotiations with the U.S. government with the contracting office on a potentially three years first here is obviously.
Sure sure, but there is two additional years to make it up to three years. We believe the value of this contract will be about a 165 X $60 million in total.
Now the reason why I highlighted that is number one that it's not that's not reflected in our backlog today and number two because of the continuing resolution that continues and the government fiscal year 20 budgeting process. There is some risk adjusted the timing of that award being dependent ties.
We are confident that we're going to get that they're going to ties in sometimes in near future. However, the exact timing really is out of our control and to some extent even out of our customers control based on day, what we are learning from their side.
So.
We are pleased because this is they've historically a very large contract award. This would be the first time, where we're getting a multi award and the tune of $160 million Force original Switchblade, which gives us basically visibility for almost about a three year period for this product line.
We still believe and the value creation and the compelling value proposition of Rtms business and switch slate, we believe that as I said on that remarks that additional international customers could potentially benefit from this and theyre interested parties. There that we're engaged with and we're executing our plan and so far on track with our results and look forward to update you in the future.
That's great and just to follow up on this mohit I'm I'm, assuming that none of this contract award is factored into your.
Fiscal 2000 guidance and and at what point, assuming the CR extends into January or February mean at what point does this become a real risk for fiscal 20, or how would you handicap that.
Yes.
I would you welcome Ken So I wouldn't conclude that it's not reflected we have at any given time, we have a very large number of opportunities at a different levels of profitability and risk factors and profiles and timing.
So we take all that into into our calculation and come up with what we believe is the most large most likely range of outcomes that we believe as possible and we review that internally very rigorously and due to the judiciously. So our forecast at this moment is based on what we bill.
EBIT the most likely range of outcomes today, obviously, we're only through our first half of the year with outstanding results and we still have another happened here to work through.
We remain on track with our plans and I would also I would suspect that by next earnings call. Hopefully, we'll have more information to update you on the status of that contract and let you know how that goes.
Thank you Ken.
Next we'll turn to Louie dipalma from William Blair Louie.
Good afternoon, Wahid, Brian and Steve.
Good afternoon.
As you guys are aware, our Raytheon indicated that it is expecting to tune receive approval to export their coyote tactical missile system. I was wondering what feedback have you received in your application process over the past couple of years.
Sure Louise this is why he thinks the question. So as I mentioned, we are engaged with multiple international customers and allies, who have shown strong interest and need for the capabilities of ours Switchblade.
We've we've also been heavily engaged with the U.S. deal with D. and as the state Department and working through the process to make sure that we get the export license as required and approvals to be able to first and foremost.
Market this to those customers and but also to eventually provided to them.
As I said before my belief is that it's a matter of wind versus.
Yes and.
The exact timing of that really it's extremely difficult to predict exactly when would that happen.
Believes that the long term prospects for that is pretty strong.
And I.
I would as as we get more updates and as we made progress through that process and some major milestones. We clear we will be glad to update you on that as were allowed.
So that's where we stand on that in terms of.
The.
Hi, OTI there.
I don't know Thats exactly a similar product this or not however, we are on track with our plans. We believe that we delivered excellent results for the first half are the demand for Switchblade and our loitering munitions system is extremely strong as you saw for the funding line and the budgeting and the negotiations that we've got Golan and we're.
During our strategy.
Okay and as a follow up on on that topic, what are the fundamental differences between.
Hi, OTI tactical missile system, and the Switchblade and related to this could the switchblade also be used for counter you a <expletive> missions in a previous answer you spoke about how you're developing a switch blade variant that could have new payloads I'm could these new payloads.
Be used for for counter you asked missions.
Sure Luis so I won't be able to comment intake specific detailed differences.
The glad to our team to provide that to you are the most of that information is published some of its publicly available.
And I encourage you to look at those information, but in general when we.
Conceived the concept and the design of our tactical missile systems. Our original Switchblade, we were very confident in so where our customers and the compelling and disruptive capability and differentiation of the solutions and its benefits that fact still remains true.
And in fact over the years, we have been able to prove the fact that that customers are customers, who are using switchblade see more and more benefits and advantages to the solution and ports capabilities and that's why we've been able to grow that revenue and that business in that product line.
