Q2 2023 AeroVironment Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
Okay.
Good evening and thank you for standing by and welcome to the Aerovironment at fiscal year 'twenty three second quarter conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
I ask a question during the session you need to press star one on your telephone please.
Please be advised today's conference is being recorded I would now turn the conference over to your speaker for today Jonas Peter Bailey. Please go ahead.
Thanks, and good afternoon, ladies and gentlemen, welcome to Aerovironment for fiscal year 2023 second quarter earnings call.
This is John it's Peter balance senior director of corporate development and Investor Relations for Aerovironment.
Before we begin please note that certain information presented on this call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
Forward looking statements include without limitation any statement that may predict 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 of similar meaning.
Forward looking statements are based on current expectations forecasts and assumptions, which involve risks and uncertainties, including but not limited to economic competitive governmental and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward looking 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 a presentation to the investors section of our website at a V. I N C dot com in the events and presentations section.
The content of this conference call contains time sensitive information that is accurate only as of today December six 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 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 Mcdonnell.
We will now begin with remarks from Wahid Nabavi Wahid.
Thank you Jonah welcome to our fiscal year 2023 second quarter earnings Conference call I'll start by summarizing our performance and recent achievements after which Kevin will review our financial results in greater detail.
And then provide a summary of our expectations for the remainder of fiscal year 2023, before Kevin Jordan I take your questions.
Let me first emphasize a few key messages, which are included on slide number three of our earnings presentation.
First second quarter and first half results were largely in line or slightly better than our expectations. While we continue to experience solid demand across nearly all our product lines.
Second solid first half performance, coupled with growing order volume gives us confidence to increase our revenue guidance for fiscal year 2023.
We're also slightly reducing our profitability outlook for fiscal year 2023, due to increased R&D investments to capture additional growth opportunities and accelerated medium UAS R. M UAS asset depreciation related to a shift in U S. Dod funding priorities.
And third we experienced funded backlog of $293 million at the end of the second quarter and record funded backlog of $388 million through November .
With this record backlog and revenue visibility and increasing order flow, we are well positioned for profitable double digit topline growth in fiscal year 'twenty three.
And beyond.
Now, let me summarize our financial results for the second quarter.
We delivered second quarter revenue of $111 6 million compared to 122.
Zero 1 million last year.
Decline of approximately 9% year over year.
This decrease was primarily due to lower suas sales, although we posted higher revenue within our tactical missile systems or Tms product line.
Weighted to increasing international demand for our Switchblade loitering munitions.
Gross profit for the quarter was $25 9 million compared to $42 $5 million in the prior year period.
Our gross margin decreased to 23% from 35% last year, primarily as a result of unfavorable product mix and accelerated depreciation charges related to the anticipated reduction in M. UAS service revenue due to changing U S. Dod budget priorities.
We expect gross margins to increase during the remainder of the fiscal year 2023, and anticipated a return to historical levels in fiscal year 2024.
Okay.
We reported adjusted EBITDA of $6 8 million compared to $21 $9 million in the second quarter last year.
Finally, non-GAAP EPS was zero cents per diluted share as compared to <unk> 78 per diluted share for the second quarter of fiscal year 2020 to the.
The decrease in adjusted EBITDA and non-GAAP EPS were primarily driven by lower revenues unfavorable product mix and higher R&D investments.
non-GAAP EPS decrease was also due to accelerated depreciation of M. UAS assets as I explained earlier.
Looking ahead recent contract awards and increasing demand for our portfolio of intelligent multi domain robotic solutions gives us confidence that we are positioned for strong long term performance and value creation.
While the budget for the government's fiscal year 2023 has yet to be finalized we maintain broad bipartisan support for our innovative solutions across the U S Dod and our allies.
In addition, we remain diligent in managing the ongoing global supply chain constraints inflationary pressures in a tight labor market.
While the entire industry is dealing with these issues. We believe aerovironment has taken the right actions to minimize their impact.
