Q2 2022 AeroVironment Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the age of a virus in fiscal year 2022 second quarter Conference call. At this time, all participants lines 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 will need to press star one on your telephone.
That's like that today's conference is being recorded for replay purposes. If you require any further assistance. Please press star zero.
I'd now like to hand, the conference over to Joan that Peter Bally. Thank you. Please go ahead Sir.
Thank you and good afternoon, ladies and gentlemen, welcome to Aerovironment as fiscal year 2022 second quarter earnings call.
This is jonna Teeter Balan senior director of corporate development and Investor Relations for Aerovironment before.
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 of 1995.
Forward looking statements include without limitation any statement that may predict forecast indicate or imply future results performance or achievements and.
And may contain words, such as believe anticipate expect estimate intend project plan or words or.
Or phrases with similar meaning.
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.
For further information on these risks we encourage you to review the risk factors discussed in Aerovironment periodic reports on Form 10-K, and other filings with the SEC along with the associated earnings release and Safe Harbor statement contained therein.
This afternoon, we also filed a slide presentation with our earnings release and posted the presentation on our website and a V. I N C dot com in the events and presentations section.
The contents of this conference call contains time sensitive information that is accurate only as of today December seven 2021.
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 this conference call.
Joining me today from Aerovironment, our President and Chief Executive Officer, Mr. Wahid, Nabavi, and senior Vice President and Chief Financial Officer, Mr. Kevin Macdonald.
We'll now begin with remarks from Wahid Nobody wahid. Thank.
Thank you Jonah welcome to our fiscal year 2022 second quarter earnings Conference call.
I will start by summarizing our second quarter performance and discuss recent achievements next Kevin will provide a more detailed summary of our financial performance for the quarter and then I will follow up with a discussion of our goals for fiscal year 2022, before Kevin Jonah and I take your questions.
Let me emphasize three key messages, which are included on slide number three of our earnings presentation.
First we delivered solid financial results in our second quarter and first half of fiscal year 2022 in line with our expectations.
Second we are experiencing stronger macro headwinds this quarter. These headwinds include supply chain constraints due to the global COVID-19 pandemic.
Delayed awards of several customer contracts due to an uptick in pandemic related travel restrictions and lack of approval of National Defense Authorization Act for government fiscal year 2022, resulting in continuing resolutions and a tight labor market.
All of the above factors are impacting our outlook for the second half of fiscal year 2022.
And third with a solid backlog and enduring long term demand for our portfolio of solutions, we remain confident in our vision for the company and ability to create long term shareholder value.
Before going through these themes more in depth, let me summarize our financial results for the second quarter.
We delivered revenue of $122 million compared to $92 $7 million last year, a 32% increase year over year.
Revenue growth was primarily due to increased sales, particularly in our medium unmanned aircraft system segment.
These along with other organic and acquisition, but increases offset the negative impact from lower small unmanned aircraft systems product line shipments.
We achieved solid backlog of $252 million, driven by new wins across multiple business segments and in part by recent strategic acquisitions that are already yielding strong results.
Gross profit for the second quarter was $42 5 million, an increase of 4% year over year.
Gross margin percentage fell to 35% from 44%, reflecting product mix and supply chain effects.
We reported net income of $2 5 million or 10 cents per diluted share as compared to $2 $1 million or nine cents per diluted share for the second quarter of fiscal year 2021.
Yeah.
While we're pleased with our results this quarter and still expect year over year growth across our business. We're adjusting our guidance for the full fiscal year 2022 to account for the headwinds we expect in the second half of the fiscal year.
On last quarter's call I touched on three global issues that could impact our business. The U S withdrawal from Afghanistan, The COVID-19, pandemic and the global supply chain disruptions.
Today, I would like to provide an update on the latter two as well as additional headwinds affecting our business and the broader industry and economy.
These additional headwinds include contract awards due to the global pandemic and current continuing resolution environment.
And labor shortages.
As we mentioned last quarter, our current supply chain constraints are impacting our business.
There are two aspects of this.
First and foremost is our ability to manufacture and deliver products to customers in a timely manner.
Supply chain bottlenecks have hindered our ability to do this even as our dedicated teams have focused on mitigating the situation to the best of their abilities and the last 12 months by working with new and existing suppliers to find component parts.
The other aspect of this predicament is increased costs, reflecting higher material cost shifting expenses warehousing costs inventory cost and overall working capital management as we continue to build inventory to meet current and future demand for our innovative solutions.
With regards to COVID-19 pandemic increased concerns over the Delta and Omicron variants of the virus have resulted in further domestic and international travel restrictions.
This along with other pandemic related delays negatively impacts our ability to succeed fewer new contract wins in a timely manner, both domestically and internationally, even even though our backlog remains robust.
Additionally, due to the current U S deal with these continuing resolution budget environment in Washington, Certain awards have also been negatively impacted.
We expect this uncertainty to persist throughout the rest of this fiscal year we.
We have worked diligently to meet the administration's mandate to have all employees vaccinated by January 4th 2022.
However, this has led to increased challenges in hiring within an already tight labor market.
Their staffing challenge to an extent as hindering our ability to hire adequate qualified engineering professionals across our growing business.
It is important to emphasize that our commitment to aerovironment and delivering value for our shareholders and other stakeholders remains stronger than ever.
Yeah.
So these challenges in aggregate, namely global supply chain constraints ongoing pandemic related constraints U S. D would you use continuing resolution and tight labor markets have led to a slower contract award environment in general and as hindering our ability to achieve the expected full year results we.
Really intended.
Due to these headwinds we find it appropriate to adjust our guidance for fiscal year 2022 as follows.
Full year revenue is now expected to be between $440 million and $460 million.
Net loss from continuing operation is forecasted to be between $12 million and $8 million.
Adjusted EBITDA is anticipated to be between $59 million and $65 million.
Our diluted loss per share will be between 47 and 33 cents.
And non-GAAP diluted EPS is forecasted to be between $1 23 and $1.37.
While these results to differ from our initial expectations. The rest assured our team is dedicated to mitigating the issues.
Some of these issues may be transitory in nature.
However, supply chain constraints and tight labor markets in particular do not appear to be short term and we've already begun working to mitigate their impact this fiscal year.
We're optimistic that such issues will also eventually work themselves out, but we currently lack visibility in terms of when that may occur.
Before turning the call over to Kevin I'd like to provide some updates on current developments within our.
The individual product lines.
I will start with our small unmanned aircraft systems, our largest product line, where we were pleased to see growth opportunities ahead.
We continue to see strong demand for our Puma AE and Raven systems, both domestically and abroad and recently showcased a sensor to shoot a demonstration including Crystal This integration.
This took place in September as part of Nato's robotic experimentation and prototyping augmented by maritime unmanned systems 2021 event.
Europe's largest maritime unmanned systems experimentation exercise hosted at the Portuguese Navy Center and Trulia, Portugal.
The successful maritime demonstration of our Puma three AE small UAS and Switchblade 300 tactical missile system was part of a U S and NATO interoperability to interchange ability initiative.
It showed that our sensor the shooter solution dramatically elevates, operator, situational awareness and reduces the chances of mis targeting which we believe should help with broader adoption of these intelligence systems for naval applications worldwide.
In September we announced that the U S Army exercised its third and final option under the flight control systems or FCS domain of a multi year small UAS contract.
The value of this option was approximately $11 $7 million, including flight control system kits ground control stations and various spare parts for the Army's existing fleet of Aerovironment systems.
Delivery of this contract award is scheduled to be completed by September of next year.
Next within our tactical missile systems segment, we continue to see growing demand for our products and believe there was a great opportunity to replace traditional munitions on ground air and sea vehicles.
In the quarter, we successfully demonstrated the integration of our Switchblade 300, loitering missiles and jumped 20 medium UAS for increased mission autonomy and efficacy.
This air launch effects proof of concept demonstration took place in August launching an interim switchblade 300 from the jumped 20 and successfully requiring both air vehicles.
This end to end integrated solution provides customers with greater time on station than if they were to deploy a switchblade on its own resulting in the ability to conduct more real time surveillance, increasing the probability of identifying targets and minimizing collateral damage.
We continue to make progress on our Switchblade 600.
We are actively manufacturing low rate initial production quantities for operational fielding off the ground version, while developing the maritime variant under our existing customer funded R&D contract through its integration into naval vessels for the U S Special operations command.
Yeah.
I will now move onto our medium unmanned aircraft system segment, which has been quite active this year.
