Q1 2023 AeroVironment Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the Arrow garments.
Full year 2023 first quarter conference call at this time, all participant lines are in listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone.
Please be advised that today's conference call is being recorded for replay purposes.
I would now like to hand, the conference over to John a cheater Balan. Thank you. Please go ahead Sir.
Thank you and good afternoon, ladies and gentlemen, welcome to Aerovironment for fiscal year 2023 first quarter earnings call. This is John I, Peter 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 1995.
Forward looking statements include without limitation any.
These statements that may predict forecast indicate or imply future results performance or achievements and may contain words, such as believe anticipate expect estimate intend.
Project plan or words or phrases with similar meaning.
Forward looking statements are based on current expectations forecasts and assumptions, which involve risks and uncertainties.
<unk>, but not limited to economic competitive governmental and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward looking statements.
For further information on these risks we encourage you to review the risk factors discussed in Aerovironment periodic reports on Form 10-K, and other filings with the SEC along with the associated earnings release and Safe Harbor statement contained therein.
This afternoon, we also filed a slide presentation with our earnings release and posted the presentation on our website at <unk> dot com in the events and presentations section.
The contents of this conference call contains time sensitive information that is accurate only as of today September seven 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, Milwaukee, and senior Vice President and Chief Financial Officer, Mr. Kevin Mcdonald.
We will now begin with remarks from Wahid Wahid.
Heath.
Thank you Joanna.
Welcome to our first quarter.
<unk> fiscal year 2023 earnings conference call.
I'll start by summarizing our quarterly performance and discuss recent achievements.
Then Kevin will provide a more detailed review of our financial results after which I will provide a summary of our expectations for the remainder of fiscal year 2023, before Kevin join 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 first quarter results were generally in line or above our expectations and we're on track to achieve our fiscal year 2023 objectives, leading to another Europe double digit top line organic growth.
Second we're seeing strong order momentum demonstrated by our record funded backlog of more than $300 million as of August 27th.
And third Aerovironment continues to successfully manage through ongoing supply chain challenges and is very well positioned for continued value creation, even beyond this fiscal year, primarily due to strong demand across nearly all our product lines.
Let me first summarize our financial results for the quarter.
We delivered first quarter revenue of $108 5 million compared to 101.
Million in fiscal year, 2020 to an organic increase of 7% year over year.
This growth was primarily due to a higher demand for our tactical missile systems, and our small unmanned aircraft systems product lines.
Gross profit for the first quarter was $33 7 million compared to $28 7 million in the prior year period.
Our gross margin increased to 31% from 28% in fiscal year 2022.
This increase primarily reflects higher sales volumes as well as favorable product and geographical mix.
We reported a non-GAAP adjusted net loss of $2 5 million or 10 cents per diluted share as compared to a loss of $4 2 million or <unk> 17 per diluted share for the first quarter of fiscal year 2022.
Looking ahead, we remain confident in the future of Aerovironment and our ability to deliver superior shareholder returns despite ongoing supply chain constraints.
<unk> III pressures and a tight labor market.
We remain in direct contact with our most critical suppliers to improve material lead times.
We're also continuing to work directly with the office of the U S Secretary of defense at the Pentagon to prioritize our raw material needs.
When appropriate we continue to build additional inventory, which will allow us to meet the growing near term demand for our highly innovative solutions.
We're still facing continued headwinds related to the tighter labor markets.
Especially in key engineering disciplines in support of our growing set of customer funded R&D programs.
That said, we are successfully managing staffing levels across the organization and continue to prioritize our development activities to ensure the most urgent and important programs received and the resources they require.
Let me reiterate demand for our innovative solutions remains high both domestically and overseas.
Our small UAS and Switchblade loitering munitions have both seen a surge in demand due to the conflict in Ukraine.
Our other product lines are also benefiting from this greater global awareness and ongoing trends towards increased adoption of unmanned robotic systems.
While our first quarter backlog remained roughly the same as last quarter, we're experiencing greater contract award activity in the current fiscal year quarter, which coincides with the fourth quarter of the U S government's current fiscal year.
As of August 27th we have a record funded backlog of over $300 million and are optimistic about additional wins in the next four to six months.
Notably our mix of business is shifting to higher product sales, which should improve our margin profile in fiscal year 2023.
We're also proud to have published our inaugural corporate social responsibility report now available on our website.