So far this year, our company wide continuous improvement initiatives have delivered.
Cost savings, while positioning us for growth and scale.
The flexibility of our manufacturing operations has enabled us to meet the planned and unplanned needs of our customers.
We continue to work directly with the office of the U S Secretary of defense and key suppliers when possible to expedite customer shipments and are optimistic about improving industry fundamentals in the quarters to come.
Based on this recent progress we now feel confident that we will have sufficient supply and labor to meet this year's financial objectives.
Now I would like to switch gears and provide an update on current developments within each of our product lines.
Let me begin with our small UAS or suas product line, where we recently received the largest foreign military sales or Fms Award in our company's history.
This contract award has a maximum ceiling value of $176 million with an initial funding of $86 million and includes deliveries of Puma at Lee Puma, three AE systems spare parts packages and associated training and logistics support.
<unk> shipments are set to begin later this quarter and will continue for six to 12 months thereafter.
Let me emphasize our Puma systems have proven to be very critical to Ukraine forces and its ongoing conflict with Russia, particularly when combined with our highly effective switchblade loitering munitions to scout enemy targets and provide battle damage assessments.
This award is an amazing testimony to our entire Puma small UAS platform.
That said and as indicated earlier, while such a significant order strengthens our outlook in reaching our goals it was largely anticipated.
We are carefully planned for this contract award and the requirements to execute it.
These shipments also incorporate our latest anti jamming software enhancements to enable successful operation in a highly contested battle space.
In addition to this large Fms award we announced in September that Aerovironment had received two additional firm fixed price Fms awards totaling nearly $21 million for Puma three AE small UAS initial spares packages training and support for two Allied nations.
<unk>.
There is an urgent need for such systems and we are proud to continue helping the people of Ukraine and our allies abroad.
Now I would like to highlight some of our suas team's recent new product introductions.
In September we announced the introduction of our next generation vapor unmanned helicopter the vapor and X 55.
Vapor Nx 55 is a more rugged reliable and capable platform and includes a completely redesigned modular autonomy framework.
Enabling 25% increase endurance and 20% expanded payload capacity.
Also in September we announced the introduction of the Puma VNS, a visual based navigation system for Puma, AE and Puma three AE.
Puma VNS enables operators to navigate in highly congested GPS denied environments using onboard computer vision algorithms and visual terrain information.
Customers will also be provided with navigation capabilities features and functionality through future software and hardware updates.
This solution provides unprecedented advantages in a contested battlefield environment.
This is yet another example of how our investments in R&D and especially in artificial intelligence and computer vision further enhances our solutions capabilities.
For our customers.
And finally, we introduced a new Raven gimbal called Mantas 23 D.
The solution will be offered as an upgrade to ravens existing large global installed base of customers, who will benefit from this new state of the art sensor suite.
It is also important to note that we have already secured initial customer orders for many of these initial and innovative solutions already.
As anticipated, we're seeing improving demand for our small UAS product line, while we continue to prudently invest in product advancements and features positioning us for continued future growth.
This year will certainly proved to be one of the best ever for our small UAS product line and we are confident we will build on this strong foundation for years to come.
Moving to our tactical missile systems or Tms product line, we are experiencing solid demand and nearly doubled revenue this quarter versus fiscal year 2022.
Our Tms product line performance this quarter largely reflects shipments of the Switchblade 306 hundred to the U S. Army in support of the Ukraine Security assistance initiative or use AI and to backfill depleted USD <unk> stockpiles.
Given switchblade strong applicability to current conflicts, we expect order activity to remain heightened for the foreseeable future and we are now pursuing multiple opportunities with a wide range of domestic and international customers.
Domestically, we are working with the U S D O D to.
To backfill and expand existing switchblade inventories.
Overseas, we're seeking additional contracts to supply Ukraine, while pursuing orders with new international customers that USD with the recently approved for sale.
We continue to receive positive feedback that Aerovironment solutions are highly effective and best in class.
