Q3 2022 AeroVironment Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Arrow viral Ben to fiscal year 2022 third quarter conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session.
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I would now like to hand, the conference over to Joe Machida Balan. Thank you. Please go ahead Sir.
Great. Thank you and good afternoon, ladies and gentlemen, welcome to Aerovironment for fiscal year 2022 third quarter earnings call.
This is jonna Teeter Balan senior director of corporate development and Investor Relations for Aerovironment.
Before we begin please note that certain information presented on this call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
Forward looking statements include without limitation any statement that may predict for kit 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 phrases with similar meaning.
Forward looking statements are based on current expectations forecasts and assumptions, which involve risks and uncertainties, including but not limited to economic competitive governmental and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward looking.
Yeah.
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 a 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 March three 2022.
The company undertakes no obligation to make any revision to any forward looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after this conference call.
Joining me today from Aerovironment, our chairman, President and Chief Executive Officer, Mr. Wahid Nabavi.
And senior Vice President and Chief Financial Officer, Mr. Kevin Mcdonnell.
We will now begin with remarks from Wahid the lobby.
Thank.
Thank you Joanna.
Welcome to our fiscal year 2022 third quarter earnings Conference call.
I'll start by summarizing last quarters performance and discuss recent achievements.
Next Kevin will provide a more detailed summary of our financial results after which I will follow up with a discussion of goals for the remainder of fiscal year 2022, before Kevin genre and I take your questions.
Let me emphasize a few key messages, which are included on slide number three of our earnings presentation.
First aerovironment like many other businesses in our industry faced continued headwinds last quarter as anticipated, notably with regards to supply chain constraints, the federal government's continuing resolution and tighter labor market.
Second that said third quarter results were largely in line with our expectations and we are maintaining our previously stated guidance for fiscal year 2022.
Historically, our fourth fiscal quarter has been our strongest and we expect that trend to continue this year.
Third we continue to make strides in reducing costs, managing working capital and increasing operational efficiency during this challenging period.
And fourth with a solid backlog and multiple expense reduction actions, we're positioned to deliver a strong fiscal year 2022 performance and even better performance in fiscal year 2023.
Before going through these themes in more detail, let me summarize our financial results for the third quarter.
We delivered revenue of $90 $1 million compared to $78 $8 million last year a 40.
14% increase year over year.
The revenue growth was primarily due to increased sales in our medium unmanned aircraft systems and unmanned ground vehicles segment.
This along with other organic and acquisition led increases offset the negative impact from lower small unmanned aircraft systems product line shipments, which we had already anticipated.
We ended the quarter with a backlog of $226 million compared to $252 million in Q2 with wins tempered due to the ongoing continuing resolution.
Despite the lower backlog, we have higher visibility to meet our current fiscal year guidance.
Further we're seeing additional contract opportunities both here and abroad that are helping that lay the foundation for growth in fiscal year 2023.
Gross profit for the third quarter was $21 4 million a decrease of 25% year over year.
Gross margin percentage decreased to 24% from 36%, reflecting a heavier mix of service revenue.
We're not content with this margin performance and we will touch on some of our cost savings initiatives in a moment.
Net income for the third quarter was breakeven or $0 per diluted share as compared to net profit of <unk> 2 million or one cents per diluted share for the third quarter of fiscal year 2021.
As I noted earlier, we're continuing to deal with the issues discussed on our last earnings call, but I would like to provide an update on these dynamic conditions.
First and foremost our supply chain constraints, which have impacted product shipments and the company's underlying results.
The overall situation has not changed materially as certain areas of recovered while others remained challenging Gabon.
The bottom line is that we're having difficulty getting certain components and the quantities or lead times that we would like despite the uncertainty we're attacking the various supply chain issues in every conceivable way to improve order fulfillment and ensure customer satisfaction.
This is a work in progress, but we took several steps in the quarter. These.
These steps include developing new tools to help us with marketplace component visibility.
Preordering material when appropriate.
Paying additional logistics expenses, where necessary and working with our suppliers under long term agreements to consolidate demand.