Following our recent success with SaaS Com, we submitted a jumped 20 proposal for the U S Army's future tactical UAS or F. T. OAS increment, one and will soon submit a proposal for increment two opportunities.
In aggregate the U S. Army's S. T. UAS program is expected to be worth over $1 billion in potential opportunity over a 10 year period.
As a reminder, the U S. Army's proposed fiscal year 2022 budget calls for over $140 million of funding for progressing this potential program.
We're very focused on competing for this large growth opportunity and expect to be awarded a contract for the increment one opportunity soon.
We're also engaged with international customers to bid on additional future potential opportunities and ensure strong growth in the years to come.
It has been an exciting few months for our unmanned ground vehicles product line, which was created through our acquisition of Germany's tell Rob.
<unk> recently received a multimillion dollar firm fixed price order from the Latvian Ministry of defense for Telematics evil hybrid and Theodore evil unmanned ground vehicles, along with engineering support.
We also delivered at telematics evil hybrid to the U S. Pentagon Force Protection Agency earlier this summer.
Designed to be operated by <unk> and it has met technicians, the tolerability, Judy can safely and effectively dispose of explosive ordinance hazardous material and chemical biological radiological and nuclear threats.
We're pleased with the expanding interest shown in these products since our purchase of <unk> earlier, this year and believe and the significant value potential for our shareholders.
And our haps product line, we continue to move ahead in designing the next generation of aircrafts under the terms of our five year Master design and development agreement with Softbank.
As we said last year last quarter, we are progressing with phase two of our partnership during which we will build a third aircraft to perform further flight testing demonstrated longer duration flights and progressed through FAA certification.
At the same time, we continue to assess various U S. D O D opportunities that can leverage <unk> unique capabilities.
As a reminder, our solar haps performance characteristics provide unique defense applications for both counterinsurgency and peer near peer conflicts.
And finally, our Maccready works advanced solutions group continues to develop new applications and autonomy and artificial intelligence.
We are engaged in many customer funded R&D projects in the area of autonomous multi domain robotic solutions and have seen new levels of interest since the successful of ingenuity. The Mars helicopter, which are Mcqueeney works team helped design for NASA.
We are very proud of these accomplishments, which underscore our leadership in designing and delivering state of the art solutions with high reliability and ruggedness for extreme environmental conditions.
With that I would like to now turn the call over to Kevin Mcdonald for a review of second quarter financials, Kevin. Thank you Wahid today I'll be reviewing the highlights of our second quarter performance.
Which I will occasionally refer to both our press release and earnings presentation available on our website.
Revenue for the second quarter of fiscal 2022 was $122 million or 32% increase from the prior year's comparable period.
Slide five of the earnings presentation provides a breakdown of revenue by segment for the quarter small UAS led the way with $54 7 million of revenue, which was down slightly from last year's second quarter and $58 3 million.
Our newly acquired medium UAS segment had a strong second quarter with revenue of $26 5 million, a sequential improvement versus our first quarter of fiscal 2022.
Our tactical missile systems, or Tms segment contributed $18 4 million of revenue during the second quarter.
The Tms Tms was impacted by supply chain issues in Q2, and we expect these issues to continue at least for the remainder of the fiscal year.
Revenue from the other segment, which includes haps increased year over year to $22 4 million versus $15 4 million in fiscal 2021 second quarter.
The increase is a result of revenue from the acquired property ISG and <unk> businesses.
Year to date, we saw declining organic revenue of 12%.
Wahid discusses remarks, we continue to face headwinds on many fronts and expect organic growth revenue growth could be limited or decline in FY 'twenty Tony too.
Turning to gross margins slide five of the earnings presentation shows the mix of product and service revenue. We saw some improvement in mix to 58% product up from 53% product in Q1 for the full year, we are tracking towards a 55% product mix down from our original expectation of 60% product.
Our reduced revenue outlook.
Disproportionate negative impact on product revenues.
Slide six of the earnings presentation shows the trend of adjusted product and service gross margins on slide 12 reconciles the GAAP gross margins adjusted gross margins, which exclude intangible amortization expense and other noncash purchase accounting items.
I will speak I will speak to our adjusted gross margins.
Overall, adjusted gross margins for the quarter were 39% up from 32% in the first quarter FY 'twenty. Two this positive trend was a result of improved product service mix and improved product and service margins.
Adjusted product margins in the quarter were 48%.
Versus 42% in the first quarter.
However for the remainder of the year, we expect to see product gross margins in the mid to low forty's.
In terms of adjusted service gross margins.
Also saw sequential improvement to 27% in the second quarter versus 22% in the first quarter of the year. We expect that we expected Q2 service margins to be indicative of what we'll see for the remainder of the year.
Now turning to operating expenses SG&A expense for the second quarter was $24 8 million and includes intangible amortization and acquisition related expenses of $5 $6 million compared to <unk> 5 million last year.
When you exclude the intangible amortization and acquisition related expenses.
G&A expense as a percentage of revenue in the second quarter of fiscal 2022 was 16%.
Expect SG&A, excluding intangible amortization and acquisition related expenses as a percentage of revenue for the year to be in line with the first half actuals and 17%.
R&D expense for the second quarter was 12% of revenue and 13% year to date, we expect R&D as a percentage of revenue to be in line with our guidance of 11% to 12% for the full year.
We also had a significant nonoperating item in the quarter, we accrued an additional $10 million of legal settlement expenses related to the claims by the buyers of our former E. S business as part of our settlement agreement. This was recorded as part of the other expense in the quarter.
Looking at the bottom line, our GAAP net income for the second quarter of fiscal 2022 was $2 $5 million or 10 cents per diluted share compared to net income of $2 1 million or nine cents per diluted share for the second quarter of fiscal 2021.
The year over year increases in net income was primarily due to a $12 million increase in tax benefits.
And at $10 $7 million favorability as equity investment income as the second quarter of fiscal 2020. One includes a loss related to the haps Loon breakdown. This was largely offset by a $10 million $10 $6 million decrease in operating income primarily driven by an increase in intangible amortization.
<unk> related to the acquisitions and a $10 $1 billion increase in other expenses. So the reporting of the legal settlement discussed previously.
The large tax benefit in the second quarter of fiscal 2022 is driven by a combination of our year to date and projected full year pretax losses.
In terms of adjusted EPS.
Slide 10 of our earnings presentation shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per share per diluted share of <unk> 78 for the second quarter of fiscal 2020 two.
Earnings of 48 cents per diluted share for the second quarter of fiscal 2021.
Year over year improvement in adjusted earnings as a result of increased adjusted gross margins offset by higher operating expense and positively impacted by the tax benefit in the quarter.
Turning to the balance sheet total cash and investments at the end of the second quarter was $124 2 million, which is slightly up from the first quarter.
Of this fiscal year, we continue to have a strong balance sheet with over $120 million of cash and investments and $100 million working capital facility.
Now I'd like to highlight some of our backlog metrics.
Slide seven of the earnings presentation provides a summary of our current fiscal 2022 visibility.
As of today total visibility towards the mid point of our $4 $40 million to $460 million revised revenue guidance range is 90% our funded backlog at the end of the second quarter of fiscal 2022 was $252 million now.
Now I'd like to turn things back to Wahid.
Thanks, Kevin.
As you can see we continue to make progress in advancing our market leading positions, while achieving critical milestones.
Before turning the call over for questions, Let me sum up the quarter with three key messages.
First we delivered a solid quarter and first half in line with our expectations.
Second we're experiencing with experiencing macro headwinds in the second half of fiscal year 2022 and to account for these challenges we have adjusted our fiscal year guidance.
Third with a solid backlog of 90% visibility to the midpoint of our guidance range. We remain focused on delivering another year of top line growth across our business portfolio, while delivering long term shareholder value.
We.
We continue to expand the company's base of business strengthening our leading position across the unmanned robotic systems landscape. Our team remains committed to managing the near term macro challenges, while achieving the long term vision of our company and creating shareholder.
<unk>.
Looking ahead, we continue to execute our strategy of broadening our capabilities integrating multi domain robotic systems artificial intelligence and an intuitive user interface to provide more effective solutions than ever before.
We have enjoyed the opportunity to meet and speak with our investors over the past quarter and thank you for your continued interest in Aerovironment, we wish you and your loved ones and a great holiday season, and happy new year.
I want to say, thank you to our customers team members and shareholders for your support and for challenging us to deliver excellence. We continue to focus on delivering on our promise to help you proceed with certainty Kevin join Ini will now take your questions.
Thank you.
Wanted to ask a question you will need to press star one on your telephone excuse me throw out in your question press the pound key.