Our family of Loitering munitions continues to expand through multiple strategic partnerships such as with Northrop Grumman.
This switchblade variant called Jackal.
Turbo jet powered loitering munition with a range of more than 100 kilometers supporting multiple warheads and payloads and can be launched from ground or air.
This long range precision munition or L. RPM is meant to provide flexible durable strike options for the U S. Army's next generation helicopters.
The program is under a three to five year development cycle and could result in significant new awards for Aerovironment over the long term.
We're making solid progress on this new variant of Switchblade and have recently received initial funding to demonstrate this new disruptive capability.
Going forward, we anticipate healthy bipartisan support bar solutions as funding priorities are laid out for the governments fiscal year 2023.
In addition, with the approval of Switchblade 300, 600 sales to over 20 allies. There is ample opportunity for continued double digit growth across our Tms product line for the foreseeable future.
Just like with our SaaS product line.
There is the potential for much larger orders going forward and we're proud of developing such innovative solutions that help defend our country and our allies worldwide.
I will now switch gears and discuss our medium UAS or M UAS product lines.
As announced last quarter, we were awarded increment one of the U S Army future Tactical UAS, our EFT UAS program, which was greatly anticipated and is now fully underway.
We continue to train U S Army personnel in Germany, while activities are ongoing at Redstone Arsenal in Huntsville, Alabama with.
With flight testing expected to start in 30 to 60 days.
We're pleased to be the deepening our partnership with the U S Army and we're working hard to prove our advanced capabilities on this next generation program.
For government fiscal year 2023, the U S. Army's proposed funding for FTE UAS is approximately $100 million.
We expect the next phase of Ft, UAS or increment two to be awarded in the next six months.
While <unk> is an exciting $1 billion potential program of record.
Our current fiscal year is now expected to be flat in terms of <unk> growth.
<unk> has been in the near term priority for the U S. Dod spending in programs outside of Ukraine that typically utilize the jumped 20 aircrafts are not seeing as much activity.
As a result of this we have recorded some accelerated depreciation expenses, which are now reflected in our revised financial outlook for the fiscal year.
In addition, we have completed the integration of our most recent acquisition plank era systems into our UAS organization.
Regarding our unmanned ground vehicles, our UGG product line, we have secured a contract to provide ground robots to Ukraine with deliveries this calendar year.
Overall UGG proposal activity remains solid and we expect additional positive developments in the months to come.
Within our haps product line as announced last quarter, we're successfully executing against our current contract with Softbank for the next generation southern bladder.
Both aerovironment and Softbank remain fully committed to the vision of developing and commercializing stratospheric based telecommunications services.
At the same time, we're engaged with the U S. Dod.
In multiple fronts, which could lead to a new incremental contract in the coming quarters.
There is an emerging and growing need for stratospheric ultra long endurance persistent ISR capability for defense applications against near peer adversaries.
Absolution are ideal for these applications and the performance capabilities of our son glider UAV stand well ahead of competitors.
Overall, we remain on track for haps revenue to be between 30 million to $35 million this fiscal year.
And finally I'll share some exciting developments at Mcgrady works advanced solutions.
Aside from the well known contributions were making to NASA with the ingenuity unmanned Mars helicopter Maccready works continues to experience growth in customer funded R&D.
These efforts are focused in the areas of artificial intelligence machine learning and contested environment logistics.
Recently, we received contracts from the U S. Navy to continue R&D testing and evaluation of certain advanced image and video analytics capabilities and biometric target recognition.
We also completed several field experiments with customers to explore AI and machine learning based solutions for GPS denied environments operations.
At the same time, we remain actively engaged with Nasa's jet propulsion laboratories or JBL under next important Mars mission now and the preliminary design phase.
In summary, Aerovironment remains on track for another year of profitable double digit top line organic growth and improved underlying results.
I'm, especially proud of how effectively and efficiently our team has executed so far despite ongoing supply chain constraints.