Aerovironment is built on a legacy of more than 50 years of environmental stewardship, and our commitment to sustainability is embedded in our mission of developing highly innovative solutions that deliver on our customers' missions, while doing more with less.
Let's not forget the overwhelming majority of our robotics solutions are designed with fully electric propulsion systems, making them amongst the greenest and most environmentally friendly solutions in the market.
Now I would like to provide an update on current developments within each of our product lines.
Let me begin with our small UAS product line, which experienced growth over the prior year's first quarter.
Given the strength of this business, we continue to see additional growth opportunities, particularly with international customers.
We're also prudently investing in developing new advanced solutions and plan to introduce multiple new products to market this fiscal year.
This will position us to pursue additional future programs of record within the U S y.
While leveraging our large installed base for upgrades and enhancements.
Overall, we see increasing global demand and our small UAS, including multiple opportunities for best in class Puma, AE and Puma LTE UAV systems for Ukraine.
Our tactical missile systems product line is also experiencing robust growth this fiscal year.
The overall demand trends for our Switchblade 300, 600, loitering munitions are accelerating.
Switchblade remains unique in terms of its long range precision strike loitering duration and patent Waveoff features.
We're extremely proud of this innovation and the capabilities that provide Ukraine and its military to defend their country.
Since our last earnings call interest in both Switchblade 306 hundred as continued to grow with Tms product line sales, increasing 20% year over year.
The U S government is intent on back filling inventories reduced through his presidential drawdowns to support Ukraine.
We were recently awarded a $26 million contract for Switchblade 300 systems from the U S Army.
In addition, the prior congressional legislation authorizing $40 billion in military and humanitarian aid has provided the opportunity for new orders for Ukraine.
We are encouraged by these developments and the opportunity to further assist Ukraine and our other allies in Europe .
Additionally, we recently received at D O priority rating by the U S Federal government, which will expedite and prioritize the purchase of necessary supplies for switchblade from our vendors.
A deal rated order is the second highest level of priority that can be granted by the U S. Dod.
We're also fielding multiple requests for proposals from additional allies for both Switchblade 306 hundred loading munitions.
We continue to work with these customers to translate their interest into FERC contracts and expect additional sales later this year and next fiscal year.
Overall, our pipeline and demand levels continue to increase setting us up for a strong shipments late in fiscal year 2023, and enter fiscal year 2024.
As you can see we remain positive about both the near term and long term outlook for our Tms product line.
Order flow is picking up with backlog growth and delivery is expected to accelerate as the year progresses.
We maintain broad bipartisan support for Switchblade products as Congress begin formulating the budget for government fiscal year 2023.
The key challenges to meet this growing demand for Switchblade loitering munitions remained the timing of these contracts coupled with global supply chain constraints.
However, we are optimistic that our proactive management of supply chain challenges coupled with the assistance of the U S government will help us deliver on our operational objectives.
I will now switch gears and discuss our medium UAS or UAS product line.
I am very pleased to announce that after some delays the U S Army as officially awarded Aerovironment increment one of the future Tactical UAS program also known as FTE UAS.
We're excited by this important award as a reminder, the ft. UAS program in aggregate is expected to be valued at more than $1 billion over a 10 year period.
In the near term the U S. Army's proposed funding for FTE UAS is approximately $100 million for.
In fiscal year 2023.
Thank you.
Our focus now turns to competing for increment, two which we expect to be awarded in the next 12 months.
We look forward to demonstrating the full breadth of our unique capabilities to the U S. Army on this very important program.
In addition, we're excited to announce that we recently acquired plank Aero systems, a leading provider of advanced unmanned aircraft navigation solutions.
This acquisition will enhance.
Autonomy capabilities across our entire portfolio and is especially applicable to our jumped 20, UAV where it is expected to further our competitive advantage for FTE UAS and other upcoming programs.
Based in San Diego Plank, Aerosystems has developed a unique unmanned aircraft solutions for close to a decade with products ranging from embedded software applications to fully integrated UAS solutions that leverage technologies for guidance navigation and artificial intelligence.
As part of our <unk> product line plank, including autonomous control engine or ace capabilities will be integrated into our existing products to enable improved autonomous takeoff and landing on land or at sea, particularly in GPS denied in contested aerospace environment.
<unk>.
Working together as part of Aerovironment, we will offer even more compelling and depreciated solutions to our customers.