Again to ask a question you will need to pass in Taiwan.
Please stand by while we compile the Q&A box right.
First question is from Peter Arment of Baird. Your line is open.
Oh, yes, good afternoon Wahid.
Well good afternoon to talk about.
Can you talk about the.
You know whether you can parse out kind of the revenue change on the outlook, whether its how much of it's kind of driven by the sea or how much was driven by maybe kind of supply chain or maybe just give some additional color there.
Sure Peter So overall as I mentioned, we're at.
Experiencing goes primarily three headwinds the three categories and I would say the supply chain and supply chain related constraints are a significant contributor to that headwind.
So we've been able to address that for the last 12 months to 18 months very effectively so far.
However, what's happened is that the length and duration of this pandemic and the restrictions that has gone along with it no one really expected it to go this long and so therefore as a result all of the.
Preliminary and proactive.
Measures that we've taken for the last 12 months to 18 months essentially were exhausted, where the supply chain as a whole even suppliers and distributors and manufacturers were not able to help us anymore. Because we put we proactively plan so much of it.
And so we adjusted our plans accordingly, and then the other two issues related to order delays.
And some of that related to the pandemic and travel some of it related to supply chain.
It's all been related to obviously, the CR as well.
And then lastly, but also tight labor market, especially for a highly highly technically qualified engineering talent, which we have a strong desire and demand for because of our business continues to grow.
Another contributor we haven't released.
<unk> broken it down specifically to a dollar amount per but those are the top three areas that contribute to overall headwinds for us Peter.
Okay, and then just as a follow up if I could on just is this does it feel like its more timing related and you know when you think about kind of the the order delays and that you would expect those to eventually come back to you or are you seeing any changes by your customers.
Sure. So as I said on my remarks. Some of these things are very transition transitory. So they will most likely work their way out sooner rather than later, but there's for example, the travel delays, we believe that it's going to start to get better and that had gotten better now the delta Varian and the variance for the rent of that.
So those I believe that over the short term is eventually going to work its way out but it is a very dynamic market. It is things are changing literally on a daily to the weekly basis in terms of the supply chain and the constraints that are out there.
And so it's really difficult to predict that far ahead. However, there are certain issues.
As the global.
Supply chain constraint itself in terms of high performance cutting edge.
Graphic processors image processors and.
Semiconductor components that we use quite frequently and majority of our products.
R and the labor market seem to be sustained.
Sustained for a little longer than we expect.
We foresee so we'll keep you updated as we get updates, but it's a very dynamic situation.
But we're watching very carefully and we're mitigating issues as they come up on a daily basis.
I appreciate it thanks.
Welcome Peter.
Thank you and we would like you to limit. Your question why have one follow up at that time, but any additional questions. Please press star one again, Tony Chang to the queue.
And our next question is from Ken <unk> of RBC. Your line is open.
Hey, good afternoon, Wahid and Kevin and John are.
Good afternoon good afternoon.
Hey, I wanted to just obviously follow up on the guidance question, but from an EBIT standpoint, you've you've lowered the full year EBIT significantly more.
The full year revenue outlook can you just talk about the puts and takes from an EBIT standpoint and are there any.
Any specific items impacting EBITDA or profitability disproportionately relative to the revenues.
Well I mean, I think it's because let me start and while you can wrap up basically.
<unk> taken off some of the higher margin business. When we took out that guidance. So that's one of the reasons why it has a disproportionate impact on EBITDA.
And we also have this adjustment throughout the second half of the year.
Ken where there are some fixed costs based on volume that address the effects of that too.
Having a lower volume in general would negatively more.
More impacts the profitability profile for this fiscal year.
And so those are the two main effects, that's one driven by mix, which Kevin said, primarily the products because you know, we generally deliver a lot more products and services.
Mix of our revenue and so those products with the shortcomings that we have in terms of the headwinds and supply chain and all that gets affected and that has a bigger impact on margins and profitability then services in general.
Okay, and if I could just to follow up on that on the revenue side, where any of the push outs due to specific competitive losses or <unk>.
Contract sort of setbacks relative to expectations on specific programs Wahid.
Not not so far what we know of in fact, while our team is making very good progress in general in terms of the markets and opportunities.
Sure.
<unk>.
We are in fact in many areas look better than we did before as I mentioned, we did the interoperability interchangeability demonstration with the NATO partners in Europe.
This is a very very big milestone because it shows how a sensor to shoot our concept of operation can be implemented and we delivered that capability, we demonstrated it live with our switchblade and our Puma AE three.
Additionally on our.
And the UAS the jumped 20.
F T UAS program for the U S Army, we have already submitted our proposal.
We like our chances we believe that we are in a leading position and that is a significant opportunity that we think.
We are positioned quite well on that as well and similarly in our tactical missile systems product line.
We've made quite a decent progress in a lot of different areas of our business. We are continuing to make products and deliver on the existing switchblade 300, although at a slower pace because of the supply chain constraints. Switchblade 600 is progressing very very effectively with the customer adoption and lower initial production and we are developing a next variant.
So overall, our win rate and the market remains strong. It's just that these headwinds are pushing things to the right as it's affecting pretty much almost every company that I know off across the board and the entire macro level of the economy and the industry.
In the Tms has shown a lot of good reception in the marketplace out of the box absolutely.
Great Alright, well, thank you very much.
You're welcome Ken.
Thank you and our next question is from Austin <unk> of Janney.
Your line is open.
Good evening Wahid.
I just have a quick question here on the supply chain. Some other contractors that I've spoken with in the past few weeks have sort of targeted an estimated resolution for a lot of the supply chain delays and disruptions for sort of mid calendar year, 'twenty, two which is a core.
And your fiscal year 'twenty three I know you didn't say anything specific around timing, but does that sound like.
Like a reasonable estimate to you.
Good evening Austin in General as I said based on what we could see in the market.
The tight labor markets and supply chain constraints that are affecting both delivery of our systems and services as well as.
The ability to manufacturer and.
Make products and delayed the orders I think that those two are going to be a little bit more sustained where there is really the type of the situation is so dynamic.
On a weekly basis things do change quite significantly.
And we've been I know from the beginning of this pandemic.
We were very fortunate because our team proactively worked on a lot of these issues in advance we diligently worked all these things proactively by buying parts and advanced by getting our suppliers, even carry inventory for us in advance and plan and build in advance.
And so most if not all of those what I call.
Our contingency plans were exhausted in terms of the duration of this pandemic and the duration of this global disruption and so essentially what's happening now theres lots of different factors that are impacting what we're doing though we are we are absolutely doing everything to control things that we can things that it's out of our control.
We really cannot control that's external but theres a lot of things that we can control and we have impacted that so I would say in some ways. The beginning of next at the Middle of next calendar year summer sounds reasonable, but I don't have a very clear picture are there to provide you that.
Yeah.
Okay. Thank you that's very helpful. And then just one follow up.
If we look in the current drafts of the N V. A a defense appropriations bills.
Approximately $68 million in there consistently for the army all ma'am Switchblade program.
And then around $70 million for future Tactical UAS I assume you still have a high degree of confidence in that.
Ending up in your fiscal year 'twenty three just once the budget is actually passed and sent to the president and stuff.
Austin.
The two figure that you mentioned are accurate, yes. Those are in the proposed N D. A.
And the government fiscal year 2022 budget request, we are in contact with those two customers. The U S Army for almonds, and FTE OAS, and we really like our position.
I am not in a position to comment about that.
The fiscal year 'twenty three activities, we are really focused on executing this year.
But we do believe that the long term prospects for our businesses and our product lines remain intact. We are we continue to be a leader in this space in the market that we're in overall the demand for our products and solutions and our innovative capabilities are certainly there and enduring.
And we're working hard to make sure that we capture those it's just these.
Headwinds that we're faced with multiple of them of course due to the external factors that are going on that we're mitigating as we go.
Okay.
Okay.
Youre welcome Austin.
Thank you and our next question is from Tien Kubicki of Alembic Global Your line is open.
Hey, good afternoon guys.
Okay can we delve into the revenue guidance.
Revenue guidance reduction by product line, but I would imagine you're seeing the most pressure you know out of the total in small UAS and Tms does that is that fair.
So Pete this is wahid.
Generally speaking as you know a significant portion of our revenue comes from product sales and product shipments.
And many of the issues that I described in terms of the headwinds impact the ability for us to manufacture product and deliver product and also to secure contracts related to that so in general those two are affected.
Product business, so overall will be affected.
And in a large extent now at the same time since our product businesses more favorable in terms of profitability profile that impacts the bottomline a little Additionally, and in the end.