Not surprisingly this disruption is negatively impacting our working capital, including higher inventory levels. However, we believe such near term costs will result in better revenue visibility along with expanded margins as prices and lead times stabilize.
Last quarter I also spoke about hiring constraints and a tight labor market with continued which continues to impact our ability to recruit top talent in certain engineering disciplines.
While this has improved there are still gaps in staffing, particularly and the engineering arena.
In response, we have increased our use of select outsourced talent firms, which are near term have enabled us to achieve our goals.
At the same time, we remain focused on managing our general and administrative expenses, which includes reducing head count and non core functions.
During the quarter, we initiated cost savings actions totaling more than $10 million of annual savings in both head count and facilities footprint.
In summary, we're taking an active approach to ensure we can achieve our future growth objectives, while operating our business efficiently.
Lastly, the continuing resolution and Washington continues to impact decision, making on projects and contract awards.
We're closely monitoring the situation and are hopeful that our budget will pass soon.
Nevertheless, our products and what programs are prioritized in the 2022 defense authorization act, reflecting sustained demand.
While the company continues to cope with it with headwinds and check changing industrial conditions. We are confident in our ability to meet our previously stated guidance.
Our recent acquisitions are performing well and we're taking multiple steps to manage our business efficiently and this challenging environment.
Even though challenges persist we believe aerovironment is positioned well to capitalize on the long term growth potential and value creation opportunities presented by our unique portfolio of intelligent multi domain robotic systems.
Let me briefly comment on the significant world event that is currently unfolding in Europe .
We at Aerovironment are truly saddened by the Russian invasion of Ukraine.
Our Hearts go out to all those impacted by the ongoing crisis, and especially the citizens of Ukraine, who are heroically defending their nation against a superior force.
Moreover, this event is a stark reminder, that our country and our allies need to be prepared to defend ourselves against such unpredictable and unreasonable authoritarian regimes.
Our family of Loitering missile and other products are ideal and helping defend against such current and future aggressions and we stand ready to assist our country and our allies around the world in any way necessary.
Now before turning the call over to Kevin I would like to provide some updates on current developments within each of our product lines.
I'll start with our small unmanned aircraft systems or S. UAS product line, our largest franchise.
As discussed above this segment's revenue has declined this year driven primarily by lower domestic demand.
We believe this is due to both the continuing resolution environment and the Army's focus on the next generation of small UAS, which we expect will be competed in the next few years.
On the other hand, our Puma and Raven systems are benefiting from enduring demand overseas.
As an example, we recently booked two international orders from New European and Asian allies totaling nearly $20 million.
To address the weak domestic demand and position the franchise for continued success, we're investing in developing new capabilities for our platforms, especially those that allow us to leverage our installed base of tens of thousands of units across the globe, while competing against near peer adversaries.
On this note, we recently announced the launch of our I 45 night Gamble, which has seen strong interest from customers.
We're also excited about the enhanced sensor to shoot our capabilities, which are achieved by integrating our small UAS products with our tactical missile systems products.
We continue to allocate a healthy portion of our R&D investment to realize our future suas solution roadmap and look forward to sharing additional developments over the coming quarters.
That brings me to our tactical missile systems, or Tms product line, where we continue to see strong demand for our solutions, both domestically and internationally.
We believe there are growing opportunities for Tms products to replace traditional munitions and ground air and sea applications, especially with our new and larger Switchblade 600 variant.
Deliveries of the first international order for Switchblade 300 are expected to take place. This month, reflecting increased interest from international customers for this innovative technology.
Additionally, we are actively engaged with multiple international customers.
You have both the interest and the need for switchblades unique capabilities.
We recently met with the U S export authorities, who support enabling our allies with our switchblade family of loitering missiles.
In addition, we recently introduced the Switchblade 300 sensor to shoot a solution, which enables operators to instantly and seamlessly transfer target coordinates from our small UAS to switchblade loitering missile systems.
By implementing this solution, we're able to provide end to end interoperability that significantly reduces the cognitive load on soldiers handling the processing evaluation and dissemination or Ted of our UAS data.