It is a great addition to the company and we're thrilled to have their talented staff as part of our team.
Yes.
Lastly, our U N UAS business continues to pursue additional international opportunities, including through recent demonstrations of our jumped 20 systems to potential customers in both Europe and the middle East.
Regarding our unmanned ground vehicles or <unk> product line, we continue to see strong interest abroad and are pursuing new opportunities leveraging the heightened interest fostered by the conflict in Ukraine.
This product line also remains on track to grow this fiscal year.
Within our <unk> product line I am pleased to announce that we secured an additional $25 million of funding during Q1 to continue with the next phase of development for our son glider platform underscoring our strong enduring partnership with Softbank.
Both companies are committed to the vision of developing and commercializing stratospheric based telecommunications services for the growing global population.
We're now focused on building a third aircraft to perform further flight testing demonstrate increased endurance and obtain FAA certification.
In addition, we're now pursuing opportunities within several agencies of the U S. Dod, which we believe can benefit from our advanced solar haps solution.
Overall, we remain on track, perhaps revenue of between $25 million to $35 million this fiscal year.
And finally I'll share some exciting developments for our Maccready works advanced solutions product line.
Recently, NASA announced that it plans to send additional space flights to Mars in the coming years for ground sample analysis and mineral retrieval.
The Mars sample retrieval lender will include two recovery helicopters known as Mars Science helicopters due to the success of ingenuity, which has already performed 29 consecutive and successful flights on Mars and survived over a year beyond its original planned lifetime.
These helicopters will provide a secondary crucial capability to retrieve samples from the surface of Mars.
We believe these upcoming missions will provide aerovironment with multiple opportunities to showcase our innovative unmanned robotic solutions, while enabling the collection of valuable scientific data that benefits all humanity.
We remain actively engaged with Nasa's jet propulsion laboratory or JPL on this next important mission.
With its architecture solidified the program is expected to move into our preliminary design phase. This October which is expected to last about 12 months.
During this phase of the program, we will complete engineering prototypes of the major mission components, after which more definitive manufacturing timelines can be prepared.
In summary, Aerovironment remains on track for double digit top line organic growth and improved underlying results. This year.
We're keeping expenses under control success successfully managing through ongoing supply chain constraints and seeking out the best and brightest talent to ensure we deliver for our customers and shareholders.
Solid execution combined with robust global demand for our products and services gives us confidence in our performance for the quarters to come.
With that I would like to now turn the call over to Kevin Mcdonnell for a review of first quarter financials, Kevin. Thank you Wahid to Dell reviewing the highlights of our first quarter fiscal 2023 performance during which I will occasionally refer to both our press release and earnings presentation available on our website in summer.
This was a good quarter, both in terms of organic revenue growth and improvement to our adjusted EBITDA versus last year's first quarter. We've done all of this despite continued supply chain challenges. That's why he had highlighted in his remarks.
Now I'd like to turn like to provide more detail to the revenue for the quarter revenue for the first quarter was $108 5 million an increase of 7% over the first quarter of fiscal 2022 revenue of $101 million slide.
Slide 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 $43 3 million of revenue up from last year's $40 million approximately 70% of small UAS revenue in the quarter was from international customers and we expect this trend to continue throughout the year.
Our tactical missile systems, or Tms segment contributed $23 million of revenue during the quarter compared to $19 2 million in fiscal 2022 <unk>.
Despite the strong first quarter growth, we are still hampered by supply chain challenges in the Tms segment. Our medium UAS segment finished the quarter with revenue of $19 3 million or $3 $1 million decrease compared to the first quarter of fiscal 2022 of $22 $4 million to decline as long.
As a result of lower UAS program revenues.
However, as Wahid mentioned, our medium UAS Division was recently awarded with the Army has stepped Helios increment. One program. This is an important milestone and building increased medium UAS product revenue over the coming quarters.
Our <unk> segment contributed $10 2 million in Q1 in line with the $10 4 million in the prior year first quarter.
As noted by Wahid.
Recently signed a contract for extension of our Haps program with Softbank.
Revenue from the other segment, which includes our teller, Rob and Maccready works businesses increased year over year to $212 8 million versus $9 2 million in the fiscal 2022 first quarter. Most of this growth in other came from our <unk> business, which continues to win contracts for advanced mission capabilities.