We are well prepared to deliver on the second half of our current fiscal year, while positioning your rodman aerovironment, even more for even more growth beyond fiscal year 2023.
With that I would like to now turn the call over to Kevin Mcdonnell for a review of second quarter financials Kevin.
Thank you Rajeev today I will be reviewing the highlights of our second quarter performance during which I will occasionally refer to both our press release and earnings presentation available on our website.
Let me start by saying that the second quarter results were in line with expectations and with the strength of our order bookings backlog and subsequent large Fms order we are positioned for a very strong second half of the year.
As a result, I will try and provide increased visibility to the second half during my remarks.
Revenue for the second quarter of fiscal 2023 was $111 6 million a decrease of 9% compared to the second quarter of fiscal 2022 revenue of $122 million.
Slide five of the earnings presentation provides a breakdown of revenue by segment for the quarter. Our largest segment during the quarter was tactical missile systems, or Tms, which contributed $31 1 million of revenue compared to $18 $4 million. During this during Q2 of last year.
This increase was driven by a higher level of Tms manufacturing activity in the quarter, which was recognized based upon revenue overtime accounting.
Our small UAS business.
We finished the quarter with $26 $7 million revenue down from last year's $54 7 million the lower revenue in the quarter result of order timing and we expect a very strong second half of the year for suas given the large Fms order received after the end of the quarter. We also continued to see growing demand for upgrades and add on products from <unk>.
Both U S and international customers.
The medium UAS segment finished the quarter with revenue of $27 3 million, a 3% increase compared to the second quarter FY 2022.
We expect to increase product sales of the Mus jumped 20 in the second half of the year. However, we do anticipate a reduction in Cocos site service revenue as overall.
UAS program is reducing the number of sites operated.
Our half segment contributed $9 1 million in Q2, a decrease of $10 3 million in the prior year second quarter revenue from the other segment increased year over year to $17 $5 million versus $12 million in last year's second quarter. Most of the growth in other came from arm accretive <unk> business, which has seen.
Strong demand for both classified and unclassified Vod customers as well as jet propulsion labs.
Turning to gross margins slide five of the earnings presentation shows the mix of product versus service revenue.
Q2, we saw a product mix of 56% compared to 58% in the second quarter of last year.
We anticipate a shift back to the 70% products and 30% service mix during the second half of the year based upon expected significantly higher suas product sales and a shift of medium UAS the mean.
<unk> business to increase product sales.
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 and other noncash purchase accounting items for the second quarter GAAP gross margins decreased from 35.
Percent to 23% year over year in overall adjusted gross margins decreased from 39% to 27%.
The decline in both GAAP and adjusted gross margins as a result of lower overall revenue reduce small UAS product mix and accelerated depreciation of medium UAS Coco assets impacting service gross margins.
However.
We still expect adjusted gross margins for the year to be in line with fiscal 2022 as indicated previously.
I'll now provide some additional detail adjusted gross margins during the quarter adjusted product gross margin for the quarter were 38% versus 48% in the second quarter of the last fiscal year, primarily due to lower suas product mix in terms of adjusted service gross margins the second quarter was at 12% versus 27%.
During the same quarter last year, primarily as a result of lower Mbas margins. Following the accelerated depreciation charges of $4 5 million due to the anticipated site reductions mentioned earlier, we also expect additional accelerated depreciation of approximately $2 5 million in Q3.
To reiterate we expect annual gross margins to be in line with FY 'twenty, two and additional depreciate and additional depreciation expense will be more than offset by higher product sales as a percentage of total revenue in the second half of the year driven by higher small UAS product sales further we expect product gross margin in the second half of the.
The year to be in the low to mid 40% range.
Now turning to GAAP earnings we had a net loss for the second quarter of $6 7 million compared to a net income of $2 5 million in last year's second quarter, the $9 $2 million year over year decrease in net income was due to $16 6 million in lower gross margin due to lower sales volume unfavorable product mix and <unk>.
