Q4 2022 AeroVironment Inc Earnings Call

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Ladies and gentlemen, Thank you for standing by and welcome to the arerrow environment four quarter full fiscal year 2022 conference call. At this time all participants are listen only mode. After the speaker's presentation, there will be a question-and-answer session. Ask a question during the session. You leave the press Star one on your telephone. Please be advised that today's conference is being recorded for replay purposes.

Speaker 1: If you require any further assistance, please press start of zero. I would now like to hand the conference over to jonah tter bayen. Thank you, Please go ahead, sir.

Thanks and good afternoon. Ladies and gentlemen, welcome to aero vironman's fourth quarter and full fiscal year 2022 earnings call. This is jonah teter baen, Senior Director of corporate development and Investor Relations for aero environment.

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 one thousand nine hundred and ninety-five.

Speaker 2: Forward-looking statements include, without limitation, any statement that may predict forecast, indicate or implies 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.

Speaker 2: Forward-looking statements are based on current expectations, forecasts and assumptions, which involve risks and uncertainties including, but not limited to economic competitive, governmental and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward-looking statements.

For further information on these risks, we encourage you to review the risk factors discussed in air environment's periodic reports on Form 10-K and our other filings with the SEC, along with the associated earnings release and safe harbor statement contained thereit.

This afternoon. We also filed a slide presentation with our earnings release and posted the presentation on our website at avimc com in the events and presentation section.

The content of this conference call contains time-sensitive information that is accurate only as of today, June twenty-eighth, 20 and twenty-two.

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 aero varment: our Chairman, President and Chief Executive Officer, MR wahed nawabi, and Senior Vice President and Chief Financial Officer, MR Kevin mcdonneald.

We will now begin with remarks from wahhida lobby.

The lobby. Why arehe?

Thank you, joonnam.

Welcome to our fourth quarter in full fiscal year 2022. earnings conference call.

I'll start by summarizing last quarter in full fiscal year performance and discuss our recent achievements.

Then Kevin will provide a more detailed summary of our financial results, after which I will follow up with a discussion of goal for fiscal year 2023. before, Kevin John and I take your questions.

Let me emphasize a few key messages which are included on Slide number three of our earnings presentation.

First our team executed well during the fourth quarter, enabling us to meet our guidance for the year, despite continued supply chain constraints, elevated material costs and tight labor markets.

Second we're confident that fiscal year 2023 will be a solid organic growth year for the company, given our backlog and visibility for the year.

And third, the world has changed considerably since we last spoke. The war in Ukraine has broad increased focus to our most innovative solutions, including small U median, UAS and tactical missile systems.

We anticipate benefiting from strong and sustained demand from multiple domestic and international customers going forward.

Before I provide greater detail on these themes, let me summarize our financial results for the quarter and fiscal year.

We delivered fourth quarter revenue of $133 million, compared to $136 million last year and an increase of about 47% sequentially from $9 million in the third quarter.

For the full fiscal year, we achieved record revenue of $446 million compared to $395 million last fiscal year.

As previously discussed, our growth in fiscal year 2022 was primarily due to a higher sales of our median oas product line, as well as the impact from strategic acquisitions which more than offset lower shipments of our small o product line.

Gross profit for the fourth quarter was $48.6 million, compared to $59.7 million in the prior year period.

Speaker 3: And our gross margin decreased at 37% from 44% in fiscal year 2021.

This expected reduction primarily reflects product mix and the impact from ongoing supply chain and efficiency.

However our performance improved significantly from Q3% to 24%, and we anticipate this improvement to continue into this fiscal year.

We reported non-GAAP adjusted net income of $7.3 million, or 29 cents per diluted shair, as compared to $10.9 million, or 44 cents per diluted shair, for the fourth quarter of fiscal year 2021.

In summary, our results for the quarter were in line with our expectations and largely met our guidance for fiscal year 2020 -two.

Looking ahead, we're quite optimistic about our fiscal year 2023 and beyond.

We believe recent world events and demand drug dynamics will further enhance our ability to grow and deliver more value to our shareholders, even as we manage through continuing macroeconomic headwinds.

Since last quarter, we've continued to take steps to manage supply chain constraints in a tight labor market.

With regard to supply chain, we're now in direct contact with component manufacturers such as Intel and invidia, to improve material lead times.

We're also working directly with the office of the Secretary of defense to prioritize our raw material orders due to the Ukraine conflict.

Finally we've decided to buy inventory will ahead of our current forecasted needs to ensure stability of supply for this year and beyond.

While we expect supply chain constraints to persist through this coming fiscal year and even longer, we believe these additional steps in those we've previously taken will improve our ability to meet increasing customer demand for our innovative solutions.

In regard to tight labor markets, it's still a challenge to find and hire the top talent we need to support our continued growth.

In addition to the steps I outlined last quarterwe're reprioritizing certain development activities to ensure the most important and urgent programs get the resources they need.

That said, with the passage of the fiscal year 2022 defense budget, we now see some increased urgency in the? U's dunthese acquisitions and contracting for the remainder of the government's fiscal year.

This is a result of two primary factors currently in play.

First.

There is an urgency within the U's Department of defense to obligate the remaining funds on approved programs and task orders now that an omnibus budget is in place.

The government is no longer constrained by a continuing resolution and, at the same time, has approximately three months to finalize and fund numerous programs.