Now looking at gross margins slide five of the earnings presentation shows the mix of product versus service revenue in Q1, we saw a product mix of 53%, which is in line with the first quarter of last year GAAP gross margins improved from 28% to 31% year over year.
I'll now speak to our adjusted gross margins.
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 the adjusted gross margins, which excludes intangible amortization expense and other noncash purchase accounting items.
Overall, adjusted gross margin of the first quarter were 34% up compared to 32% in the first quarter FY 'twenty. Two this increase was the result of higher margin Suas international product sales.
Adjusted product gross margins for the quarter were 45% versus 42% in the first quarter of last fiscal year due again to favorable geographical mix.
In terms of adjusted service gross margins the first quarter was at 21% versus 22% during the same quarter last year, the slight year over year decrease was due to lower medium UAS service gross margins.
As mentioned last quarter, we expect product mix to be higher in fiscal 2023, which will result in improving gross margins, partially offset by some short term increased supply chain costs.
Now turning to GAAP earnings we had a GAAP net loss for the first quarter of $8 4 million compared to a net loss of $14 million for the first quarter of fiscal 2022, the $5 $5 million year over year improvement was due to a $5 million and increased gross margin dollars $4 5 million or $4 five.
Decrease in acquisition related expenses, and a $1 $8 million decrease in SG&A expenses. These positive items were partially offset by a $3 $6 million increase in tax expense and an increase of $1 $3 million and R&D expenses.
Note that under the current tax accounting rules, we will continue to have a tax expense in quarters with a pre tax loss and a tax benefit in quarters with taxable income of approximately 50% of the GAAP pre tax income in both cases.
In terms of adjusted EBITDA Slide 13 of our earnings presentation shows the reconciliation of GAAP net loss to adjusted EBITDA. The adjusted EBITDA for the first quarter of fiscal 2023 was $13 1 million an increase of over 90% over the prior year.
The $6 $3 million improvement over Q1 of FY 'twenty to $5 $4 million related to increased adjusted gross margins as a result of improved product margins to $3 million related to lower SG&A expense and this was partially offset by a $1 $3 million increase in R&D spending.
Slide 10 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted loss per diluted share of <unk> 10 for the first quarter of fiscal 2023 versus 17 Duluth.
Diluted share loss for the first quarter of fiscal 2022.
Turning to the balance sheet. The total cash investments to end of the quarter were $123 5 million. This represents an increase of $6 million over our year end balances, we saw improvement in accounts receivable and unbilled receivables during the quarter, partially offset by some expected inventory increases we anticipate inventories.
We will continue to increase throughout the year due to increasing demand for our products and supply chain headwinds that requires us to buy some inventory ahead of orders.
We continue to have a strong balance sheet with over $100 million of cash and investments and $100 million working capital facility.
I would like to conclude with our FY 'twenty three revenue visibility slide eight of the earnings presentation provides a summary of our products our current fiscal 2020 visibility.
Visibility as of today is at 75% to the midpoint of our revenue guidance range. The 75% visibility compares favorably to historical Q1 conference call visibility now I'd like to turn things back to what Heath.
Thanks, Kevin.
We remain confident in our ability to deliver on our expectations for fiscal year 2023 and beyond.
While federal budget priorities are still being determined by for government fiscal year 2023, our advanced unmanned robotic solutions continue to be in strong demand.
As such we are reiterating our previously provided guidance for fiscal year 2023, which has again shown on slide number seven.
We anticipate revenue of between $490 million and $520 million for fiscal year 2023, representing double digit organic growth in net income of $11 million to $18 million or <unk> 42.
To <unk> 72 per diluted share.
We forecast non-GAAP adjusted EBITDA of between $82 million and $92 million and non-GAAP earnings per diluted share excluding acquisition related costs amortization of intangible assets and other one time expenses of between $1 35, and $1 65.
We continue to expect 60% of revenue will be in the second half of this fiscal year, reflecting the timing of current and anticipated awards.
Our adjusted gross margin should end up at or slightly above last fiscal year.
This is mainly driven by favorable product mix and higher volumes somewhat offset by the unfavorable impact of ongoing supply chain expenses.
We also expect to deliver adjusted EBITDA of between 16% and 18% of revenue for the full year as previously discussed.
Before turning the call over for questions. Let me just reiterate a few key takeaway points on which our investors should focus.