In addition to that there's also additional expenses in.
Expediting fees and material costs, and warehousing costs et cetera. So overall the reductions are impacting all of our businesses, but products are getting impacted slightly higher.
Okay, Okay, and I think in your release, you guys mentioned slower.
Slower decision, making in D. C. I wasn't sure if that solely meant the budget.
I wanted to ask you if you've had any trouble getting.
<unk> approval export approvals for any of your product giving.
So much has now shipped overseas both for small UAS and Tms.
So Pete that's a very good point in general the slowdown.
Multiple factors that are.
Impacting that number one the global pandemic.
Still serves as a deterrent and.
For the ability of our customers and our teams to travel both domestically and internationally as we used to do before the pandemic. That's one number two.
Besides the travel the continuing resolution that is happening right now in the U S.
Defense budgets, and Washington, and government continuing resolution does also have an impact in our ability to actually.
Process, these things and move them through the sales cycle as a as we expected. So in terms of the Fms office, yes. The overall impact of international shipments also are affected not just by the ability for the government to allow us to ship those things.
But also and actually securing in processing paperwork to secure those contracts and get the permission to get get them through overall.
Just a very large overall impact that the whole industry space that are multifaceted.
Okay. Thank you.
Youre welcome.
<unk>.
And the time line to ask a question you will need to press star one on your telephone. Thank you Anthony.
One on your telephone.
And our next question is from Brian Wattenberg.
Capital Your line is open.
Yes. Thank you very much a lot of my questions been asked but.
But I did have a question on solar Haps can you give us an update on that.
Where are we are we on track as anything gotten delayed.
Because of the pandemic pushed to the right can you give us a general update there.
Thanks, Brian of course this is wahid so in terms of the our haps business as I mentioned, we're making really really steady progress in that program in general.
As you know the business plan for that is a three phase business plan. We've completed successfully the first phase of this which was design develop demonstrate and deliver two airplanes now is phase two which is to make the final version of the airplane.
And then get this through certification and testing and flight testing with the FAA and other agencies. We've begun that process. We have a very detailed project plan that we have.
We have been executing we are at the initial phases of that the program is on track in terms of overall deliverables to our customer our partner Softbank and apps mobile however.
The shortages.
Resources are tight labor markets, where the engineers that we need to expand and also to prepare for the next flight season, which is going to be upon us coming this summer that.
Those two have been impacted because of this including some supply chain and lead times for material.
So nothing has gone.
Sort of untouched or a state in this area.
But overall relative to our plans for with our customer and our partner we're on track in meeting those milestones because we had already adjusted those based on the pandemic. However, this labor markets and supply chain is throwing another challenge at us at this stage of the game.
Okay. So there is some delay, but nothing really new in the last quarter on haps in fact, the summary that is correct.
Great. Thank you very much Youre welcome Brian.
Thank you and our next question is from Louis Dipalma of William Blair. Your line is open.
Well, he need Kevin and John and good afternoon.
Good afternoon.
I just have one question of the $100 million in guidance reduction are you able to quantify how much of that 100 million is still in your pipeline versus how much you'd be able to deem like has been like cancer.
Sold outright by the customers.
So Louis the majority of that is still in our pipeline.
I don't.
Make them down specific line by line because the line items are very very extensive and large and long overall and general vast vast majority of those have shifted to the right.
Either because of one or the other or multiple.
The headwinds that I described earlier in general there are some level of Sustainment orders.
That what we call it little bit perishable. So if you don't have.
The ability to provide products or secure those orders that they will be reduced or may not come back.
You may not recover from that.
The dollar amount of that the extent of that is difficult.
To quantify specifically however, we have a very large installed base and we believe that over time, that's going to work itself. Its way out and we're also as you know developing new generation solutions that helps us.
Generate new demand so I would say in general majority has shifted to the right.
One way or the other some could be considered perishable that may not be recovered primarily because of just time disclose bi will relate to the some of the sustainment orders.
Great and all of that $100 million was there any specific contract concentration such that like there might have been like a very large array of an order or a very large switchblade 300 order that you you.
Painted or would you say that it was like evenly distributed.
And it wasn't.
Abnormally large relative to your normal.
Contracts.
Louis So well it depends on the product line specific because in certain categories. We have a lot of different variety of things that we offer so small UAS across.
Has the board Puma parts.
Raven parts in various different components that goes into designing the subsystems on our tactical missile systems and other product lines, primarily of Switchblade 300 600. Those are the two primary drivers of our revenue for Switchblade and tactical missile systems.
I'd say those are the primary ones, but there's not one single specific opportunity or product because we use these advanced.
Processors in semiconductor components across our entire product line. So if there's a shortage of a specific chip or semiconductor component.
More than one product of ours in general.
We've taken a number of actions to address that like I said by even swapping components and redesigning the boards.
We've done gone through other sources, we have bought in advance.
We are exhausting all of the possibilities that is in our control, but there are certainly large macro level headwinds that we can't control and that's the reason for the adjustments that we've made in our guidance overall, though I could tell you that our 90% visibility to the midpoint of our guidance and a very strong backup.
<unk> $252 million gives us confidence that we're going to be able to execute this year, but the situation is very dynamic things change on a daily basis.
Thanks Mohit.
Youre welcome Louis.
Thank you and as a reminder to ask a question you will need to press star one on your telephone again that is star one.
Our next question is from Quebec, Schiappa Lindsay Goldberg Your line is open.
Thanks, guys.
One or two follow ups.
Because a lot of people are talking about the potential for a full year continuing resolution for fiscal 'twenty. Two so we just don't really get a budget.
So in light of that.
Youre halfway through your fiscal year should we how are you guys thinking internally about fiscal 'twenty three just directionally.
Is it reasonable to keep it kind of flat year over year, I don't know, maybe even down considering the lack of visibility on the budget and the supply chain.
What's the right way to think about that.
So Pete obviously I'm not an expert in predicting the government continuing resolution situation I will not speculate on that but what I can tell you is that we believe that based on the current environment and based on the visibility in the backlog and the.
The visibility, we have within our customers and markets and opportunities and our operations that were confident about our ability to execute and deliver our fifth consecutive year of growth this year.
And we are a growth company their demands for our systems and solutions and our long run remains strong we believe that our tactical missile systems is disrupting a very multibillion dollars large market opportunity, which we're just at the beginning of that and our and the UAS jumped 20 system.
It sort of presents a very large short term and long term growth opportunity for our business and our company.
No.
And then of course long term, our small UAS as well as our <unk> business.
Sort of present large large step function.
Growth opportunities for US we are a growth company. We believe we can grow and we believe are the demand for our solutions long term is going to stay strong and we will provide you more updates on fiscal 'twenty three.
When the time comes close to that on our fourth quarter.
Okay last one for me on F F T UAS.
I think you said increment one award could be could be soon correct me, if I'm wrong, but for increment. One is that is that a competitive down slot or all three of the of our competitors getting award for kind of further refinement.
That's a great questions Pete I'm glad you asked the question because I.
Alluded to that in my remarks, which was we have submitted our proposal to ft UAS increment one.
And come and one is strategically very important because increment one sets the stage for the future program of record acquisition plans and requirements.
The customer initially indicated to us.
That they will be they have not determined whether they're going to award it to once only sole source to one vendor or multiple vendors. We believe we are a very strong position. We have submitted our proposal for that and we like our chances and our.
Our profile for success. There. However, there is still work to be remained it is a very large opportunity theres lots of competitors competing for that.
And we remain committed to making sure that we win in that opportunity.
We believe our solution is extremely compelling and extremely differentiating compared to all the other options on the table now the reason why increment. One is important is because that sets the stage for the government and the U S army to inform its future deployment and acquisition planning and while the dollar is small.
All for income and won the strategic important is significant.
Okay. Thanks for the color I appreciate it Youre welcome.
Thank you and there are no further questions on queue do you have any closing remarks.
No. Thank you I think we're ready to wrap up the call. We are ready to wrap up the call. Operator. Thank you all for your interest in Aerovironment and we look forward to.
Talking to you again in the near future and happy holidays.
Thank you and ladies and gentlemen. This concludes today's conference call. Thank you again for participating.
Look forward to speaking with you again next quarter you may now disconnect.
Okay.
[music].
Yes.
[music].
Okay.
[music].
Yes.
[music].
Hum.
Okay.
[music].
Okay.
Yes.
Yes.
Yes.
Okay.
Yes.
Okay.
Yes.
[music].
Okay.
Yeah.
Yes.