And second AeroVironment has received increased attention lately because of the relevance of our innovative solutions in Relations to the war in Ukraine.

Now before turning the call over to Kevin, I would like to provide an update on current developments within our individual product lines.

I'll start with our tactical missile systems product line, where we have experienced significant heightened interest recently, primarily due to the war in Ukraine.

Switch blade is highly relevant to the current conflict in Ukraine, given its unique advantages compared to any other weapon or missile system, including its longer range, significant loyering time on target precision strike capabilities and patented wave-off capability, to name a few.

In April , I met with the ukrainian ambassador and defense at the shape.

Since then, Ukraine has effectively used our Switchblade bodering missiles, which they have received through the U's Department of defense as part of the presidential drawdown orders.

Not surprisingly, Ukraine has asked for many more, and recent congressional legislation authorizing $4 billion of military humanitarian aid, signed by the President on May twenty-first, should help provide additional quantities.

While the timing of such task orders is still being finalized, we anticipate a significant positive impact to our fiscal year and beyond, given the? U's Army's plan to procure switch blades for the European theater, particularly within the NATO countries in Ukraine's proximity.

I'm also pleased to inform you that we have been successful at attaining the? U's government's approval to sell switch blade 300 and switch blade 600 to more than 20 of our allies around the world.

We are now fielding FMS and DC requests for switchplate 30.6 thousand from several allies seeking these innovative solutions.

We're also experiencing increased demand for the switch blade 300 sensitof sugar solution and our other small and medium UAS platforms, such as Puma Raven, was and the jump twenty.

Further we're seeing increased interest from industry partners, such as nortor Grumman, to develop additional variance of Switchblade for new and expanded mission sets.

In summary, all these positive and encouraging developments will take some time to mature and translate into orders and backlog.

We expect global supply chain constraints will soon remain our primary challenge in converting all this demand and to gain changing solutions ready to be shipped to our customers.

Overall we remain committed to assisting the? U's and our allies in Europe and elsewhere to provide, to prepare for threats and to combat them effectively.

We're proud of this Assistant we've already provided to the ukrainian citizens in defending their country this year and we expect strong double-digit growth in tactical missile systems in fiscal year 2020. -three.

Now let me turn to our small UAS product line.

As I mentioned last quarter, our domestic customers are focused on developing requirements and initiating new acquisition programs for the next generation of small UAS.

While we work with our usdu-with e customers on these upcoming programs, we continue to expand the adoption of our small dues within our growing international customer base.

As an example, last quarter we announced a $2 million order for our Puma systems for Ukraine.

Additionally, we recently donated over 100 of our quanttex weekon, unmet airraft systems and operational training services to the Ukraine Ministry of defense.

These qutex reconsistence are already performing lifefesaving missions for the ukrainian military.

We continue to invest in our small ua solution portfolio with the intent of breaking several new products.

To the market over the next few years.

These solutions are targeted to address both future U? sdo and expanded international customer requirementswith these R? D investments, we will also continue providing enhanced capabities Tore installed base of tens of thousands of systems globally.

Based on current trends, we believe our small Urs product line will grow in fiscal year 2023, primarily driven by an opttic and international demand.

I'll now move on to our median oas product line.

We continue to stay engaged with the's Army in anticipation of its future tactical us or F. to us and creimin one award.

While the U's Army has not officially awarded this contract to anyone yet, we believe aeroviamman is well positioned to win.

We expected an award announcement by now, but suspect that the award timing is being negatively impacted by the war in Ukraine, with the? U's dwithd resources allocated to more urgent contracting needs.

As a reminder, the us Army's fduus program in aggregate is expected to be valued at more than $1 billion over a 10 -year period.

We remain optimistic about this major opportunity going forward.

On the international front, we continue to engage with several countries who are interested in our jump 20 medium o solution.

Today we have provided proposals to multiple international allies in Europe and the Middle East.

We also remain the market share leader in the? U's socoms and euaas four programs.

While providing intelligence, surveillance and reconnaissance services with our jump 20 system.

Overall we believe our media UAS product line should achieve solid growth in fiscal year 2020. -three.

Regarding our unmet ground vehicles ogv product line, we're seeing strong customer interest in Asia and Europe and are actively working to expand into additional markets.

Some of this interest is related to the war in Ukraine, where our ugvdss are becoming more relevant with the need to remove mines and other explosive devices.

Similar to the overseas sales potential for the jump 20, we believe our UGV product line should continue to grow in fiscal year 2020. -three.

Within our H product line. We continue to work on the next-generation Sunglider solar aircraft under the terms of our master design and development agreement and DA with softank.

During the term of the MDA. Av has exclusive rights to design and manufacture sunglite, our solar house, and any of its feature variants, based on certain terms.

As was stated previously, the current phase of this partnership involves building a third aircraft, in performing additional flight testing, demonstrating longer duration flight and making progress towards a certification.

We are now in negotiations with stbank on the second tranche of funding to advance the next steps of sun glllider's commercial development, which we expect to generate between 25 million to $35 million in revenue in this fiscal year.

As we discussed previously, we have also been evaluating restructuring and financing options for half mobile.

In furtherance of this effort, AV sold at 7% minority sta this past quarter back to SoftBank, which already owned a 93% majority share of a JV.

We will now work directly with southbank.