First we remain on track for our fiscal year 2023 guidance, including among other things double digit topline organic growth stable margins and improve bottom line results.
Second we're seeing strong order momentum demonstrated by the record funded backlog of more than $300 million as of August 27th.
And third Aerovironment continues to successfully manage through ongoing supply chain challenges and is very well positioned for continued value creation, even beyond this fiscal year, primarily due to strong demand across nearly all our product lines.
I would like to thank our employees for their hard work during the quarter.
Their perseverance and dedication has enabled us to continue supporting our military and allies around the world.
All of us at Aerovironment are committed to providing the U S. Our allies and other customers around the world with the most reliable innovative and invaluable unmanned aerial and ground based robotics solutions.
Similarly, we remain committed to our goal of delivering strong returns for our shareholders.
And with that Kevin John and I will now take your questions.
Thank you.
As a reminder to ask a question. Please press star one on your telephone as well ask one question and one follow up question one moment, while we compile the Q&A roster.
The first question is coming from Ken Herbert.
Of RBC your line is open.
Yeah, Hey, good afternoon everybody.
Good afternoon, Ken.
Hey, Wahid I just wanted to start out can you just maybe provide an update specifically on on switch.
Switchblade three and 600.
How much of the how much of that may be the 300 and funded backlog you've called out or implied in the.
'twenty fiscal 'twenty three revenues, our sales associated with switchblade into Ukraine, either directly into Ukraine, or as part of a replenishment of inventories here in United States.
So Ken the mix of backlog so far is somewhat evenly divided between the product lines.
And as I mentioned in my remarks, we expect significantly more new orders for Switchblade over the next four to six months for the two specific.
Reasons, you mentioned, one to provide more switchblade to Ukraine through the U S government and two to also backfill depleted inventories of the USD.
That they have already.
Drawn from to help Ukraine with so far so I would say as of now.
Mix of our backlog is evenly distributed it's not heavily tilted towards switchblade, yet, but we do have line of visibility to several additional contracts and orders that are in the works through the U S. Dod and some of our allies that should make it into orders in the next few months.
Okay. That's helpful and just as a follow up is it possible maybe to quantify the impact of the supply chain on the fiscal first quarter and what's your visibility on.
If that's getting better or is it steady is it stable I mean, how do we think about that impact of the flows through the rest of the fiscal year.
Sure.
Welcome Ken So definitely supply chain remains to be a headwind for everyone around the world that I know of and we talked to you in our industry as well and that's no different for us.
We are managing it very successfully by proactively working with suppliers with the U S. Dod with the after the secretary of defense.
With the distributors of our suppliers and many many other activities that we've got going.
For Q1.
The results really were threefold, one it was within or slightly above our expectations. So we're very pleased with the results for Q1, as we expected them to be.
If you recall government.
Continuing resolution for fiscal year 2022 did not end up until sort of March April timeframe.
So a lot of the acquisition and dollars in funding that the USDA is expecting to put in contract in government fiscal 2022 is actually being executed now which is basically going through this month or next month or the last two months of it and that's why there are some delays in contracting in that regard.
And lastly supply chain still while it still remains a headwind.
We have managed to secure as much of our supply as we can for this fiscal year.
While there still remains to be some risk, but overall, we feel good about the remainder of this year, we believe that given our position today and all the actions, we've taken including building a little bit in advance.
It's prudent.
<unk> as well to be able to achieve our operational plan for this year.
Thank you.
You're welcome Ken.
Thank you our next question will be coming from.
Peter Ahmad.
Of Baird. Your line is open.
Good afternoon, Kevin China.
Hi, Peter how are you Peter Hay.
Hey.
I guess I wanted to come back to I guess talk about switchblade as well just.
Over the summer you had a lot of a lot of interest I think internationally, maybe you could just update us on.
The timeline there because it sounds like what you're referring to is the supply chain in particular impacting your Tms kind of product line. So your ability to kind of fulfill some of the demand thats obviously, increasing.
Peter that's accurate overall are.
Most of our products are.
Somewhat affected by the supply chain constraints, the global supply chain.
Trains, but switchblade in particular, because some of the as you know.
Some of the electronics that are within Switchblade are very specific to switchblade, specifically, the warhead and fuse for the army of of them of the munition et cetera et cetera.
Overall I can tell you that the activity level in terms of demand signals is very very strong for switchblade and our small UAS overall at both domestic as well as international.