The Switchblade 300 sensor to shoot our solution includes everything needed to quickly update mission planning applications with the sensor suite of software.
Target coordinates are instantly transferred from our small UAS to Switchblade 300, creating an automated mission plan and launch sequence with no chance of data entry error.
Upon launch the Switchblade 300 can autonomously navigate to the designated courted position, allowing operators to match whole motion video from both assets to ensure a positive identification of the target.
Finally, our small UAS provides overwatch that can verify mission success.
The Switchblade 300 sensor to sugar solution builds on Aerovironment is commitment to deliver innovative streamlined interoperable solutions that elevate the warfighters situational awareness reduce engagement timelines and cognitive load and increased mission success and operational safety.
Further this solution demonstrates how interoperability between our different product lines can lead to better customer outcomes and builds upon our prior integration of the switchblade, what the jumped 20 medium UAS, thus expanding the breadth of our capabilities available to our customers.
I will now move to our medium unmanned aircraft systems or any UAS product line.
As previously announced we submitted a jumped 20 proposal for the U S Army's future tactical UAS or ft, UAS increment, one and more recently increment too.
This contract serves as the proving ground for our technology by placing a half a dozen jumped 20 systems in the hands of the U S Army combat brigades for testing.
We look forward to hearing back on this award any day now.
Assuming all goes well, we believe our win on increment, one will put us in a favorable position to win increment. Two later this year, which could be worth up to $50 million of new contract value.
As a reminder, the fts program.
In aggregate is expected to be valued at over $1 billion over a 10 year period. After a full testing is complete.
The U S. Army's proposed fiscal year 2022 budget called for over $140 million of funding for advancing this potential program of record.
In the meantime, we're submitting proposals to U S allies across the globe and are upgrading our jumped 20 with a new auto pilot to improve its ability to operate in environments with limited GPS availability.
We currently have several rfps being evaluated by European and Middle Eastern countries and have conducted demonstrations for numerous U S allies overseas.
So far we have built a healthy sales pipeline since this acquisition and expect first awards from these international efforts in fiscal year 2023.
It's exciting to see the level of interest or jumped 20 systems have generated with our international customers and install base validating a key synergy of the acquisition.
Moving to our unmanned ground vehicles or UGG product line the business is performing well.
We have seen strong customer interest, especially in Europe , and the southern Pacific.
And we're continuing to position the business to compete for domestic programs over the coming years.
Further our team has been working to expand the market opportunities and chemical biological radiological nuclear or CB, Oran and tactical use cases.
We are pleased with the expanding interest in our UGG products and believe in the solid value potential for our shareholders.
Within our Haps product line, we continue to move ahead and designing the next generation aircraft under the terms of our five year Master design and development agreement with Softbank.
As we said last quarter, we're progressing with phase II 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 <unk> opportunities that can leverage <unk> unique capabilities.
And finally, our Mcqueeney works advanced solutions group continues to develop new applications and autonomy and artificial intelligence.
In the quarter, we secured multiple new programs to advance the autonomy and swarming capabilities of a these existing products.
One of these programs Leverages technology from a project he ISG acquisition to automatically detect and classified targets before transmitting target coordinates to a swarm of switchblades.
As a reminder.
Our ISG team is a leader in the development of AI enabled computer vision machine learning and perception of autonomy technologies.
We're also a provider of related autonomy and computer vision services to U S government customers.
We're excited that our <unk> acquisition is bearing fruit and look forward to creating further value in our core products through these advanced technologies.
In summary, we're taking the steps within our control to manage the global headwinds impacting our industry and company.
We've had to make some difficult decisions in the quarter, but believe these decisions are better positioning us for even stronger growth in the years ahead.
Ed.
While there is more work to be done our portfolio of intelligent multi domain robotic systems provide a unique competitive advantage for our company, which should generate long term shareholder value.
With that I would like to now turn the call over to Kevin Mcdonald for a review of third quarter financials, Kevin. Thank.
Thank you Wahid today I'll be reviewing the highlights of our third quarter performance during which I will occasionally refer to both our press release and earnings presentation available on our website.