Speaker 3: To fund the development and demonstration of solar powered HAPS.

Regardless of the sale, both companies remain fully committed to our partnership and realizing the market potential for delivering stratospheric deliment mitications services.

And finally, armccrady work's advanced Solutions group is actively engaged with several customers to develop next-generation autonomous, multi-domained robotic solutions.

Notably, we're now engaged with NASA's jet propulsion laboratory on a future diversion of deammara's helicopter. Following ingenuities' incredible success.

Additionally, this past March V ingenuity Mars helicopter and our toub engineers received the 2022 Collier trophy.

As a reminder, the Collier trophy is considered the most precedious industry award in the field of aviation.

We are very proud of our talented team's accomplishments and this incredible, history-making achievement.

We are very proud of our talented team's accomplishments and this incredible, history-making achievement, but we're not stopping there.

rteam is also working on future defining capabilities that enable our solutions to operate in highly contested battle spaces and the presence of heavy jamming and electronic warfare.

In summary, aerobriman is well positioned for organic growth, as we experienced continued robust demand for our portfolio of intelligent multi-domain robotic systems.

At the same time, we remain committed to actively managing the headwinds facing our industry and economy.

We're excited to continue building on this momentum to drive greater shareholder value in fiscal year 2023 and beyond.

With that, I would like to now turn the call over to Kevin McDonald for a review of fourth quarter financials.

Kevin. Thank you a he. Today, I will be reviewing the highlights of our fourth quarter and full year fiscal 2022 performance, during which I will occasionally refer to both our press release and earnings presentation, available on our website.

Overall our revenue the quarter was in line with expectations, despite continued supply chain headwinds. Adjusted gross margins reached a high for the year. Our adjusted EBITDA was solid and we also have some other positive income items during the quarter.

As waahhei outlined, revenue for the fourth quarter of fiscal 2022 was $132.6 million, a decrease of 2% from the fourth quarter of fiscal 2021 revenue of $136 million.

Speaker 4: Slide five with the earnings presentation provides a breakdown of revenue by segment for the quarter. Our largest segment during the quarter, with small as, with 59.2 million revenue. While this was down from last year's 70.9 million, it was the largest revenue quarter for the year for as, and included a $2 million FS peruma order for you Ukraine Ukraine, as what he D mentioned.

Our medium o segment had a solid quarter with $23.1 million of revenue. Most of our medium oas revenue as classified as service revenue.

Speaker 4: We anticipate growth in this segment in future periods to come from product sales, including the Army's fq program and international demand.

Our tactical missile systems, or TMS segment, contributed twenty-point nine million revenue during the quarter, compared to thirty-two point 39.2 million in FY 21. TMS continued to be impacted by ongoing supply chain issues.

Speaker 4: Our half segment contributed 13.1 million in Q4, a strong increase from seven point one million in the comparable prior year quarter.

Speaker 4: Revenue from the other segment, which includes our acquired teer Rob in Progeny ISG businesses, increased year-over-year to $17 million versus $3 million in fiscal the fiscal 2021 fourth quarter.

Speaker 4: Revenue for the fiscal year ended at 445.7 million as compared to 394.9 million for fiscal year 2020, onerepresent an increase of 50.8 million or 13%. And FY 22: we saw a shift in our product service mix from approximately 70% product revenue in fiscal 21 to 54% product in fiscal 2- twenty-twothis shift is larger, a result of the acquisition of our truourists in FY 2- 21, which is mostly service- mostly a services today, and also a decline in SUS revenue, which is mostly product revenue.

This had a significant impact on our adjusted gross margins as a result of the lower percentage of higher-margin product revenue.

Speaking of gross margins Slide five in the earnings. Presentation shows the mix of product versus service revenue for Q4. We saw an increase in the product mix to 56% compared to 47% in Q3 and.

But this is down from 71% in the fiscal year 2021 fourth quarter.

Slide six of the earnings presentation shows the trend of adjusted product and service gross margins, while Slide 12 reconciles the GAAP gross margins to adjusted gross margins, which excludes intadible amortization expense and other noncash purchas accounting items.

Slide six of the earnings presentation shows the trend of adjusted product and service gross margins, while Slide 12 reconciles the GAAP gross margins to adjusted gross margins, which excludes intangible amortization expense in other noncash purchase accounting items. I'll now speak to the adjusted gross margins.

Speaker 4: Overall adjusted gross margin for the fourth quarter were 40%, up sequentially from 29% in the third quarter of FY 22. this increase was a result of higher product revenue, including higher margin Suas product sales.

Adjusted product gross margins for the quarter were 49% versus 37% in the third quarter, due to the favorable product mix.

In terms of adjusted gross service margins, we also saw an increase to 28% in the fourth quarter, versus 23% in the third quarter of the year.

We ended the year with adjusted gross margins of 36%. We expect adjusted gross margins for next year to be in line with FY 22, with some improvement from product mix, but this improvement will be muted as a result of continued supply chain costs.

Next Turning to operating expenses. Sgna expense for the fourth quarter was 29: 21.9 million, down two point nine million from last year's fourth quarter. Sgna includes intangible amortization and acquisition-related expenses of four point three million in q4- fiscal 2022 and six point seven million for the fiscal of 2021 fourth quarter.