Accelerated depreciation in addition, R&D investments increased $2 3 million in the second quarter of fiscal 2023 versus the same period last year.
<unk> expense was $9 million higher over last year in equity investment losses were $1 6 million higher versus last year. These items were partially offset by a decrease in SG&A expenses of $1 2 million and a $10 million reduction in other expense.
As a reminder, in last year's second quarter, we recognized a $10 million litigation settlement charge that was recorded as other expense.
Terms of adjusted EBITDA Slide 13 of our earnings presentation shows the reconciliation of the GAAP net loss to the adjusted EBITDA. The adjusted EBITDA for the second quarter of fiscal 2023 was $6 8 million a decrease of $14 1 million, primarily due to the $13 8 million lower adjusted gross margins from <unk>.
<unk> revenue and unfavorable product mix.
Given the strong revenue and gross margin outlook for the second half of the year, we expected our adjusted EBITDA in the second half of the year to be significantly higher than the first half and the same period last year as a consequence, we are narrowing our adjusted EBITDA outlook to the upper end of our previous guidance range.
Slide 10 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted an adjusted earnings per share diluted share of zero cents for the second quarter of fiscal 2023 versus <unk> 78 per diluted share for the second quarter of fiscal 2022.
Turning to the balance sheet total cash and investments at the end of the quarter was $123 9 million, which is essentially the same as last quarter.
We had a good working capital quarter as the combination of accounts receivables and Unbilled receivables decreased during the quarter, partially offset by increasing inventories. We expect inventories to continue to increase as we ramp up to meet demand I'd also like to note that we paid down $20 million of our long term debt during the quarter.
We continue to have a strong balance sheet with over $120 million in cash and investments and approximately $100 million.
Available under our working capital facility.
I'd like to conclude with some highlights of our backlog metrics slide eight of the earnings presentation provides a summary of our current fiscal 2023 visibility.
As Wahid mentioned, our funded backlog at the end of the second quarter of fiscal 2023 was $293 million.
In November we were awarded a large fms contract with an initial value of $86 million, resulting in a November ending backlog of $388 million our visibility as of today to the midpoint of the revised guidance range is 92%.
We also expect orders continue to be strong for the remainder of 2023 now I'd like to turn things back to what Heath.
Thanks, Kevin as I noted earlier, we now have greater line of sight on our fiscal year 2023 financial performance given the overall robust demand environment and recent contract awards, especially our record Fms order for Puma systems.
As such we are now raising our revenue guidance for this fiscal year, our new outlook for fiscal year 2023 as shown on slide number seven and is as follows.
We anticipate revenue of between $505 million and $525 million, which is higher than our prior guidance.
Net income of 8 million to $17 million or <unk> 33 to <unk> 65 per diluted share.
non-GAAP adjusted EBITDA of between $84 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 26, and $1 58.
While we are raising revenue guidance and narrowed guidance for adjusted EBITDA, We have reduced some earnings metrics given greater than expected depreciation of <unk> assets and higher R&D investments necessary to capture future business opportunities.
However, we believe adjusted gross margins will increase sequentially going forward, driven by favorable product mix and higher volumes.
We expect to deliver adjusted EBITDA between 17% and 18% of revenue and R&D investments between 11% to 12% of revenue for the full fiscal year.
We continue to anticipate roughly 60% of full year revenue will be recognized in the second half of this fiscal year.
That second half total approximately 60% of it will occur in Q4 as we deliver on orders now in the production stage.
In summary, with 92% visibility to the midpoint of our revised revenue guidance range. We are confident in our ability to achieve not only these objectives in fiscal year 2023, but also position aerovironment for another year of strong profitable growth in fiscal year 2024 and beyond.
Before turning the call over for questions. Let me once again summarize the key points from today's call.
First were performing according to our plan with second quarter and first half results largely in line or slightly ahead of expectations.
Second we are confidently raised revenue guidance for this fiscal year, even as we continue managing through several challenges, including supply chain constraints and inflationary cost pressures, while making the investments necessary to capitalize on future growth opportunities.