We are actively engaged on several countries. The less continues to grow and most of those engagements are progressing quite well through the acquisition and contracting process.
Why I mentioned earlier in my remarks that we expect to secure more contracts and the momentum should continue into our second and third quarter of this fiscal year now how much of that demand weaken.
Convert to actual sales and revenue for this year is still undetermined because of the timing of those contracts and the supply chain constraints, but we are working and working them actively and what what I can say is that we feel good about being able to achieve our current plans.
Given the situation, we're in and the visibility that we have within our pipeline.
And then lastly of course.
Switchblade has absolutely been incredible game changer for the Ukraine.
Military through this complex many of the U S allies in Europe are woken by this and they are really interested in acquiring the capability.
We're actively engaged with them on both Vcs in Fms cases and I.
I expect that to continue over the next several months or quarters.
To add to that that we are also seeing.
Does it get lost that we're seeing increased adoption with the U S.
D across.
A broader class of customers there so while the international demand is great and the Ukraine War. We're also seeing in the U S side, So it's kind of a double whammy.
Yes, and then just a follow up related to.
Compensation Switchblade.
Wahid the profitability for this area and Tms I assume as the international mix grows, particularly as you get more direct.
We should expect that to improve is that a correct assumption.
Yes.
Our first quarter profitability was pretty much inline or slightly above our expectations as usually we have a lower and unprofitable for first quarter and that over time.
Improves this year, especially we do have the backlog, but supply constrained.
That's what is really driving some of the revenue and top line for the first half and that's why we expect about 60% of our revenue to be in the second half and of course for the full year, we expect it to be fairly profitable year for us.
Way better results in last fiscal year, and we expect that momentum to continue into our government of our fiscal.
Fiscal year 2024, I believe that the demand drivers and the macroeconomic levels. Despite the economy.
Higher interest rates and inflationary pressures I believe that we're positioned very well for this fiscal year as well as next fiscal year and beyond.
I appreciate all the color thanks to.
Youre welcome Peter.
Sure.
Thank you.
Our next question will be coming from.
Austin Mueller.
Of Canaccord Genuity.
Hi, good afternoon, Wahid and Kevin.
Hey, Austin.
Hello there.
Hi.
So just my first question here. This has sort of been touched on by a few analysts before me but.
Within that $307 million backlog as of August 27.
How many of those customers are specifically NATO Europe country customers that were part of the 20 countries approved by the Dod and the state Department a few months ago.
So often we have a fairly growing list of international customers, both for Switchblade as well as for our other small UAS products. We're also engaged with.
Multiple countries on our medium UAS jumped 20 systems.
Internationally.
Not able to comment specifically on.
The number of customers and company countries, primarily because of the sensitivity of those countries and customers.
Four of disclosure, but what I can tell you is that the portfolio of those customers are is growing the demand is healthy and I expect that to even grow further in the coming months majority of those engagements or through the U S government in Fms cases, but there is also multiple activities.
And even.
Unfunded contracts on.
On a DCF basis, which is reflected on our unfunded backlog, which is separate from the $307 million that I mentioned earlier.
Although we are more bullish on Fms cases for Switchblade in Dcs.
Because in our U S government I believe generally prefer for this type of loitering munitions to be.
Procured and provided to our allies through Fms cases, although we have a letter authorizing us for both Dcs in Fms, but we feel more optimistic on the Fms sales in general.
Okay. That's helpful. And then all of the customers that are looking at the jumped 20 and medium UAS. How many are looking at buying that kit and bundling it with some switchblade 300, just given that you can fire those off the wings.
So we have actually demonstrated that cable already several customers are interested in them.
We are actively engaged in those discussions.
The number again is sensitive to our customers.
But I expect long term in the next two to three years that multiple of our existing <unk>.
Switchblade customers would be highly interested in both our vapor helicopter as well as our medium jumped 20 UAS to be equipped with switchblade multiple switchblade, which we have demonstrated both in live demonstrations in real life.
So I think that.
Not only switchblade will be successful and grow as its own product line and similarly, our medium UAS evidence of one of the major evidenced as the army <unk> program, but other platforms and enabling our medium UAS another platform for Switchblade will become more and more common in the industry over there.
Years to come.
Okay, great. Thanks for filling me in on all of that.
Youre welcome Austin, Thank you.
Thank you as a reminder, if you have a question. Please press star one one.