Excluding intangible amortization and acquisitionallyl expenses, SGA for the fourth quarter was 17.6 million, or 13% of revenue, compared to 18.2 million, also 13% of revenue, in the prior year period.

Speaker 4: For the full fiscal year 2022 SNA, excluding intangble amortization and acquisition rel expense, with 73.5 million or 16% of revenue, compared to full fiscal year 2021 of 56.4 million or 14% of revenue.

We expect SDNA expense, excluding intangible amortization, to be 15% to 16% of revenue in FY twenty-three.

Rd expense for the fourth quarter was 10% of revenue and 12% for the full year. Fiscal 2000 and twenty-twod Isa centage of revenue was in line with our idanceofelevenpercentto 12% for the full year. We will continue to run R? Nd the 10 percentto 11% range as we invest in new products and upgrades to existing products to meet the evolving needs of our customers.

Looking at the bottom line, our GAAP GAAP net income for the fourth quarter of fiscal 2022 finished a $7.3 million, or 29 cents per diluted share, compared to net income of 10.9 million, or 44 cents duted share for the fourth quarter of fiscal 2021.

Q4 net income benefited from a $6.5 million gain on the sale of our stake in the house mobile JB and equity investment income of four point four million, related to both the house mobile JV sale and other investment gains.

Speaker 4: However we did some catch-up on the tax vision during the quarter, resulting to the $15.5 million expense, which represented over 80% of our pretax income.

Speaker 4: For the full year of fiscal 2022, we generated a GAAP net loss of $4.2 million, or negative 17 cent preilued share, compared to net income of two thousandy-three, $3 thousand, or 96 cents per lued share. For fiscal 2021 .

The $27.5 million reduction net income was primarily due to a decrease of 53.2 million in operating income, which was largely the result of an increase in intangible amortization expense from acquisitions and other noncash purchus accounting adjustments of 29.2 million.

And a decrease in gross margin due to changes in sales mix mentioned previously. We also had increased interest expense of four point eight million and a increase in other expense of two million compared to FY twenty-one.

Speaker 4: The lower operating income and additional interest expense was partially offset by a tax benefit for the full year of 10.4 million versus a tax expense of 539 thousand in FY 21. also, the gains in the sale of the half TV equity stake of six point five million and the income from our equity meth investments of four point six million versus a loss of 10.5 million in FY 21.

In terms of adjusted EPS. Slide 10 of our earnings presentation shows the reconciliation of GAAP and adjusted our non-GAAP ut EPS.

The company posted adjusted earnings per diluted share of 30 cents for the fourth quarter of fiscal 2022, versus a dollar four per diluted share for the fourth quarter of fiscal 2021. We have excluded a 26 cents per share gain from the sale. Our half mobile JV equity stake in our adjusted EPS.

Speaker 4: Looking at the full year, the company posted adjusted earnings per diluted share of a dollar 25 for fiscal 2022, versus $2 in 10 cents per diluted share for fiscal 2021 .

Before moving to the balance sheet, I'd like to note that we have added additional visibility on our stock-based compensation expense.

Our adjusted EBITDA will now exclude stock-based compensation expense, which is more consistent with our peers and more representative cash flow. On Slide 14 of the earnings presentation, we have provided the historical adjusted EBITDA calculation for the last eight quarters.

Now turning to the balance sheet. Total cash and investments at the end of the year was 117.4 million, which represented a $16 million increase from the end of last quarter. This, with this increase, was a combination of proceeds from the sale of our interest in the half splowl with JV and operational cash flow.

In terms of working capital, we see inventories increasing while unbilled receivables should decline, So that working capital should remain around the same level for the next couple of quarters. However, we anticipate that inventories will continue to increase throughout the year because of increasing demand for our products and supply chain headwinds. That requires us to buy some inventory ahead of demand.

We continue to have a strong balance sheet with over $1 million of cash and investments in $1 million working capital facility.

I'd like to conclude with some highlights of our backlog metrics.

Speaker 4: Slide eight of the earnings presentation provides a summary of our current fiscal 2022 visibility. Our funded backlog at the end of the fourth quarter of fiscal 2022 was two hundred and ten point eight million dollars, and our visibility today is at 57% of the midpoint of our guidance range.

Now I'd like to turn it back to what heat?

Thanks keven.

Speaker 3: Looking ahead into fiscal year 2023, we have a healthy funded backlog and total visibility of 57%, as described on Slide number eight of our earnings presentation.

Additionally, given the increasing the global awareness and demand for innovative solutions, the U's government's urgency to spend 2022 appropriate funding and our continued management of headwinds, I'm pleased to share with you our guidance for fiscal year 2023, which represents another strong growth here for the company.

As summarized on Slide number seven of our earnings presentation. We anticipate revenue of between four or $9 million and $52 million in fiscal year 2023, representing double-digit organic growth, and net income of $11 million to $18 million, or 42 cents to 72 cents per diluted share.

We anticipate non-GAAP adjusted EBITDA of between $82 million and $92 million and non-GAAP earnings per diluted shair, excluding acquisition-related costs, amortization of intangible assets and other on-time expenses, of between $1 and 35 cents and $1 and 65 cents.

We anticipate about 60% of revenue in the second half of fiscal year 2023, compared to 40% in the first half, particularly as we benefit from orders placed at the end of the government's fiscal year and rapid turnaround shipments related to Ukraine.