I'm confident that over the long term, we will be able to create a similar business or if not larger than our small UAS business and our tactical missile family of systems and solutions.
So I'm pretty bullish on the long term prospects of our Switchblade and Tms business.
And in terms of specifics differences I encourage you look at some information that's available online and there's lots of that up there publicly available today.
Now in terms of.
Additional payloads and capabilities for Switchblade per count our yes.
We are very aware of the counter us.
Demand and market opportunity and need we've been engaged with multiple parties.
We have not been able to disclose any of that publicly at this moment. However, our solutions. We believe has multiple applications beyond just the original use case of Switchblade that it was originally developed.
The partnership that we have with general dynamic land systems, where we will equipping their ground combat vehicles with the future Switchblade systems, and you ABS and our partnership with Kratos.
All are examples of additional use cases and capabilities that our systems bring to the war fighter and our allies and the conflicts that were involved in and we feel pretty confident about all those in the future.
Thank you we will now take a question from Troy Jensen of Piper Jaffrey Troy.
Sure you there.
Okay.
It's Ken Herbert on the line or next question.
Yeah I appreciate the follow up.
Hi, Good Wahid you also mentioned the.
Significant interest or I think you've seen it interest from multiple customers around the vapor.
On a client or that you're also.
Moving ahead with the plans to move production about two to see value. I believe you mentioned can you just update on on when you expect that process to be completed when you expect their trends you should we be done any more detail on the the interest you're seeing on the vapor and how that obviously is playing out relative to your initial expertise.
You should you be that acquisition.
Sure can so there are number of different fronts that we are addressing with the acquisition of Paul's and the vapor product line.
First of all in our sales and marketing activities, we want to make sure that we offer this set of new capabilities and mission capabilities to our existing both domestic international customers.
In the back of all that we also are integrating our operations, our core business processes product development activities future capability development.
And as well as operationally on our business processes, our enterprise resource planning processes supply chain production and all that so my comments on the call earlier was that overall, we're making really really good progress with this acquisition and the integration activities Secondly, based on quite early initial.
Bill.
Demonstrations and engagements that we've had with our existing customers with the vapor family of products, we've seen quite strong interest from both domestic as well as international customers.
And this was originally our plan and we're on track with that obviously these things don't happen overnight because the acquisition process is fairly long process. As you know from the rest of our solutions and our customers and the market that were involved in however, based on our historical historical performances, we believe.
We're making good progress and we continue to advance our strategy of creating value and leveraging this capability to our customers and as we made more progress. We'll keep you updated so by the end of our third fiscal quarter, we are going to be able to produce and manufacture the vapor product line and our senior.
Value operations, where we make all of our small UAS made in America and we also have integrated our cancers Cape operations in terms of R&D and engineering with the rest of our company in order to be able to develop the future products that we have in our pipeline in our roadmap.
I appreciate all the detail Wahid if I can you just one other follow up.
I'm sure you've been following you know the air forces are being growth programs and I'm just curious if the golden who word there they're swarming effort I know, it's focused on munitions smaller munitions initially, but I'm just wondering if there's any opportunity for the Tms product line or other parts of your portfolio as part of the swarming opportunity spin.
The Gold award opportunity from your force.
Sure Ken So I am aware of the Golden reward.
Potential program and also the concepts of swarming and the value and the capabilities of swarming could provide to the us deal and our allies.
I am of the believing so as our team that are small UAS being.
Early well positioned for those types of applications and mission effects and mission capabilities.
We believe that having small you weigh these whether its switchblade or even our small you will be all fixed wing and.
Rotary you ABS all can play quite a compelling role in the swarming initiative and concepts that U.S. Diaz for future warfare systems and cost of operation.
Very early for us to be able to provide any more details. We are engaged with the cost with our customers. We are thinking about that wouldnt. We're we're informing them and showing them. This is sort of a concept that we can it could be using that but I think at this point it's premature.
Two.
Claim or make any forecast as to where the actual specific application could be for this capability for our systems today and all our long term as I said, we're very bullish on the long term value creation potential of our business, we're executing our strategy as you've seen quite well and we're delivering excellent results. So far and we look forward to updating unit.
Next few quarters.
Yes.
Thanks for the fall Ken will try a Troy Jensen again from Piper Jaffray shorter you there.