Revenue for the third quarter of fiscal 2022 was $90 $1 million, a 14% increase from the prior year's comparable period.
<unk> five of the earnings presentation provides a breakdown of revenue by segment for the quarter.
Our largest segment during the quarter was small UAS with $24 4 million of revenue down from last year's $55 million in revenue.
Reiterating what Wahid said the client in small UAS. The small UAS business was primarily driven by reduced U S. Dod spending while international demand continues to be consistent with historical patterns. We expect the demand for small UAS for the Dod.
Two continued below historical levels in the near term.
Our acquired medium UAS segment had another solid quarter with revenue of $21 2 million a small increase over the second quarter. Most of our medium UAS revenue was classified as service revenue.
We anticipate growth in this segment to be in the form of product sales as.
As what Wahid indicated we are well positioned for the Army's FTE UAS program and our international pipeline for the jumped 20 continues to build.
Our tactical missile systems business, our Tms segment contributed $18 6 million of revenue during the quarter Tms continued to be impacted by ongoing supply chain issues in Q3, and we expect these issues to continue at least for the remainder of the fiscal year.
But to repeat what he said we are seeing an increased opportunity for international international sale of our Tms products revenue from the other segment, which includes haps and our acquired tell Robin progeny ISG businesses.
Increased year over year to $26 million versus $8 6 million in fiscal the fiscal 2021 third quarter. The increase was primarily a result of revenue from the acquired progeny of ISG and <unk> businesses.
Turning to gross margins.
Five of the earnings presentation shows the mix of product versus service margins service revenue sorry, our mix of product and service revenues is a major factor in our overall gross margins for Q3, we saw decline in the mix to 47% product.
From 58% product in Q2 at 74% in the prior year third quarter for the full year, we are tracking towards a 55% product mix down from our original expectation of 60% and below our historical 70% level.
Despite this negative mix trend our guidance remains unchanged as when he indicated in his remarks.
Slide six of the earnings presentation shows the trend of adjusted product and service gross margins, while slide 712 reconciles the GAAP gross margins to adjusted gross margins, which exclude intangible amortization expense and other noncash purchase accounting items.
I'll now speak to our adjusted gross margins.
Overall, adjusted gross margins for the quarter were 29% down sequentially from 39% in the second quarter of FY 'twenty two the two primary factors in the lower adjusted gross margins are lower product mix as product revenue traditionally has higher gross margins than our service revenue and lower.
Product gross margins as a result of lower small UAS sales mix.
Adjusted product margins for the quarter were 37% versus 48% in the second quarter, reflecting the product mix shift I just mentioned.
However for the remainder of the year, we expect to see adjusted product gross margins to be in the mid to low <unk>.
In terms of adjusted service gross margins. We also saw a decrease of 23% in the third quarter versus 27% in the second quarter of the year the service margin decline.
Sequentially and year over year reflects the impact from our acquired medium UAS cocoa business, which has lower gross lower margins than our traditional service businesses.
We are expecting adjusted service margins to end up in the mid Twenty's with a full fiscal 2022.
Next turning to operating expenses.
SG&A expense for the third quarter was $22 5 million and includes intangible amortization and acquisition related expenses of $4 6 million compared to just <unk> 7 million last year.
Excluding intangible amortization and acquisition related expenses SG&A for the third quarter was $17 9 million or 20% of revenue compared to $12 2 million or 15% of revenue in the prior year period. The increase was primarily a result of added expense from the three acquisitions, we completed over the <unk>.
Past year year to date, SG&A, excluding intangible amortization and acquisition related expense was 18% of revenue, we expect SG&A as a percentage of revenue to be 17% for the full year again, excluding the intangible amortization and acquisition related expenses.
R&D for the third quarter was 14% 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.
At this point I'd like to take note that we took several cost reduction measures during the quarter to reflect current business conditions. This includes head count reductions the facility consolidation, we incurred some one time costs and other nonrecurring expenses in Q3 of $1 5 million impact $1.5 million impacting both of cost.
The goods sold and operating expenses. These costs will continue into Q4, but had been included in our guidance.