As Kevin mentioned, fiscal year 2023 adjusted gross margins should end up an add or slightly above our fiscal year 2020 -two.

This is mainly driven by favorable product mix, higher volumes and some what offset by unfavorable impact of supply chain costs.

We continue to emphasize careful control of expenses and we expect to deliver adjusted EBITDA of between 16% and 18% of revenuewe expect internal R these investments to be about 10% of 11% of revenue in fiscal year 2020. -three.

While we actively managed, through the supply chain, material costs and labor market headwinds we discussed earlier, we are quite bullish about our potential for solid and sustained organic growth driven by increased global demand for our unmanned robotic solutions.

Given such dynamics, it is likely that our inventory levels will remain elevated in the near term, as we work to meet customer requirements and ship as efficiently as possible.

Before turning the call over for questions, let me just reiterate two key takeaways on which our investors should focus.

First.

Speaker 3: We met our revised guidance for fiscal year 2022, overcoming many challenges, including the pandemic, supply chain constraints, inflationary pressures, a tight labor market and the prolonged continuing resolution.

Speaker 3: As we enter fiscal year 2023, we will continue to work towards improved results that drive sustainable long-term value.

And second: the future looks bright for vironment.

Speaker 3: While we are entering fiscal year 2023 with a healthy backlog, we anticipate increasing orders in the quarters to come, driven by strong global demand across many of our platforms.

We're particularly encouraged by the growth anticipated within our tactical missile systems and medium us product lines.

Our products and services by and large enjoy strong bipartisan support in Congress and we anticipate several orders prior to the end of the government's fiscal year, with even higher shipments in calendar year 2020. -three.

An improving product mix should also increase gross margins going forward, leading to overall improved bottom line results.

I would like to again thank you, our employees, for their incredible hard work and focus throughout a very challenging year.

There's steadfast dedication to ARO bararment, and our innovative solutions have made us a leading brand in defense industry, not just in the United States, but all over the world.

I am proud of their accomplishments and the assistance we have been able to provide our military, Ukraine and our other allies during a very difficult time.

I'm also grateful for our long-standing shareholders, who support us and share our passion for our mission.

We are dedicated to making sure that our investors, as well as our customers and employees, benefit from everything we do in the years to come.

And with that Kevin, John and I will now take your questions.

thankyou as our minded. To ask a question, you'll need to press Star one on your telephone to withdraw your question. Press the pound cheief.

Please stand by with a bwithcjunior aspect.

Our first question comes from moss and moer. With kencord you may proceed.

Good afternoon. We'll heed kev in jonah and congratulations on getting the approval for the twentie glass. U's ice for switchpoint.

Thank you, marston the hausted.

So my first question is just essentially around that you talk about the backlog visibility for next year. We've got 20 -plus countries that have been approved now and if the bottleneck year is around the supply chain. So if, if the supply chain issues is, maybe there's less cryptocurrency mining or something and so there's more GPS availablei guess, how much visibility do you have per TMS into next year and could that change?

Sure Austin, So you're absolutely right that one of the gating factors for our fiscal 2023 will remain to be the supply chain constraints. I believe that the timing of the contracting is going to be resolved and address, sooner RA than later, our proposal. Activity for tech. Our switch blade and tactical missile systems and other products in general is as fairly healthy and strong, and we believe that it's also is going to represent a very long term growth opportunity. For ussupply chain remains to be the biggest challenge, in my view and as I said on my remarks, because we have the most innovative solutions that uses the latest, greatatest technology in terms of.

Ate those risks and make sure that we can deliver another growth here. We feel confident that we will, as I provided the guidance and it will be another double-dit to top line growth for us. But more importantly, we're going to hopefully also build a very strong backlog that we will benefit from in the years to come.

Great and just a follow up on that is: how does being in direct contact with like invididion Intel compared to having like a DX or a du order status newis that still potentially in the cards?

Yes absolutely So. The deal orders. We currently do receive themthe challenge with deal orders are from the? U sdud is that we're not the only ones who or getting those, and there are others who are also getting the du orders. So DX however, would be significantly, significantly a positive impactwe're currently working with the? U's Department of defense, the office of the second defense, directly on that. They are been very actively engaged with us. We're very, very frequentin communication with them, literally on a weekly basis.

And they've tried to mitigate many of those risks so far and they'll continue to do that in the future. However, a D X rated- or we have not received those yyet and we're still working on that- if that were to be the case, the situation could change significantly for us because that will put us what in front, the line, the number of orders in the U's D with these ecosystem that has that the receives a D X raining, get very, very minimal, extremely small relative to any other type of order. So that will obviously put us much higher in the pri ization list often.

Okay fantastic congresss and thanks for all the details.

Okay fantastic congats and thanks for all the details. Thank you often.

Thank you and, as a reminder, Please moveave yourself to one question, one follow-up. Our next question comes from Ken urbert with RBC. You may proceed.

You good afternoonthey can, I can, he can.

Why you- maybe just a follow-up on the previous question- can you quantify what you expect sort of a supply chain headwinds to be in fiscal 23 from a revenue standpoint?

Can it is a very, very fluid subject or topic and issue because on a regular basis, daily basis, the supply chain challenges change and in one direction or another, we they range from issues related to the microeronics, niconductors to components, but also- now it started to lately- have actually even gone into some of the material that we use in Composites. As you know, many of those material is oil based, So the issue and the issues with supply of oil and the prices of oil has affected the Composites.