[music].
Yes.
[music].
Okay.
Yes.
Yeah.
Yes.
Yes.
[music].
Okay.
Mhm.
[music].
[music].
[music].
[music].
Ladies and gentlemen, thank you for standing by and welcome to the environment fiscal year 2022 second quarter Conference call. At this time all participants lines 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 will need to press star one on your telephone.
That's right that today's conference is being recorded for replay purposes. If you require any further assistance. Please press star zero.
I would now like to hand, the conference over to Joan that Peter balance. Thank you. Please go ahead Sir.
Thank you and good afternoon, ladies and gentlemen.
Welcome to Aerovironment for fiscal year 2022 second quarter earnings call. This is John It's Peter Balan Senior director of corporate development and Investor Relations for Aerovironment.
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 of 1995.
Forward looking statements include without limitation any statement that may predict forecast indicate or imply future results performance or achievements.
And may contain words, such as believe anticipate expect estimate intend project plan or words or.
Or phrases with similar meaning.
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.
For further information on these risks we encourage you to review the risk factors discussed in Aerovironment periodic reports on Form 10-K, and other filings with the SEC along with the associated earnings release and Safe Harbor statements contained herein.
This afternoon, we also filed a slide presentation with our earnings release and posted the presentation on our website at a V. I N C dot com in the events and presentations section.
The content of this conference call contains time sensitive information that is accurate only as of today December seven 2021.
The company undertakes no obligation to make any revision to any forward looking statements contained in our remarks today.
Or do you update them to reflect the events or circumstances occurring this conference call.
Joining me today from Aerovironment, our President and Chief Executive Officer, Mr. Wahid, <unk>, and senior Vice President and Chief Financial Officer, Mr. Kevin Mcdonnell we will now begin with remarks from Wahid Nabavi Wahid.
Thank you Joanne and welcome to our fiscal year 2022 second quarter earnings Conference call.
I will start by summarizing our second quarter performance and discuss recent achievements next Kevin will provide a more detailed summary of our financial performance for the quarter and then I will follow up with a discussion of our goals for fiscal year 2022, before Kevin Joe and I take your questions.
Let me emphasize three key messages, which are included on slide number three of our earnings presentation.
First we delivered solid financial results in our second quarter and first half of fiscal year 2022 in line with our expectations.
Second we are experiencing stronger macro headwinds this quarter. These headwinds include supply chain constraints due to the global COVID-19 pandemic.
Delayed awards of several customer contracts due to an uptick in pandemic related travel restrictions and lack of approval of National Defense Authorization Act for government fiscal year 2022, resulting in continuing resolutions in a tight labor market.
All of the above factors are impacting our outlook for the second half of fiscal year 2022.
And third with a solid backlog and enduring long term demand for our portfolio of solutions, we remain confident in our vision for the company and ability to create long term shareholder value.
Before going through these themes more in depth, let me summarize our financial results for the second quarter.
We delivered revenue of $122 million compared to $92 $7 million last year, a 32% increase year over year.
The revenue growth was primarily due to increased sales, particularly in our medium unmanned aircraft system segment.
These along with other organic and acquisition increases offset the negative impact from lower small unmanned aircraft systems product line shipments.
We achieved solid backlog of $252 million, driven by new wins across multiple business segments and in part by recent strategic acquisitions that are already yielding strong results.
Gross profit for the second quarter was $42 5 million, an increase of 4% year over year.
Gross margin percentage fell to 35% from 44%, reflecting product mix and supply chain effects.
We reported net income of $2 5 million or <unk> 10 per diluted share as compared to $2 1 million or <unk> <unk> per diluted share for the second quarter of fiscal year 2021.
While we're pleased with our results this quarter and still expect year over year growth across our business. We're adjusting our guidance for the full fiscal year 2022 to account for the headwinds we expect in the second half of the fiscal year.
On last quarter's call I touched on three global issues that could impact our business.
The U S withdrawal from Afghanistan, the COVID-19, pandemic and the global supply chain disruptions.
Today, I would like to provide an update on the latter two as well as additional headwinds affecting our business and the broader industry and economy.
These additional headwinds include contract awards due to the global pandemic and current continuing resolution environment.
And labor shortages.
As we mentioned last quarter, our current supply chain constraints are impacting our business.
There are two aspects of this.
First and foremost is our ability to manufacture and deliver products to customers in a timely manner supply chain bottlenecks have hindered our ability to do this even as our dedicated teams are focused on mitigating the situation to the best of their abilities and the last 12 months by working with new and existing suppliers to find component.
<unk>.
The other aspect of this predicament is increased costs.
Selecting higher material cost shipping expenses warehousing costs inventory cost and overall working capital management as we continue to build inventory to meet current and future demand for our innovative solutions.
With regards to COVID-19 pandemic increased concerns over the Delta and Omicron variants of the virus have resulted in further domestic and international travel restrictions.
This along with other pandemic related delays negatively impacts our ability to.
Fewer new contract wins in a timely manner, both domestically and internationally, even even though our backlog remains robust.
Additionally, due to the current U S Dod's continuing resolution budget environment in Washington, Certain awards have also been negatively impacted.
We expect this uncertainty to persist throughout the rest of this fiscal year.
We have worked diligently to meet the administration's mandate to have all employees vaccinated by January 2022.
However, this has led to increased challenges in hiring within an already tight labor market.
We're staffing challenge to an extent as hindering our ability to hire adequate qualified engineering professionals across our growing business.
It is important to emphasize that our commitment to aerovironment and delivering value for our shareholders and other stakeholders remains stronger than ever.
So these challenges in aggregate, namely global supply chain constraints ongoing pandemic related constraints U S. Dod is continuing resolution and tight labor markets have led to a slower contract award environment in general and as hindering our ability to achieve the.
<unk> full year results, we initially intended.
Due to these headwinds we find it appropriate to adjust our guidance for fiscal year 2022 as follows.
Full year revenue is now expected to be between $440 million and $460 million.
Net loss from continuing operation is forecasted to be between $12 million and $8 million.
Adjusted EBITDA is anticipated to be between $59 million and $65 million.
Our diluted loss per share will be between 47 and 30 <unk>.
And non-GAAP diluted EPS is forecasted to be between $1 23, and $1 37.
While these results to differ from our initial expectations. The rest assured our team is dedicated to mitigating the issues.
Some of these issues may be transitory in nature.
However, supply chain constraints and tight labor markets in particular do not appear to be short term and we've already begun working to mitigate their impact this fiscal year.
We're optimistic that such issues will also eventually work themselves out, but we currently lack visibility in terms of when that may occur.
Before turning the call over to Kevin I'd like to provide some updates on current developments within our.
The individual product lines.
I will start with our small unmanned aircraft systems, our largest product line, where we were pleased to see growth opportunities ahead.
We continue to see strong demand for our Puma AE and Raven systems, both domestically and abroad and recently showcased a sensor to shoot a demonstration including Crystal list integration.
This took place in September as part of Nato's robotic experimentation and prototyping augmented by maritime unmanned systems 2021 event.
Europe's largest maritime unmanned systems experimentation exercise hosted at the Portuguese Navy Center in Troy, Portugal.
The successful maritime demonstration of our Puma three AE small UAS and Switchblade 300 tactical missile system was part of a U S and NATO interoperability to interchange ability initiatives.
It showed that our sensor to sugar solution dramatically elevates, operator, situational awareness and reduces the chances of mis targeting which we believe should help with broader adoption of these intelligence systems for naval applications worldwide.
In September we announced that the U S Army exercised its third and final option under the flight control systems or FCS domain of a multi year small UAS contract.
The value of this option was approximately $11 $7 million, including flight control system kits ground control stations and various spare parts for the Army's existing fleet of Aerovironment systems.
Delivery of this contract award is scheduled to be completed by September of next year.
Next within our tactical missile systems segment, we continue to see growing demand for our products and believe there is a great opportunity to replace traditional munitions on ground air and sea vehicles.
And the quarter, we successfully demonstrated the integration of our Switchblade 300, loitering missiles and jumped 20 medium UAS for increased mission autonomy and efficacy.
This air launch effects proof of concept demonstration took place in August launching an interim switchblade 300 from the jumped 20 and successfully recovering both air vehicles.
This end to end integrated solution provides customers with greater time on station than if they were to deploy a switchblade on its own resulting in the ability to conduct more real time surveillance, increasing the probability of identifying correct targets and minimizing collateral damage.
We continue to make progress on our Switchblade 600.