On your telephone.
The next question, we have is coming from Louis hip hop.
Omar.
William Blair. Please go ahead.
Why he'd Kevin and Jonah good afternoon.
Afternoon, Louis alloy good afternoon Louis.
Has the contract.
That has been discussed widely in the media for Aerovironment to manufacture and ship.
Ken Switchblade six hundreds to Ukraine has that contract closed.
And was that responsible for a portion of the increase in backlog during the month of August .
Louis.
I am not in a position to be able to again comment on specific contracts due to the customer sensitivity, but I can tell you is that for Switchblade 600, specifically.
Several several engagements and contract activities that are near.
Signage or.
Award with the U S Vod, they're both for Ukraine, as well as some other allies Besides Ukraine.
And also.
Portion of the unfunded backlog that we have is also specific related to switchblade six hundred's, our Dcs sales for one of our allies and so again, but I am more optimistic on Fms sales of Switchblade in general than Dcs, Although we remain.
Engaged on both fronts with our customers in the pipeline for both Switchblade 306 hundred looks quite healthy.
And growing thanks, Scott Thanks, Mohit and you were successful with the FTE UAS incremental one.
And can you remind us how does that win position Aero environment for that Ultimate 1 billion dollar program of record and how does <unk>.
Increment to fit into the mix with the program of record.
Sure so Louis.
The way that the U S. Army has so far described and plans to.
Okay.
Award the future Tactical UAS program is as follows.
Income and one is really critical and what's critical for us and for anybody who wins that because it is the first set of air vehicles and systems, whereas the U S. Army is going to buy them and provide them to an operating combat brigade. So one combat brigade within the U S Army is going to receive.
The system.
Yes.
And they are going to take that system and basically operate the.
Intent there is to inform the U S Army program office of any additional enhancements improvements or changes to the platform.
<unk> or to make sure that what they have so far selected.
Is what the operators and users really want and need for their missions.
Additionally, an increment to the U S Army plans to add additional improvements or enhancements to the performance requirements of the competition.
Which we are very well aware of.
And our goal is to meet those.
Additional expectations.
Head of the customers.
The acquisition process and so the reason why increment one is so critical.
That whoever gets increment one award.
They get to feel systems with the users.
We are in a much better position than all the other competitors to benefit and be ahead of competition in terms of competing program come into although increment two will be an open competition, but that will give us an advantage because so far according to the U S Army.
We are the only awardee for income in one and they are proceeding with us only at.
At this time and based on our engagements with them. They are very happy and satisfied with our system's performance and they look forward to filling these systems and working with us to improve and deliver more capability to the military and so once increment two gets awarded that becomes the official program of record which is expected to be.
About $1 billion and the budget process and as part of the acquisition planning.
Planning process within the U S Pentagon and U S Army.
Great and do you expect that $1 billion to be allocated just to one vendor or is it expected to be.
The company.
That's a great question Louis.
It is.
Not comment for the U S Army for such.
Set of capabilities, whether it's a group two three UAV or a weapon system or.
Another asset that the soldiers are the combat brigades carry for them to actually have multiple.
The options are multiple choices, because then you're forced structure do you have to deploy this system and train the force structure based on more than one set of capabilities. So although the U S Army Hasnt fed <unk>.
Definitively that they plan on awarding to one that is their plan today.
Could that change possibly.
Is it likely in my view the likelihood is low and primarily the reason I think the likelihood is low is because the way that the U S. Military and army operates in trains and does its training doctrine and supply maintenance.
And support structure.
We're having two separate systems for this for <unk>.
Given combat brigades will make it extremely difficult if not been possible.
To practically implemented.
Right.
One final question if I may.
Or are you are you able to I know this is very it.
It might be premature, but are you able to discuss your partnership with Northrop Grumman for the Jackal Switchblade variant that they showcased at.
The special operations forces conference.
Yes.
I can't comment on that and we are certainly partner with Northrop Grumman.
For a very specific.
U S Army opportunity, that's referred to us al RPM long range precision munitions and it's essentially the U S. Army's version of a switchblade capability that can be deployed and <unk>.
The U S Army.
That's already with that is a very large program, which both Northrop and Aerovironment feel that we have a very compelling solution that we should compete and go forward with.
So what you saw at that conference as SOCOM was where Northrop actually demo that displayed.
First prototype of the Jackal loitering munition system.