Speaker 3: And I believe that's going to continue, going into fiscal year 23 and even calendar year 23 as well. In terms of the size of that for us, I mean it could be significant tens of million of dollars. Our ability to make product and deliver product remains quite strong, quite good, but it's really the two challenges that is related to contract have timing. How fast can the U's D, our allies can, move through the process of acquisitions and convert those requests and demands into actual contracts? And secondly, being able to secure the parts and material. Currently we have already for many, many months.

Placed at risk quarers for supplies of materials for supply chain. But since those are at risk they're at commercial rating, So they don't have a priority with our suppliers because we're buying those components at risk today unless they're a D D order associated with it that has a rating. So that makes it a little bit challenging. However, we expect this year to be another growth here, despite all those factors. I mean we've included that in our numbers. We already included the thought of supply chain head with into our guidance rate. That's right, and so we expect another grow issue as well.

Okay no, would imagine you effectively, or at least tried to derrisk the guide for 23 to reflect these headwinds, I guess. one other question: what do you expect in terms of timing- and I guess it's related, But as as the U's looks to rebuild inventories, perhaps of the switch plate 300, do you get a sense that those inventory levels will be completely rebuild and as the issue just about your ability to obviouslyess deliver those? And or what should you expect in terms of timing of the inventory restocking?

So the answer- the short answer can- is definitely yes. We see all the signs and signals from our customer, which we're very close. They didn't contact with that. The? U sdud is planning on replenishing all the inventory levels that they have preukraine war, maybe even higher. Maybe even higher because the efficacy and the relevance of our switch blates family of systems have been extremely positive, given the conflict that's going on out there in the usage of it.

And so, in general, that's one factor. The second factor that we should take into play also is that there are several, several countries.

Primarily in Europe that are all made requests bothte through F's and E C's cases for proposal and request for acquiring switch blade and some of our other small U a systems then meeting aware systems to. So I see it not only the demand from the? U's domestic D customers but also to fulfill and backfill existing depletion of inventories but maybe even increasing that to some extent. But additionally, on top of that we've got approval for 20 plus countries to be able to sell switch weights to and many of them have already made requests of those eventually were convert to orders, we believe.

Their difficulty is exactly when that timing is very difficult to predict. But we're engaged with them and they're all moving in the positive direction. It will take some time for that to convert to actual orders.

Exactly when that time think is very difficult to predict, but we're engaged with them and they're all moving in the positive direction. It will take some time for that to convert to actual orders. Great, Thank you.

You welcome, Ken. thanktake your. Your next question comes from Louis debomo with William Blair. You may proceed.

Why he' Kevin and jonah. Good afternoon Louis, Hi loween Louis.

For the 20 plus export approvals for the switch blade. Does that cover the switch blade 600 in addition to the switch blade three hundred?

Yes Louis, almost every request that we received includes both SW played 30.6 thousand and the approval from the state Department in U's government is for both SW played 30.6 thousand. Sales for international allies: twenty-plus countries.

Great and what he? Can you speak in general about the progress for the switch playied 600, as the media report seems to suggest that for the shipments to you Ukraine, the vast majority have been for the 300. So has there been any limitations in terms of shipping the 600, and is it fully ready or do more trials need to be done for it to be fully read out of service?

Yeah So it is true that majority of the presidential order, the drawdowns for Ukraine so far, has been for switch ate 300. the main reason for that has been not the readiness of the product, mostly has been the availability of inventory in the? U's stockpile of we of switched blade in general. So that's been the driver for it in terms of the product readiness. Absolutely, the product is ready. We are a strong believer. Ukraine in military has requested that more of boat switched playate 300 and especially 600, andespecially 600 is very unique in its capability.

It's one of the very, very few miss of web missile systems that have much longer standoff distances.

20 times further than a Javelin, a missile with essentially the same warhead that allows the ukrainian military to take positions and target Russian military distances where they're not at harm's way.

And that unique feature- switch blade- alone makes it extremely strategically important to the ukrainians and we're ready to provide him. More obviously, contracting and supply chain continue to be the two top limiting factors.

Great and you referenced how several countries.

Are looking to acquire the switch blade throughw.

Foreign military sales type transaction. I think there was a report last week about France potentially acquiring the switch blade. How long do you expect it to take for some of our allies to evaluate a switch blade procurement? I know you just mentioned how. Like the big question is is when, but how long does it take?

Allies in general to be comfortable with like doing trials, sure. So we believe, based on our interactions and communication and engagements, both for the U's do would D as well as with these foreign militaries, all allies- is that they're pretty much convinced and sold on the efficacy in the and the capabilities switch blade they have. These are, most of them are already are existing customers for small UAS 50 plus countries and so they understand, in no switch played quite well. In addition, during the last 15 years and the persian, the Middle East, as well as Afghanistan, most of our allies have been with the United States.

Speaker 3: Witnessing the efficacy of switch weade and those theaters. So there's very little, in my view, concern or doubt in their mind that switch weade can be valuable to them where they have to evaluated.

For them so far was really an awareness and the ability for the? U's to provide approval. I believe that this is going to move through the process. You are correct that the france- there was a public news about it and they made some statements that they are going to acquire SW blade. They are engaged with us, they are requesting that we're engaged in that process. It's not going to be overnight, these thinks. They do take time. It takes the process that they gotto go through the would D and they understand that, and it's never faster, faster enough for anybody's ires really, in my view, except our adversaries. So, other than that, you know, we believe that majority of this is going to convert to.