Yes, Sir sorry about that guys, but congrats on the nice results.
Thank you as Roy.
So I hear you mentioned several times going in your prepared remarks sole source for the man's contract I am just your conviction that that's a that's the case and is there anything ever any situation, where the dual source.
No. So we made sure that we communicate this with our customer it is our understanding based on what it's publicly been already announced on various.
Government public announcements that their engagement with Aerovironment is on a source source nature.
There was a full and open competition.
Couple of years ago, maybe more than two years ago, and we've had several opened competitions into switchblade product line and obviously, we're proud of our track record because we've been the winner of those competitions essentially every single time.
So we are quite confident that what we're hearing from our customers and what weve wreck publicly that we are the sole negotiation negotiating party and this contract because that's how it was published and Thats, how its been communicated to us directly twice.
Perfect. That's just my follow up would be on half so just curious.
The what the step next steps are and when will we see the next trial slate.
Sure. So there is.
Key points I want to point out about perhaps program number one we've executed our strategy and our plan very well so far we've had two successful initial flights.
And we're very proud of that our team is mates phenomenal progress in the last two or so years.
We're now sort of ending the phase of the design and development in entering the phase of testing and certification testing and certification phase of this business launch.
Really is a long process imagine a commercial airline or that get certified to epay.
There is an extensive process you go through and there is going to be quite a lot of testing that is going to take place in that process. We're at a very early stages of this and we will be conducting multiple multiple flights over that.
Period that we foresee in the future beyond fiscal 2020. That's also why I mentioned on Mike My remarks that we don't expect the bookings and revenue for this business.
To change dramatically and the short term or mid term, we expect that to continue as we have seen in the past couple of years Lastly, I would say this is an exciting opportunity because we're positioned really really well from very large global market opportunity and while we're working towards building that business, we're generating revenue we're developing a pro.
Correct that we can also use for defense applications, and we have contractual rights to be the sole designer manufacturer and hopefully also even though the supporter of such half systems to our joint venture partnership with Softbank. So to me. This is excellent results. So far we'll keep you updated us we have more significant milestone.
Loans.
And we're making great progress.
Thank you Troy as a reminder to ask a question. Please press star and then one on your Touchtone phone.
We'll now take a question from Joe Denardi at Stifel Joe.
Hey, guys. This is John on for Joe.
Well he kind of update us on the Hey, guys can you update us on the you Avi adoption rate trends that you're seeing with your international and domestic customers I guess, what what kind of looking for are you, making any headway in terms of accelerating the adoption rates.
Internationally, especially and has the U.S. government been helpful on that end.
Sure So John .
As you saw from our results are small UAS continues to grow internationally both into in terms of existing customer and breadth of those customer share of wallet and spend but also with repeat orders and expansion with investments with those customers a new customers in new geographies, we have been.
Very focused on that for the last three plus years have very very heavily and our results demonstrate that we also have a very strong track record of working with the state department and achieving the required regulatory export licenses to be able to export that now we're up to 45 plus.
Countries worldwide. So yes, the U.S. government has been very supportive they understand the value of this to our allies in the complex that were involved in the world and we see tremendous potential here and our track record in the last three plus years also demonstrate how strong this business has been in could be in the future as well.
So we're pretty pleased with that and the addition of April family of systems to our portfolio, obviously enhances the mission capabilities of our small UAS even further.
It's another reason why we did that acquisition because it solves more of our customers problems and a better way. So our business remains strong our growth portfolio is continues to advance and internationally, we're showing very strong such as things in terms of growth and results as well.
Alright. Thank you just kind of pivoting to the GDP news.
Given your teaming arrangement there with TD land systems can you kind of update us on how you're approaching the news that TD was the sole contractor on the Army's optionally man fighting vehicle. How are you feeling this opportunity internally and can you kind of give us some details on how you're thinking about the size and the timing of this work.
Thanks, John Yes, I'm glad you've noticed that based on the latest public announcements and publications that Gls now remains to be the only qualified provider for that AUM at the competition.
And not only gls as the only competitor or supplier left on that competition or opportunity. We're also they are only partner on this and we really value that partnership mutually.
We are working towards progressing dose prototypes and concepts, obviously that program as a multiyear program.