Looking at the bottom line, our GAAP GAAP net income for the third quarter of fiscal 2022 rounds to $0.00 per diluted share compared to net income of $1 2 million or one set for diluted share for the third quarter of fiscal 2021, while the year over year difference wasn't significant it.
A decrease of $33 5 million or operating income driven in large part by the increase in intangible amortization related to our acquisitions.
During the quarter, we also incurred $1 5 million of additional operating expenses related to cost savings initiatives as I. Just mentioned this was largely offset below the operating line by $15 4 million, a $15 $4 million tax benefit driven by a combination of our year to date and projected full year pre tax losses.
And R&D tax credits.
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 of 32 for the third quarter of fiscal 2022 versus 14 cents per diluted share for the third quarter of fiscal 'twenty one.
The difference between GAAP and non-GAAP earnings reflects acquisition related expenses and intangible amortization, we have not added back one time costs related to the cost saving actions expense during the quarter.
Turning to the balance sheet total cash and investments at the end of the third quarter was $100 7 million, which is slightly up from the second quarter of this fiscal year.
We continue to have a strong balance sheet with over $100 million of cash and investments and $100 billion working capital facility.
Next 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 4400 $40 million to $460 million revenue.
Our revenue guidance range is 95% our funded backlog.
At the end of the third fiscal quarter of 2022 was $226 $3 million.
Now I'd like to turn things back to what he.
Thanks, Kevin.
Before turning the call over for questions. Let me just reiterate a few key points from earlier today.
With 95% visibility to the midpoint of our previously stated guidance, we are reaffirming our guidance for fiscal year 2022 as follows.
Full year revenue between $440 million and $460 million.
Net loss from continuing operations between $12 million and $8 million.
Adjusted EBITDA between $59 million and $65 million.
Diluted loss per share between <unk> 47.
<unk> 33.
And non-GAAP diluted earnings per share is forecasted to be between $1 23, and $1 37.
While facing the ongoing challenges caused by our supply chain constraints, the continuing resolution in Washington, and a tight labor market, we have and will continue to aggressively reduce costs manage working capital and improve aerovironment for long term growth profile.
While I am well.
While I'm proud of our team and the progress shown in tackling the various macro challenges I'm also excited by the many opportunities which lie ahead.
Given the potential ft UAS program win the solid performance of our recently acquired businesses and expanding demand from overseas customers. I believe aerovironment is on the right path for growth, which will yield improved financial and operational results.
That means better margins and higher cash flow as well as an even larger international presence.
We believe in the future of Aerovironment and we're investing in leading edge technologies that will accelerate the top line and provide four years of solid performance.
So as we approach approached the end of fiscal year 2022, I speak for the entire team here at Aerovironment.
Our resolve to serve our customers to the best of our ability to capitalize on new market opportunities and ensure the returns that our investors have come to expect.
And with that Kevin and John and I will now take your questions.
Thank you Sir.
As a reminder to ask a question you would need to press star one on your telephone to wood.
Are your question press, the pound key or the hash key.
Due to the interest of time, we ask that you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
I show. Our first question comes from the line of Ken Herbert from RBC Capital markets. Please go ahead.
Hey, good afternoon, Wahid, and Kevin and John how are you.
Wonderful Ken good to hear from you how are you.
Thank you very good Hey, Wahid, just a first question.
Can you provide any more color on the.
Expected timing of the S F T UAS con.
Contract announcements and what assuming you're successful with the assuming you're successful with the.
With increment, one what that could contribute to this year, if anything but I guess more importantly to fiscal 'twenty three.
Sure Ken So the U S. Army has basically told us that they are planning on awarding that contract and make an announcement.
<unk> in our fourth fiscal quarter right now so we're hopeful that by the end of this quarter, we will have that outcome.
Basically announced and communicated.
That's for increment one fairly soon after that the Army also plans to award increment too.
Whoever wins increment one the the probability of being successful winning increment two obviously increases which is good for US and then that also increases the probability of success for the longer term program of record acquisition. If it were to become a program of record.
So in terms of the actual award we expect that to happen sometimes in this quarter.