Orders and backlog, and the next, not only few quarters but maybe a couple of years ago, and to me these are all initial customers, just like the usu D. I believe that longer term, once they establish a program and requirement and uses for this, that will continue to become a line item for them that they would continue to fund and acquire more of over the years to come as we progress through the process with themparticularyourear's question goes from petez ically Olympic global mayacy.

And good afternoon guys. Good mean your guys, your guids for SW, for TMS and fiscal' 23. can you give us a sense for how firm your expectations are for what that split is between domestic and international revenue?

So we don't provide specific guidance to each product line or to the mix between international versus domestic. What I can tell you is that our overall demand signal for switch blade is both domestic and intern and it's a fairly large sort of basket of countries: Western European, Eastern European, the baltics, a lot of different countries around the world have an interest in that. Now that we receiive the export approval, I'm sorry to sale the approval for sale of the product internationalnationally. I think this this is going to encourage even more countries.

To engage, coupled with the complic ates going on in Ukraine. Overall, although this year that by far the biggest factor in switch bles, growth is going to be sooner. Not contracted timing, but rather supply chain constraint.

Speaker 5: And how much we can address that and how much more we can solve that, and that will improve over time. That will help us throughout the year and we'll keep you updated. That changes, But right now we feel good about our confidence, our guidance. We feel good about our business- another year of growth and our switch blate and our other product line. We'll continue to grow and we're in a good spot in that regard.

Ok let me ask you more on this four billion Ukraine funding initiative that they referenced. Have you guys been able to get any fidelity into you know specifically maybe, how much small U aas might be in there, how much T M MS might be in there? Have you we to see any kind of specific line items? Yes and no yes, we are very engaged in that and we're very aware that we want to make sure that there's a a reasonable amount for our switch ples. We do know that the Ukraine and military expressed- specifically expressed- more switch blade 30.6 thousand that they need for their conflict.

Speaker 5: And we could see from today's conflict and what's going on and news that capabilities such as switchweight extunded is actually vital to their success. It's imperative for them to have it. The specific details are not really disclosed yet publicly and for confidentialallity reasons I I need to be cautious of that for the sensitivity and safety of our customers.

Okay thanks guys, you welcome. Thanks Pete, to be.

Okay thanks guys, you welcome. Thanks Pete, it could bete. Thank you. Next question comes from Brian rumber, with.

superi capital, we proceed. Yes, Thank you very much. Nobody's really asked- and they's been hitting you with a lot of questions around Ukraine and things like that- but nobody's talked about the sale, the solar HAPS in the joint venture and what the future lies there, because I had, you know, a you know large potential of you know million of dollars potentially of this solar high altitude joint venture. What happens going forward now that you soldi your interest, sure? So great question. I I'm glad I brought that up because I mentioned on my remarks. First of the foremost.

We both remain very committed to the long term and short term prospects for the solar, houseb and sungliders next phasewe have been funded, as you know, for the last many years through ST Bank, through the JV. We did sell our shares and that was primarily a request from our partner. There were already a very large majority shareholder of the joint venture and for various reasons of their own reasons- they wanted us to sell that minority share for them. However, in no way that that should impact are commitment on both sides to the short and long term prospects of working together and be committed to the long term value creation opportunity that represents for us.

We're right now actively engaged with negotiating the next tranche of their contract with's Bank directly, So it really means just a defse contract vehicle for us. In that regard. There are several other value creation opportunities with the solar houseps business venture. For us we're still exclusive designer of the airplane, where still an exclusive MAN bure of the airplane for the joint venture with specific terms we're still. We still have exclusivemarket access to that platform for defense applications globally except Japan. So those things do not change.

rei feel very good about it. We are. It is not the most urgent because the war in Ukraine we have. We prioritized some of our resources because of talent needs, that we have two other more urgent programs and projectsre but we expect that to be a business that we're to do, as I said, on my marks: 25 30 30, five million dollars revenues sha.

Customer funded nd from SoftBank directly rather than the joint JV. So overall we feel very good about it and we'll continue to stay the course.

Thank okay, Thank you very much. You welcome come ride.

Thank una. As a reminder, to ask a question you'll need to press Star one on your telephone. Our next question comes from kender. With RBC you may proceed.

Yes just a quick follow-up. Can you provide any more color on FAS and is there any concern that with delays in timing, that this slips further to the right, that it could potentially negatively impact the probability of that contract for you or the competitive dynamic?

Ken a great question. Short answer is always: delays are not good. We don't VIE any delays to be positive by however. We're a very frequent communication with their Army's program office, where ftoas. We believe that our odds of succeeding in that program is quite strong. We were surprised that they did not award this yet. Our suspicion is that mainly that's because of the heavy, heavy urgency that is put on. U's duty is contracting resources to shift resources towards the Ukraine conflict and contracting for those.

And we we feel that urgency and we feel that from the other side, of course, because we have fifth blade needs our, our customers do that. That affects it, So delays are never going in H view. However, we're committed to that program. The Army is very committed to that program. That does increase the risk a little bit, but we like our chances and we like our position in that we believe that our solution is the best solution amongst all the competitors and we have performed quite well so far with the Army of two years competitions and different fly also that they've had. So we exactly when they're going to be able to get this done. It's really difficult to put a specific timing on it. We'll keep you updated.