We are actively manufacturing low rate initial production quantities for operational fielding of the ground version, while developing the maritime variant under our existing customer funded R&D contract through its integration into naval vessels for the U S Special operations command.
Okay.
I will now move onto our medium unmanned aircraft system segment, which has been quite active this year.
Following our recent success with SaaS Com, we submitted a jumped 20 proposal for the U S Army's future tactical UAS or FTE UAS increment, one and will soon submit a proposal for incremental opportunities.
In aggregate the U S. Army's ft. UAS program is expected to be worth over $1 billion in potential opportunity over a 10 year period.
As a reminder, the U S. Army's proposed fiscal year 2022 budget calls for over $140 million of funding for progressing this potential program.
We're very focused on competing for this large growth opportunity and expect to be awarded a contract for the increment one opportunity soon.
We're also engaged with international customers to bid on additional future potential opportunities and ensure a strong growth in the years to come.
It has been an exciting few months for our unmanned ground vehicles product line, which was created through our acquisition of Germany's tolerable.
<unk> recently received a multimillion dollar firm fixed price order from the Latvian Ministry of defense for Telematics, Evo hybrid and tiered door ego unmanned ground vehicles, along with engineering support.
We also delivered at telematics Evo hybrid to the U S. Pentagon Force Protection Agency earlier this summer.
Designed to be operated by <unk> and it has met technicians. The tolerability JV can safely and effectively dispose of explosive ordinance hazardous material and chemical biological radiological and nuclear threats.
We're pleased with the expanding interest shown in these products since our purchase of <unk> earlier, this year and believe and the significant value potential for our shareholders.
And our <unk> product line, we continue to move ahead in designing the next generation of aircrafts under the terms of our five year Master design and development agreement with Softbank.
As we said last year last quarter, we are progressing with phase two of our partnership during which we will build a third aircraft to perform further flight testing demonstrate longer duration flight and progressed through FAA certification.
At the same time, we continue to assess various USD <unk> opportunities that can leverage <unk> unique capabilities.
As a reminder, our solar haps performance characteristics provide unique defense applications for both counterinsurgency and peer near peer conflicts.
And finally, our Maccready works advanced solutions group continues to develop new applications and autonomy and artificial intelligence.
We are engaged in many customer funded R&D projects in the area of autonomous multi domain robotic solutions and have seen new levels of interest since the success of ingenuity. The Mars helicopter, which are Mcqueeney works team helped design for NASA.
We are very proud of these accomplishments, which underscore our leadership in designing and delivering state of the art solutions with high reliability and ruggedness for extreme environmental conditions.
With that I would like to now turn the call over to Kevin Mcdonnell for a review of second quarter financials, Kevin. Thank you Wahid today I'll be reviewing the highlights of our second quarter performance.
Which I will occasionally refer to both our press release and earnings presentation available on our website.
Revenue for the second quarter of fiscal 2022 was $122 million or 32% increase from the prior year's comparable period.
Slide five of the earnings presentation provides a breakdown of revenue by segment for the quarter small UAS led the way with $54 7 million of revenue, which was down slightly from last year's second quarter and $58 3 million.
Our newly acquired medium UAS segment had a strong second quarter with revenue of $26 5 million, a sequential improvement versus our first quarter of fiscal 2022.
Our tactical missile systems, or Tms segment contributed $18 4 million of revenue during the second quarter.
The Tms Tms was impacted by supply chain issues in Q2, and we expect these issues to continue at least for the remainder of the fiscal year.
Revenue from the other segment, which includes <unk> increased year over year to $22 4 million versus $15 4 million in fiscal 2021 second quarter.
The increase is a result of revenue from the acquired property ISG and <unk> businesses.
Year to date, we saw a decline in organic revenue of 12% as Wahid discussed his remarks, we continue to face headwinds on many fronts and expect organic revenue growth to be limited or decline in FY 2022.
Turning to gross margins slide five of the earnings presentation shows the mix of product and service revenue. We saw some improvement in mix to 58% product up from 53% product in Q1 for the full year, we are tracking towards a 55% product mix down from our original expectation of 60%.
Our reduced revenue outlook.
Disproportionate negative impact on product revenues.
Slide six of the earnings presentation shows the trend of adjusted product and service gross margins on slide 12 reconciles the GAAP gross margins adjusted gross margins, which exclude intangible amortization expense and other noncash purchase accounting items.
I will speak I will speak to our adjusted gross margins.
Overall, adjusted gross margins for the quarter were 39% up from 32% in the first quarter FY 'twenty. Two this positive trend was a result of improved product service mix and improved product and service margins.
Adjusted product margins for the quarter were 48%.
Versus 42% in the first quarter. However for the remainder of the year, we expect to see product gross margins in the mid to low <unk>.
In terms of adjusted service gross margins. We also saw sequential improvement to 27% in the second quarter versus 22% in the first quarter of the year. We expect we expect the Q2 service margins to be indicative of what we'll see for the remainder of the year.
Now turning to operating expenses.
G&A expense for the second quarter was $24 8 million and includes intangible amortization and acquisition related expenses of $5 $6 million compared to <unk> 5 million last year.
When you exclude the intangible amortization and acquisition related expenses.
<unk> expense as a percentage of revenue in the second quarter of fiscal 2022 was 16% mix.
We expect SG&A, excluding intangible amortization and acquisition related expenses as a percentage of revenue for the year to be in line with the first half actual of 17%.
R&D expense for the second quarter was 12% of revenue and 13% year to date, we expect R&D as a percentage of revenue to be in line with our guidance of 11% to 12% for the full year.
We also had a significant non operating item in the quarter, we accrued an additional $10 million of legal settlement expense related to the claims by the buyers of our former EES business as part of our settlement agreement. This was recorded as part of the other expense in the quarter.
Looking at the bottom line, our GAAP net income for the second quarter of fiscal 2022 was $2 $5 million or <unk> 10 per diluted share compared to net income of $2 1 million or <unk> <unk> per diluted share for the second quarter of fiscal 2021 the.
The year over year increases in net income was primarily due to a $12 million.
The increase in tax benefits.
And at $10 7 million favorability in equity investment income as the second quarter of fiscal 2021 includes a loss related to the haps Loon breakdown. This was largely offset by a $10 million $10 6 million.
Decrease in operating income, primarily driven by an increase in intangible amortization related to the acquisitions and a $10 $1 million increase in other expenses. So the recording of the legal settlement discussed previously.
The large tax benefit in the second quarter of fiscal 2022 is driven by a combination of our year to date and projected full year pretax losses.
In terms of adjusted EPS.
Slide 10 of our earnings presentation shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per share per diluted share of <unk> 78 for the second quarter of fiscal 2022.
This was earnings of 48 cents per diluted share for the second quarter of fiscal 2021 year over year improvement in adjusted earnings as a result of increased adjusted gross margins offset by higher operating expense and positively impacted by the tax benefit in the quarter.
Turning to the balance sheet total cash and investments at the end of the second quarter was $124 2 million, which is slightly up from the first quarter of this fiscal year. We continue to have a strong balance sheet with over $120 million of cash and investments and $100 million working capital facility.
Now I'd like to highlight some of our backlog metrics.
Slide seven of the earnings presentation provides a summary of our current fiscal 2022 visibility as of today total visibility towards the mid point of our $4 $40 million to $460 million revised revenue guidance range is 90% our funded backlog at the end of the second quarter of fiscal 2022 was 252 million.
Now I'd like to turn things back over here.
Thanks, Kevin.
You can see we continue to make progress in advancing our market leading positions, while achieving critical milestones.
Before turning the call over for questions, Let me sum up the quarter with three key messages.
First we delivered a solid quarter and first half in line with our expectations.
Second we're experiencing with experiencing macro headwinds in the second half of fiscal year 2022 and to account for these challenges we have adjusted our fiscal year guidance.
And third with a solid backlog of 90% visibility to the midpoint of our guidance range. We remain focused on delivering another year of top line growth across our business portfolio, while delivering long term shareholder value.
We continue to expand the company's base of business strengthening our leading position across the unmanned robotic systems landscape. Our team remains committed to managing the near term macro challenges, while achieving the long term vision of our company and creating shareholder value.
Looking ahead, we continue to execute our strategy of broadening our capabilities integrating multi domain robotic systems artificial intelligence and an intuitive user interface to provide more effective solutions than ever before.
We have enjoyed the opportunity to meet and speak with our investors over the past quarter and thank you for your continued interest in Aerovironment.
We wish you and your loved ones and a great holiday season, and happy new year.