The timelines are already published publicized publicly.
And it's known in the market.
And we are working actively with them to essentially mature that capability and deliver it to the end customer for possible at ventral program a record when the program happens and if it happens.
There are several opportunities there first there's an opportunity for greenfield I referred to which has any new armored vehicles as part of that or MSV program potential is qualified to receive.
And integration of our Switchblade and small UAS family of systems. Secondly, also the existing installed base of armored vehicles as qualified to some extent and could be a potential market for us to retrofit with with our systems. So we look forward to that and it's another way to see the potential.
Application and prospects of growth for our solutions and its value creation for our shareholders and our customers.
Thanks, Mike you have done.
And our last question comes from follow up question to Louie Dipalma at William Blair Louie.
Thanks, guys in terms of helping us build out our financial models, how does the potential future $160 million three years Switchblade procurement contract compare with.
What you're currently doing as an average run rate for Switchblade Omams procurement I calculated.
A rough 30 million dollar increase based on how you publicly disclosed $67 million and how man's contracts. Since April 2018 would you consider that to be in a in the right ballpark in terms of how this contract is incremental to what you're currently doing.
Yes, so look we.
The way that I would interpret the $160 million is that in the past we've had what I referred to as drew on joint urgent operational needs statements, which enabled our customer to procure switchblade on what I call almost on AD hoc basis.
What's unique about this contract and this potential award is that it gives us a three year window and run one runway with that ceiling potential of about $160 million and the $160 million comes from the government approved fiscal year 19 budget plus the unapproved.
But submitted and proposed government fiscal year 20 budget line items. If you add those two line items and the government fiscal year. It adds up to about $190 million ish or so and so we estimate that to be about $160 million to aerovironment as a result of that.
Obviously that is not guarantee and it's also not potentially limited because once we have a contract vehicle and government fiscal year 21 comes along.
Theres, obviously, a potential for us to go head and work with our customers based on demand and supply and see what needs to be done.
In terms of your question specific as to how cheap comprehend that in your model.
I'm not specifically.
Privy to yours that model right now what I could tell you is that so far none of that $160 million that will be coming out of this contract is reflected in our backlog.
We do not have any of that reflected in our backlog as of today. So all of that.
Basically most likely will be incremental to our existing business on switchblade going forward.
And just to add Luis point, our data to date that report Tms revenue includes more than just the switchblade production bears customer funded R&D and other kinds of revenue associated with other pieces Thats right. Rtms revenue includes more than just to original Switchblade system.
Right do you have any sense of I guess, what percentage of Tms revenue is switch play procurement.
No we do not unfortunately have that specific detail and we don't break them down by individual product for a number of reasons.
Mainly because of our customers sensitivity towards that to begin with.
Okay and.
And just one clarification for your scripted remarks, and which you said that you obtained more than 90% of the the dollar volume for the task orders was that for the the five year 248 million dollar I'd like Q that.
You were partner for April 2018 for the long range reconnaissance is that what you were referring to.
No. So what I was referring to Louie was that.
Roughly from 2013 until now if you look at the IDI Q contract for small you way, yes, which was awarded by the US Army two aerovironment and multiple other competitors on that award we have been able based on 10.
Last quarters and delivery orders secure over 90% of the dollars have got contract value.
And essentially my point was that while.
We have competition within our category when it comes to competing for individual task orders, we have a very high win rate.
And our record showed that and demonstrate vault and support that we never count on that we always respect competition that we always respect our customers desire to have better and better performing solution, but it is a threat as a track record that it's worth noting to all of you.
And just just to add a little bit to that question to answer. Your question. Louise We won the initial RMB you a small units contract back in 2005.
We run its recompete and it has since been renewed.
Couple of times so prior to the April 2018 announcement of this latest 248.5 million dollar IDQ, we were operating under the prior iteration of the contract and so that explains any revenue from 2013 up through this current I'd like you.
And with that we have no further questions and we thank you all for your attention and for your interest in Aerovironment. An archived version of this call is SEC filings and relevant company and industry. You can be found on our website www dot Avi Inc. Dot com, we wish you a healthy and a joyous holiday.
Reason and we look forward to speaking with you again following next quarter's results wish you good day.