Based on their latest. You know they're really trying harder than that again. Okay, that's ful. If I could just one quick followup as well, there's been a lot of press on other companies that have had success in selling loitering munitions into Ukraine recently. Are you at risk of losing share because of some of the supply chain disruptions, or how would you characterize the competition? Now it seems to be getting. There seems to be more competition perhaps in this marketplace, and what's the risk? The supply chain holds you back as you, as you look at that environment now.

Great question again, can? I'm glad that you asked that question. We think about that on a very, very daily pacees as almost we take competitors very seriously and, as you know from our track record, we've done quite well therewe do not believe that the products that are out there really are some the same as switch wayate 300 to 600. the technical performance, the actual operational performance of switchwayate 300 and six hundredis incredibly unique in compelling and unmatched, and further to that we actually have some specific patents.

That defend competitors in that space. So, for example, the wave oul capability of Switchblade is patent. We own the patent on that, and so that's one thing. The second thing is you are absolutely right that this higher awareness and demand for loitering missiles in general has increased the number of competitors and investors to go after this market more aggressively.

Speaker 5: I think that that's going to generate more competition, no question, but we as a company, as a team, are very aware of that and, were we like, our odds and our track record really bodes well for us. The last thing I would say is that the war and Queen is also demonstrated that? U's technology, such as our Switchblade 30.6 thousand, is by far better performing and superior, and most of our allies would prefer- highly prefer- to get the? U's made, U's design that products such a switchweight in our other systems.

So those are some of the advantages we have. But it's an open market, more larger awareness. Larger market does sort of increase the number of comp competitors, but we like for chances.

Some of the advages we have, but it it'san open market, you know more. Larger awareness, larger market does sort of increase the number of compp competitors, but we like chances. Thanks you.

You arelcome againthank you. Next question comes from be peie. To basically re the global, you may proceed, he thanks. Just a kind of follow up on Ken's question, guys.

You know we've talk about the, a follow on to the Army's L M's competition, kind of an L M's recom be, and I think a sources sought notice came out last month I believe. What do you guys think you know overall that that L M's recompete might kind of crystallize? I guess that's my question.

Great question, Pete. Let me just share with you what we do know and what we think of this number one historically there, throughout my 12 -plus years of 10 ure year at AB, there's been several such competitions for lmouns with the U's Army and do we have one of essentially all for lmouns?

Yes you're absolutely correct that there was a public announcement, and the reason for that is because the? U's Army needs to have a new contract vehicle- multiyear contract vehicle- in order to be able to continue to procure capability- such a switch- a called Lance capability- for the? U's nity. Any time they do that contract based on far rules, they have to put it as an open competition and we expect that. No different this time and but our Tru record is pretty strong and our position is very strong because our product is performed really, really well. There's always a risk for that and chance. However, I think the likelihood is very, very low.

I think you're refering to the o pf M opportunity or organic precision fire Mountain and that was different than the switched way 300 L specific contract and acquisition and competition although similar but it was for the larger vehicles. You are absolutely correct that that probably the only one that that we know of that we have not one and the outcome of that is still to be determined with the Marines. The U's Army does have its own sort of a similar requirement that we were tracking and we're also going to be sort of pursuing that separately and we like our chances there to and we working on those with other vari of which later as imentioned my.

A ship.

Your third Sunglider to SoftBank this calendar year, or has your focus on Ukraine delayed production of that third aircraft?

We are not expecting to deliver the third aircraft this year. Louis, we are working on that airplane and the development of it, as well as the improvements that we've G from the first three flights. So the funding that we currently have from soft band and the funding that we expect to get in the next several months that will fund us throughout fiscal year twenty three will not get us to the full delivery of that airplane. That will be further out beyond this fiscal yearand yes, you're rightite, it's mostly because of two reasons. one is that we have to reprioritize resources based on engineering talent and catered to more urgent needs.

And second, that is more of a longer-term play. Delivery an airplane quickly, for that is not going to reallyremove the needle much. What's more important is though, we get the right airplane design, test it and get a certified. Through faha and other agencies like that which we're working with, it would SP bank on, and that will take more than one year to get achievement, as ive said before. So overall, all we're committed, soft bx committed, but the delivery of the airplane is not planned for this year.

Okay is there any timeline on when you expect to potentially receive the FA certification? Louis, that is definitely. It's going to be further than this fiscal year. That certification process is a pretty long process. It's the first time in the history of aviation, to our knowledge, that FA is going to certify a stratmaric airplane, especially in airplane of this nature. We are, we are engaged with them. It's going to require a lot of testing but it will be beyond- in my view, would be beyond- fiscal year 2023. do you need the third aircraft?

To get that certification? Are they able to certify the second aircraft and that would also be applicable for the third aircraft? No, you would. You would need it because the F a a is going to test the airplane flight. We have to do a lot of testing and they also have to approve the manufacturing process besi get the design process of airplane.

Both and it is going to the extensive flight testing as well louisok.

Yeah that makes sense. Thanks B. he thanks Kevin and chonathank.

Thank you, 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. We may now disconnect.

Thank you, 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. We may now disconnect. Thank you you, Thank you.

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