I want to say, thank you to our customers team members and shareholders for your support and for challenging us to deliver excellence. We continue to focus on delivering on our promise to help you proceed with certainty Kevin John Ini will now take your questions.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone to meet you on your question press the pound key.
Again to ask a question you will need to cross in Taiwan.
Please standby, while we compile the Q&A roster.
Our first question is from Peter Arment of Baird Your line.
Yeah.
Yes, good afternoon, Wahid arent genre.
Well good afternoon talk about can you talk about the.
You know mainland whether you can parse out kind of the revenue change on the outlook, whether its how much of it is kind of driven by the CR. How much is driven by maybe kind of supply chain or maybe just give some additional color there.
Sure Peter So overall as I mentioned, we're at <unk>.
<unk> goes primarily three headwinds the three categories.
And I would say the supply chain and supply chain related constraints are a significant contributor to that headwind.
So we've been able to address that for the last 12 months to 18 months very effectively so far.
However, what's happened is that the length and duration of this pandemic and the.
Restrictions that gap has gone along with it.
No one really expected it to go this long and so therefore as a result all of the.
Preliminary and proactive.
Measures that we've taken for the last 12 months to 18 months essentially were exhausted, where the supply chain as a whole even suppliers and distributors and manufacturers.
We're not able to help us anymore, because we've put.
We proactively plan so much of it.
So we adjusted our plans accordingly, and then the other two issues related to order delays.
Some of that related to the pandemic and travel some of it related to supply chain.
And related to obviously, the CR as well.
And then lastly, but also tight labor market, especially for a highly highly technically qualified engineering talent, which we have a strong desire and demand for because of our business continues to grow.
It has been another contributor we haven't released.
Broken it down specifically to one dollar amount per but those are the top three areas that contribute to overall headwinds for us Peter.
Okay, and then just as a follow up if I could on just is it does it feel like its more timing related and when you think about kind of the the order delays and that you would expect those eventually come back to you or are you seeing any changes by your customers.
Sure. So as I said on my remarks. Some of these things are very transition transitory. So they will most likely work their way out sooner rather than later.
For example, the travel delays, we believe that it's going to start to get better and that had gotten better and now the delta Varian in the Amazon variants.
Rent of that.
I believe that over the short term is eventually going to work its way out but it is a very dynamic market. It is things are changing literally on a daily to the weekly basis in terms of the supply chain and the constraints that are out there.
So it's really difficult to predict that far ahead. However, there are certain issues such as the global <unk>.
Supply chain constraint itself in terms of high performance cutting edge.
Graphic processors image processors and.
Semiconductor components that we use quite frequently and majority of our products.
Our <unk> and.
And the labor market seem to be.
Sustained for a little longer than we expect or we foresee so.
We'll keep you updated as we get updates, but it's a very dynamic situation that we're watching very carefully and we're mitigating issues as they come up on a daily basis.
I appreciate it thanks.
Welcome Peter.
Thank you and we would like you to limit your questions to one one follow up at that time for any additional questions. Please press star one again to the team.
Our next question is from Ken Herbert of RBC. Your line is now open.
Hey, good afternoon, Wahid and Kevin and John are.
Good afternoon, and good afternoon.
Hey, I wanted to just obviously follow up on the guidance question, but from an EBIT standpoint, you've you've lowered the full year EBIT significantly more.
The full year revenue outlook can you just talk about the puts and takes from an EBIT standpoint and are there any.
Any specific items impacting EBITDA profitability disproportionately relative to the revenues.
Well I mean, I think it's because.
Let me start and while you can wrap up basically youre, taking off some of the higher margin business. When we took out that guidance. So thats one of the reasons why it has a disproportionate impact on EBITDA.
And we also have this adjustment throughout the second half of the year.
Ken where there are some fixed cost based on volume that address the effects of that too.
So having a lower volume in general would negatively more.
More impacts the profitability profile for this fiscal year.
And so those are the two main FX, that's one driven by mix, which Kevin said, primarily the products because we.
We generally deliver a lot more products and services.
Our mix of our revenue and so those products with the shortcomings that we have in terms of the headwinds and supply chain and all of that gets affected that has a bigger impact on margins and profitability then services in general.
Okay, and if I could just to just to follow up on that on the revenue side.
Were any of the push outs due to specific competitive losses or.
Hum contract sort of setbacks relative to expectations on specific programs Wahid.
Not not so far what we know of in fact, where our team is making very good progress in general in terms of the markets and opportunities.
We are pursuing.
Rob.
We in fact in many areas look better than we did before as I mentioned, we did the interoperability interchange ability demonstration with NATO partners in Europe.
This is a very very big milestone because it shows how a sensor to shoot our concept of operation can be implemented and we delivered that capability, we demonstrated live with our switchblade and our Puma AE three.
Additionally on R. R.
And the UAS the jumped 20.
Ft UAS program for the U S Army, we have already submitted our proposal.
We like our chances we believe that we are in a leading position and that is a significant opportunity that we think we.
We are positioned quite well on that as well and similarly in our tactical missile systems product line.
We've made quite a decent progress in a lot of different areas of our business, we are continuing to make products and deliver on the existing switchblade 300.
Although at a slower pace because of the supply chain constraints Switchblade 600 is progressing very very effectively with the customer adoption and lower initial production and we're developing the next variant of it. So overall our win rate and the market remains strong. It's just that these headwinds are pushing things to the right as it's affecting.
Pretty much almost every company that I know of.
Across the board and the entire macro level of the economy and the industry.
And the product Tms has shown a lot of good reception in the marketplace out of the box absolutely.
Great Alright, well, thank you very much <unk>.
You're welcome Ken.
Thank you and our next question is from Austin.
From Canaccord your line is open.
Good evening Wahid.
I just have a quick question here on the supply chain. Some other contractors that I saw.
Poking with in the past few weeks have sort of targeted an estimated resolution for a lot of the supply chain delays and disruptions for sort of mid calendar year 'twenty, two which is of course in your fiscal year 'twenty. Three I know you didn't say anything specific around timing, but does that sound.
Like a reasonable estimate to you.
Good evening Austin.
In general as I said based on what we could see in the market.
The tight labor market and supply chain constraints that are affecting both delivery of our systems and services as well as the.
The ability to manufacturer and.
Make products and delayed the orders I think that those two are going to be a little bit more sustained where there is really the type of the situation is so dynamic that on a weekly basis things do change quite significantly.
And we've been from the beginning of this pandemic.
We're very fortunate because our team proactively worked on a lot of these issues in advance we diligently worked all these things proactively by buying parts and advanced by getting our suppliers, even carry inventory for us in advance and plan and build in advance.
And so most if not all of those what I call.
Contingency plans were exhausted in terms of the duration of this pandemic and the duration of this global disruption and so essentially what's happening now theres lots of different factors that are impacting what we're doing though we are we are absolutely doing everything the control things that we can things that is out of our.
Charles we really can't control, that's external but theres a lot of things that we can control and we have impacted that so I would say in some ways. The beginning of next at the Middle of next calendar year summer sounds reasonable, but I don't have a very clear picture there to provide you that.
Okay. Thank you that's very helpful. And then just one follow up.
If we look in the current drafts of the NDAA and the defense Appropriations bills, there's approximately $68 million in there consistently for the Army Switchblade program.
And then around $70 million for future Tactical UAS I assume you still have a high degree of confidence in that.
Ending up in your fiscal year 'twenty three just once the budget is actually passed and sent to the president and Seth.
Austin.
Yeah.
To figure that you mentioned are accurate, yes, those are in the proposed NDA.
And the government fiscal year 2022 budget request, we are in contact with those two customers. The U S Army for <unk> and Ft, UAS, and we really like our position.
I am not in a position to comment about.
Fiscal year 'twenty three activities, we are really focused on executing this year, but we do believe that the long term prospects for our businesses and our product lines remain intact. We are we continue to be a leader in this space in the markets that we're in overall the demand for our products and.
And our innovative capabilities are certainly there and enduring and we're working hard to make sure that we capture those assess these.
Headwinds that we're faced with multiple of them of course due to the external factors that are going on that we're mitigating as we go.
Yeah.
Okay.
Youre welcome Austin.
Thank you and our next question is from Paul.
Good that ski of Alembic Global your line is open.
Hey, good afternoon guys.
Now can.
Can we delve into the revenue guidance.
Revenue guidance reduction by product line event, I would imagine youre seeing the most pressure.
Out of the total in small UAS and Tms does that is that fair.
So Pete this is wahid.
It generally speaking as you know a significant portion of our revenue comes from product sales and product shipments.