And in terms of contributions we may recognize a small amount of revenue for that in fiscal year 'twenty two this fourth quarter.
But majority of that most likely will be in the next quarter.
And that's primarily predicated by how fast our customers can move and being able to.
I assume deliveries or accept deliveries and deploy the systems out there. It is a very large strategic opportunity that we're very focused on and we're so far engage with the U S. Army very actively on a regular basis and we hope to provide you with more updates in the near future.
Okay. That's helpful and as a follow up what's the situation currently in eastern Europe . There is some speculation about reinstatement of maybe <unk> accounts.
If anything have you seen.
That situation in Europe impacting your business today, or how should we think about that to potentially impact the business.
In fiscal 'twenty three.
Sure So Ken the.
Recent events in Ukraine in Europe .
Obviously.
It is very heartbreaking and are hot.
Our hearts and minds and prayers go to the Ukrainian sit.
Citizens and others at the same time the solutions that we have developed such as Switchblade 300, 600 jumped 20 in our small UAS is perfectly designed and suited for those types of conflicts, we truly believe that our switchblade family of loitering missiles.
Could be a game changer literally a game changer for they were screaming Ukrainian military.
The ability to shoot these things at very easily and identify target and designate them automatically and take them out and disable them or destroy them with no collateral damage is absolutely phenomenally well situated for that type of a conflict.
In terms of a <unk> budget and account historically, we have benefited from that during the conflicts in the middle East and Afghanistan.
We use historically received significant amount of funding for both our small UAS and Tms as a result of that it.
It is not clear to me now whether that is going to happen again in the case of Ukraine. If it does I believe that would be a positive.
A contributor to our business and even besides that I do believe that all the activity that's going on right now is sort of becoming a wakeup call for a lot of our allies in Europe as well as the U S military that systems like Switchblade and jumped 20, it could be extremely effective and vital to these types of conflicts.
In the future.
Great. Thanks, Paul.
You're welcome Ken.
Thank you I show. Our next question comes from the line of Austin Moeller from Canaccord. Please go ahead.
Good afternoon Wahid.
Just my first question here.
The last time, we spoke.
I was wondering if there was any timing around.
When do you think the supply chain component Herman issues might be resolved.
You guys have any better visibility into that now relative to the last quarter.
Hi, Good afternoon, Austin, Great to hear from you at the the short answer is that we have some visibility to the best of our abilities and we're taking a lot of actions related to the supply chain constraints and I mentioned, a few of them on my remarks, but it is an ongoing effort.
And challenge on a daily basis, and some areas, we have seen improvements and in some areas. We have seen a lack of improvements.
I tend to believe that those challenges will continue into next fiscal year of ours and I don't see how all of those issues are going to go away within the next three to six months I tend to believe that while some areas have shown some improvement overall the situation is still existing.
We've taken an enormous amount of effort to address many of those and I think we've done a.
Credible job of addressing the issues that are out there working with our suppliers.
And how that could be mitigated, but you know we do this on an ongoing basis, we evaluate the impact due to this and also it there may be some issues related to the Ukraine situation that could cause this in some ways to improve by putting a priority for defense acquisitions and supply chain.
But also made negatively impacted because of the global supply chain constraints in general.
<unk> had ongoing challenge that I see it continuing into next fiscal year for us.
Okay. That's very helpful and just a follow up there so say that.
Some countries in Europe wanted to procure some switchblades could you potentially prioritize using.
Components for Tms relative to some other.
Duct lines, just to get some shifts out faster.
Yes, we could there's there's multiple ways that we can address that potential new increased demand first and foremost we have some inventory within our U S defense got with all the defense customers themselves. So U S. Military can provide some of those directly to those customers and.
Wait for us to backfill there.
Needs and their supply from Aerovironment in the next few months number one number two we already are working all of our supply chain.
Avenues and relationships and and.
And suppliers to see if we can get more of those components that are in high demand that could be useful for those needs and third another key item in here as the U S Department of defense had always activate a higher priority for.
Military or act of war type of situations that could put us and many others defense contractors on the higher priority what the suppliers fundamentally our volumes in some of these areas are not that big relative to the global demands and volumes for these microprocessors and chips. However.