And public we are engaged with them, we're very pleased with that partnership we're making very good progress.
And we intend to compete there and the reason why this is important because this is another example of how we believe the adoption of loitering munition is going to.
Keep getting more and more momentum not in the U S. Dod, but also with most majority if not all of our allies in the next decade, and we're very very fortunate and pleased to be in a position that we are as the leading provider with a demonstrated validated.
Yield proven capability that is already fielded by the thousands and that gives us a significant advantage in the marketplace to be able to capitalize capitalizing those opportunities going forward.
Awesome. Thanks Ryan.
Youre welcome Louis.
Thank you.
Our next question will be coming from.
Brian Rotenberg.
Of Imperial capital.
Yes. Thank you very much a couple of quick questions first of all back to.
Supply chain, what we're hearing is supply chain from a number of companies is at least visibly starting to get better that six to nine months.
I think should be dramatically improved from where they are now I know you made a comment about supply chain still having yet you're still having issues. There can you comment about what youre seeing in the next couple of quarters in terms of visibility on the supply chain.
Brian the supply chain situation really is extremely dynamic and changes literally on a daily basis.
Since we are a <unk>.
Prime system contractor and provider of a system solution to our customer we deal with a variety of different products not just one set up specific electronics or that we buy a composite material motors semiconductors microprocessors.
Lenses gimbal.
Cameras et cetera et cetera, so the.
Battery packs battery systems et cetera, So our needs is pretty broad and our portfolio is pretty wide and large as well.
So the profile of supply chain constrained changes on every one of those categories on a very very.
Fast paced basis number one number two as I mentioned on my remarks, we have received authorization from the Pentagon U S Department of Commerce and Department of Defense.
<unk> authorization that allows us to go with our suppliers in place at risk quarters.
Ahead of actual U S government contract signed for the demand that the USDA is forecasting for Ukraine and for the U S. Dod.
<unk> priority rating level.
That is a very difficult.
Authorization, which is to my knowledge almost unprecedented but the U S. <unk> has given us that authorization and we're engaged already in the last two months with our suppliers on all of our.
At risk orders and our non at risk quarters to be able to secure that so.
While I cannot give you a very clear picture, we see improvement in some areas, but we also see some areas that are stagnant.
I would say that the two areas that are still are the highest.
Need for us as some semiconductors and processors that go into the Switchblade systems as well as <unk>.
Critical set of components that go into the Switchblade warhead.
And we're working those as I said from many many different angles.
But it is a.
And department of Defense the office of the Secretary of Defense for Sustainment and acquisition is directly engage with us on a weekly basis.
Is working and actively making phone calls with us and reaching out to our suppliers to try to solve this and that has been very helpful. But its still not sufficient to be able to give us 100% confidence yet, but we feel pretty good about our position and ability to be able to deliver on our expectations. This year.
Great and as a bolt on to that just as a follow up gross margins. You said are going to be flat to slightly up is that because of the supply chain or is that because of the rising cost in U.
Price a lot of your.
Youre deliverables.
Years in advance and prices are rising is it a combination of those two factors or is it one versus the other.
That's accurate Brian It is basically a combination of both so we expect the gross margins for the full year to be at or slightly above last fiscal years gross margins and the reason why it's going to be up is because the mix of our products our revenues changed favorably to more hardware sales and product sales versus services.
And also.
Have your dose of international sales versus domestic sales, which also gives us a better margin profile now that is offset to some extent by some increases in supply chain constraint costs and expenses expert expediting apart some material cost because of that.
Macroeconomic levels, the pricing increases et cetera, et cetera, now having said all of that we have already taken.
Active steps to adjust our prices, where we can which we can aim in many many cases, we can but.
The effect of that is not immediate we always work with our customers to make sure we plan with their budgets accordingly, and what they have put in our budget. So we do not want to surprise him at the last minute and we are working with them to make sure that they can accommodate those and we can justify those increases as time moves forward.
That's the reason why I think for this fiscal year, it will be either at or slightly above and hopefully even better next year.
Okay.
Thank you.
Youre welcome Brian .
Thank you.
Ladies and gentlemen, this concludes today's conference call.
You gave for participating and we look forward to speaking with you again next quarter you may all disconnect have a wonderful evening.
Yes.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
Yeah.
Yes.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
[music].
Okay.
Okay.
Yeah.