And many of the issues that I described in terms of the headwinds impact the ability for us to manufacture product and deliver product and also to secure contracts related to that so in general those two are affecting the product business. So overall will be affected.
And a large extent now at the same time since our product business is more favorable in terms of profitability profile that impacts the bottomline a little Additionally, and in the <unk>.
In addition to that there's also additional expenses in.
Expediting fees and material cost and warehousing cost et cetera. So overall the reductions are impacting all of our businesses, but products are getting impacted slightly higher.
Okay, Okay, and I think in your release you guys mentioned.
Slower decision, making in D. C. I wasn't sure if that solely meant the budget.
I wanted to ask you if you've had any trouble getting.
Fms approval export approvals for any of your product.
So much has now shipped overseas both for small UAS and Tms.
So Pete that's a very good point in general the slowdown.
Some multiple factors that are impacting that number one the global pandemic.
Still serves as the deterrence and.
For the ability of our customers and our teams to travel both domestically and internationally as we used to do before the pandemic. That's one number two.
Besides the travel the continuing resolution that is happening right now in the U S.
Defense budgets, and Washington, and government continuing resolution does also have an impact in our ability to actually.
Process, these things and move them through the sales cycle as a as we expected. So in terms of the SMS office, yes. The overall impact of international shipments also are affected not just by the ability for the government to allow us to ship those things.
But also and actually securing in processing paperwork at to secure those contracts and get the permission to get them through overall.
Just a very large overall impact that the whole industry faced app that are multifaceted.
Okay. Thank you.
Youre welcome.
<unk>.
Thank you and the timeline to ask a question you will need to press star one on your telephone. Thank you Anthony.
One on your telephone.
Our next question is from Brian Wattenberg.
Capital Your line is open.
Yes. Thank you very much lot of my questions been asked but.
But I did have a question on solar Haps can you give us an update on that.
Where are we are we on track as anything gotten delayed.
Because of the pandemic pushed to the right can you give us a general update there.
Thanks, Brian of course this is wahid so in terms of the our haps business as I mentioned, we're making really really steady progress in that program in general as you know the business plan for that is a three phase business plan. We've completed successfully the first phase of this which was design develop demonstrate and deliver two airplanes now.
Now its phase II, which is to make the final version of the airplane.
And then get this through certification and testing and flight testing with the FAA and other agencies. We have begun that process. We have a very detailed project plan that we have.
We have been executing we are at the initial phases of that the program is on track in terms of overall deliverables to our customer our partner Softbank and apps mobile however.
The shortages.
Resources are tight labor markets for the engineers that we need to expand and also to prepare for the next flight season, which is going to be upon us coming this summer.
Those two have been impacted because of this including some supply chain and lead times for material.
So nothing has gone.
Sort of untapped.
As stated in this area.
But overall relative to our plans for with our customer and our partner we're on track in meeting those milestones because we had already adjusted those based on the pandemic. However, this labor markets and supply chain is throwing another challenge at us at this stage of the game.
Okay. So there is some delay, but nothing really new in the last quarter on apps is that the summary that is correct.
Great. Thank you very much Youre welcome Brian.
Thank you and our next.
Question is from Louis Dipalma of William Blair. Your line is open.
Well, he need Kevin and John and good afternoon.
Good afternoon.
I just have one question of the $100 million in guidance reduction are you able to quantify how much of that $100 million is still in your pipeline versus how much each be able to deem like has been like cans.
Outright by the customers.
So Louis the.
The majority of that is still in our pipeline.
I don't.
Jake them down specific line by line because.
The line items are very very extensive and large and long our overall and general vast vast majority of those have shifted to the right.
Either because of one or the other or multiple.
Winds that I described earlier in general there are some level of Sustainment orders.
That what we call it a little bit perishable. So if you don't have.
The ability to provide products or secure those orders that they will be reduced or may not come back you.
You may not recover from that.
The dollar amount of that the extent of that is difficult.
To quantify specifically however, we have a very large installed base and we believe that over time, that's going to work itself. Its way out and we're also as you know developing new generation solutions that helps us.
Generate new demand so I would say in general majority has shifted to the right.
One way or the other some could be considered perishable that may not be recovered primarily because of just time disclose by.
Related to the some of the Sustainment orders.
Great and all of that $100 million was there any specific.
Contract concentration such that like there might have been like a very large raven order or very large switchblade 300 order that.
You anticipated or would you say that it was like evenly distributed.
It wasn't.
Abnormally large relative.
During normal.
Contracts.
Louis So well it depends on the product line specific because in certain categories. We have a lot of different variety of things that we offer so small UAS across.
Has the board Puma parts late Raven parts in various different components that goes into designing the sub systems on our tactical missile systems in other product lines, primarily of Switchblade 300 600. Those are the two primary drivers of our revenue for Switchblade and tactical missile systems.
I'd say those are the primary ones, but there's not one single specific opportunity or product because we use these advanced.
Processors in semiconductor components across our entire product line. So if there's a shortage of a specific chip or semiconductor component.
More than one product of ours in general.
We've taken a number of actions to address that like I said by even swapping components and redesigning the boards.
We've done gone through other sources, we have bought in advance.
We are exhausting all of the possibilities that is in our control, but there are certainly large macro level headwinds that we can't control.
That's the reason for the adjustments that we made in our guidance overall, though.
Tell you that our 90% visibility to the midpoint of our guidance and a very strong backlog $252 million gives us confidence that we're going to be able to execute this year, but the situation is very dynamic things change on a daily basis.
Thanks, Thanks Mohit.
Youre welcome Louis.
Thank you and Thats a reminder to ask a question you will need to press star one on your telephone again that is star one.
Our next question is from Tien Kubacki of Alembic Global your line is open.
Yes, thanks, guys.
One or two follow ups.
There's a lot of people talking about the potential for a full year continuing resolution for fiscal 'twenty. Two so we just don't really kind of budget.
So in light of that.
We're halfway through your fiscal year should we how are you guys thinking internally about fiscal 'twenty three just directionally.
Is it reasonable to keep it kind of flat year over year, I don't know, maybe even down considering the lack of visibility on the budget and the supply chain.
The right way to think about that.
So Pete.
Obviously I'm not an expert in predicting the government is the continuing resolution situation I will not speculate on that but what I can tell you is that we believe that based on the current environment and based on the visibility in the backlog and the.
The visibility, we have within our customers and markets and opportunities and our operations that were confident about our ability to execute and deliver our fifth consecutive year of growth this year.
And we are a growth company the demand for our systems and solutions and our long run remains strong we believe that our tactical missile systems is disrupting a very multibillion dollars large market opportunity, which we're just at the beginning of that and our and the UAS jumped 20 system.
Right.
Sort of presents a very large short term and long term growth opportunity for our business and our company.
No.
And then of course long term, our small UAS as well as our <unk> business.
Sort of present large large step function.
Up growth opportunities for us we are a growth company. We believe we can grow and we believe are the demand for our solutions long term is going to stay strong and we will provide you more updates on fiscal 'twenty three.
When the time comes close to that on our fourth quarter.
Okay last one for me on <unk>.
UAS.
I think you said increment one award could be could be soon this is correct me if I'm wrong, but for increment. One is that is that a competitive down slapped or all three of.
Competitors getting award for kind of further refinement.
That's a great questions Pete I'm glad you asked the question because I.
Alluded to that in my remarks, which was we have submitted our proposal to ft UAS increment one and.
And come and one is strategically very important because increment one sets the stage for the future program of record acquisition plans and requirements.
The customer initially indicated to us that they will be they have not determined whether theyre going to awarded to one only sole source to one vendor or multiple vendors.
We believe we are a very strong position, we have submitted our proposal for that and we like our chances and our.
Our profile for success. There. However, there is still work to be remained it is a very large opportunity theres lots of competitors that's competing for that.
And we remain committed to making sure that we win and that opportunity because we believe our solution is extremely compelling and extremely differentiating compared to all the other options on the table now the reason why increment. One is important is because that sets the stage for the government and the U S army to inform its fuel.
<unk> deployment and acquisition planning and while the dollar is small for income in one.
Strategic important is significant.
Okay. Thanks for the color I appreciate it Youre welcome.
Thank you and there are no further questions on queue do you have any.
Closing remark.
Yes.
No. Thank you were ready to wrap up the call we are ready to wrap up the call. Operator. Thank you all for your interest in Aerovironment and we look forward to.
Talking to you again in the near future and happy holidays.
Thank you and ladies and gentlemen. This concludes today's conference call. Thank you again for participating and look forward to speaking with you again next quarter you may now disconnect.