If the U S D enacted.
Such a priority on it it'll give us priority within the suppliers and the whole global supply chain in general. So there are at least three ways that I can think of that we're actively working all three if there was to be a stronger demand that we can address that.
Excellent fantastic color when he.
You're welcome Austin.
Okay.
Thank you I show. Our next question comes from the line of Brian Rotenberg from Imperial Capital. Please go ahead.
Yes, thank you very much.
First question is just helping us understand your revenue visibility going into the quarter you saw.
<unk> supply chain issues, continuing resolution delays like that.
What is your visibility I know you have great backlogs and things like that do you have the supplies in place right. Now you have the orders in hand to ship in this fourth quarter.
Brian . Thank you for the question and the short answer is overall, we as I said on the comments that we feel confident about our ability to achieve the reaffirmed guidance that we provided based on the.
Variables and the facts and the conditions that we see today there are several reasons as to why number one we have a visibility, which we referred to as our visibility for achieving the midpoint of our guidance, we're about 95% visibility to the midpoint of our current guidance on revenue.
And that compared to historical levels, that's pretty much in line with it and maybe to some extent I'm slightly better number two we have a strong backlog that contributes to that backlog.
That visibility and three is we have already started this process internally with suppliers are.
Are there still some risks absolutely there always has been and there will continue to be as the quarter goes on but overall based on all the indicators that we have and based on all the factors that we see we believe that we should be able to achieve our guidance and as we confirmed today for the full fiscal year <unk>.
Fourth quarter.
Great.
As a follow up on a slightly different subject if I can.
In terms of you.
You sell to 50 countries roughly have you sold to Ukraine in the past or sold to.
Turkey that selzer, Ukraine I didn't know if there was any direct exposure with your your.
Sure.
Systems right now.
Yeah, So Brian .
Oh, I'm not able to comment on any specific country for sensitivity reasons, what I can tell you is that.
Absolutely positively majority if not most of the European countries.
Our western European Eastern European the Baltics, the Scandinavian middle Eastern Northern African countries are our existing customers and that less continues to grow.
So that's number one number two.
Given the fact that we already do business with 50 plus countries around the world and have a very large installed base helps us execute our strategy and provide more of our products and portfolio to various countries around the world. So we generally feel pretty good about that because our installed base and customer base is very robust.
It's very broad.
Probably unmatched in the industry and menu aspects of it internationally and it's actually one of the strong seasonal environment. We're very fortunate to have a diversified product portfolio diversified customer base geographically as well as different types of customers and different services of the military Army Marines Navy.
The Air Force et cetera.
Thank you.
Welcome Brian .
Thank you.
As a reminder to ask a question you would need to press star one on your telephone to withdraw your question. Please press the pound or hash key. Our next question comes from the line of Christopher <unk> from Baird. Please go ahead.
Hi, Good afternoon, Wahid, Kevin and Joe Thanks for the time.
Good afternoon.
Uh huh.
Just sort of piggybacking on Austin's first question I'd like to double click on a comment you made regarding the supply chain difficulties you're experiencing.
Some areas are better and some are worse.
Could you sort of speak to the specifics as best you can as to how the situation has changed from last quarter.
Sure.
So generally speaking because our systems are extremely.
Innovative in terms of cutting edge technology, we use some of the most.
Highest performing Gpus as graphic processor.
The units and Cpus and other various types of semiconductor that addresses and they are in terms of the performance there on the most.
Extreme of whats referred to a swap size weight and power performance.
So.
These are the types of things that are highly highly in demand and many other industries. Besides ours.
So it is the cutting edge and the leading edge and based on that the supply in general for those systems are very very high globally. Besides just in the United States.
Historically, we've done a really good job of working with our suppliers to not only give them long term forecasts, but we've also provided them with requirements that they have to actually carry inventory based on our forecast.
And that's really helped us over the last 253 years considerably.
What's changed from last quarter to this quarter and some areas we see some improvement.
And those improvements or such that a supplier might have quoted as an X amount of weeks of lead time and as time has gone by they've been able to improve that lead time and in some cases that is actually erode. It. So net net I would say that there has been pockets of positives, but theres also some pockets of negatives or setbacks in that regard.
Overall, we've been able to manage that and it's a daily effort daily <unk>.
Activity too.
Address the issues that come up and to go away, it's a dynamic dynamic environment overall, given our forecast today and how we execute it so far we believe we are well positioned to achieve our full year.
Resolved that were taught what we discussed earlier, so again I'm very proud of our teams being able to execute on the third quarter and delivered the results that we expected and we believe that we're positioned well for not only the this fiscal year, but even of our fiscal year 'twenty three and beyond.
Alright very helpful. Thanks for that and just switching gears here.
Just switching gears here.
On the Labor front has your utilization of outsourced engineering services had a material impact on your margins and if so could you quantify the impact.
Brian I'm sorry, Chris.
Outsourced labor effort has had some effect.
Not very material in general, but has had some effect.
We don't typically break them down by specific drivers or contributors overall, there are certain areas that we could use outsides labors labors or engineering resources for some of the work, but some of it is very very high tech work, which requires a lot of training.
And knowledge transfer transfer, which we are very hesitant to do and it's not practical to do that easily. So overall, we've made progress on both fronts, bringing some outside outsourced labor in but also actually increasing our head count and hiring and so we've made some progress since last quarter, but it still remains a challenging environment.
Overall, the demand for the type of resources that were looking for primarily in you know autonomy AI guidance navigation and control Air Mechanical design Robotics engineering. These are the areas that we have.
Look for it and we have needs and the demand for those still remain to be very very high and competitive.
Overall.
Alright, great. Thanks, I appreciate the color.
Youre welcome Chris.
Thank you I show next question comes from the line of Louie Dipalma from William Blair. Please go ahead.
Wahid, Kevin and John a good afternoon.
Louie either.
Hi, can wahid can you discuss opportunities and the developmental progress.
The Switchblade 600.
You previously have discussed how there is some strategic overlap with the 600 and and javelin missiles amongst other types of missiles and.
And specifically the javelin missile as I've been in the news a lot as it relates to Ukraine. So I was just wondering if you could discuss at a high level the different types of end markets and applications you see for that 600.
Sure. So louie so far it's a strong belief of ours that a loitering missile such as Switchblade 300, or 600, and particularly Switchblade 600 is an ideal capability that today, the Ukrainian military and the other.
Our allies and neighbors in eastern Europe , Western Europe could absolutely benefit from and use.
As you know these carry similar warheads, and then and they have similar amounts of warhead capacity and payload capacity, but in terms of its other performance characteristics Switchblade 600 is extremely superior.
Being able to travel 50 plus kilometers.
<unk> not have to have the target on your visual site and then designated and then take it out. These are all the competitive compelling unique value proposition and Differentiators of Switchblade 600, which I believe makes it a superior weapon and missile system for the type of conflict that we see today and Ukraine.
Possibly in other areas all over the world. Eventually so we feel very good. This is something that we've been talking about and we believed in for years and years. That's why we invested in it I think our domestic customers see that as well and we're hopeful that with our latest engagements with the U S State Department and the Pentagon.
We will get more of their support to be able to export these store allies and thats really the key for us to be able to do that.
Again, one of the other things I want to mention movies that we have received the authorization as you know to export that to one country. The Switchblade 300, we had some very favorable and positive engagements with the U S State Department and officials from the U S Department of defense and the last quarter, where.
They are quite supportive of helping us.
Equip our allies with more of our Switchblade 306 hundred and then the next few months to come. Obviously this is going to take some time because the processes doesn't go it doesn't happen overnight, but we believe that those engagements is very positive in terms of encouraging us and giving us optimism that the U S military.
Harry and state Department is very much supportive of enabling our allies with this capability.
Awesome. Thanks, I hate that that's it for me.
You're welcome Louis.
Thank you.
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Ladies and gentlemen. This concludes today's conference call. Thank you again for participating and we look forward to speaking with you again next quarter you may now disconnect.
Thank you. Thank you.
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