And third we are positioned for strong organic double digit growth this year as evidenced by our solid visibility record backlog and continued growth across nearly all our product lines.
We expect margins in backlog to increase throughout the second half of this fiscal year laying the foundation for strong profitable double digit organic growth in fiscal year 2024 and beyond.
I would again like to thank our employees for their hard work and dedication to our success.
They and our loyal shareholders have made aerovironment what it is today a global leader in intelligent multi domain robotic solutions, which helped to protect our country and our allies around the world.
And with that Kevin and John and I will now take your questions.
Thank you.
As a reminder to ask a question you need to press star one on your telephone please standby, while we compile the Q&A roster.
We respectfully ask Louis you just stick to two questions limited and return to the queue to ask further questions. One moment. Please.
Our first question comes from the line of Peter Arment Baird. Your line is open.
Hi, guys good afternoon Wahid Kevin.
Estimated either Peter.
Hey.
I guess just to comment on that on the backlog, maybe you could just give us.
An expectation of kind of how you see things progressing year from here with them.
Your Tms obviously, it sounds like a lot of the small.
Small UAS is really ramping up based on the order, but maybe if you could just walk us through kind of some of the demand signals that you're seeing on Tms just given the growing most of the countries there.
Sure. So Peter we're very excited about the prospects of growth this year as well as next year.
Yes for this quarter at this time.
Our small UAS have booked some very significant international Fms orders and domestic orders that are really propelled it but.
But we expect similar demand and growth in our tactical missile systems business, if not greater it's purely based on the timing of the quarter and our customers' ability to execute the contracts. The U S. Dod is really really backed up in terms of.
Resources to be able to execute on these contracts.
The Ukraine conflict is obviously priority number one for a lot of the customers of ours.
And folks that we deal with but we expect strong order growth in the next second two quarters for not only a small UAS, but absolutely also for our Tms business. Similarly, we expect some strong growth in our other product lines, such as our Maccready works, which really it's constrained primarily not by contracts by by resources.
Top talent that we need to execute the work. So overall I see very very positive signs in terms of our prospects for growth in the future and I expect the order activity to continue to be in this momentum that we are today and it will even pick up towards the latter part of this second half of this fiscal year.
A follow up just thinking about like the.
The bottom line adjusted EPS, So you're still expecting.
Quite a big range to come in in the second half of them running two quarters of the year.
That range still with only two quarters is still pretty wide is that just.
Mixed driven or are there any other puts and takes we should be thinking about within the women that EPS range.
Great. Peter glad you asked that question because really the range has to do with the timing of these orders.
The mix, obviously as the number one driver there.
Given the different product lines, but we have.
Our profitability profile of each and every single one of these contracts vary and depending on which contract is able to come in first and what takes priority versus the other it really makes a big difference on the profitability overall, though we expect profitability significantly increase in the second half, especially in the fourth quarter and we also expect our.
<unk> gross margin to pick up and since volume is going to be up all of that ends up being a better profitable outcome for the second half of the year for us as we have forecasted.
Thank you again, if you'd like to ask a question. Please press star one one on your telephone one moment. Please.
One moment. Our next question comes from the line of Austin Moeller of CMT. Your line is open.
Hum.
Paul would you Didnt Kevin.
Hello, Osten, either high so so nicely outlook in the quarter here Youre Puma delivery outlook over the next couple of quarters would seem to imply that CPU and GPU supply chain is improving because of softer consumer demand you're able to get your hands on <unk>.
And Gpus now.
So Austin the supply chain picture is really a mixed bag. If you look at the entire spectrum of parts CPE.
Cpus Gpus.
Et cetera.
I believe that our team has done a fantastic job navigating through those challenges last couple of years as well as this year for this year, we have very strong visibility on our booking and backlog as you saw from the numbers and we have pretty much addressed vast vast majority of the supply chain.
Risks related to the execution and delivery of products for the second half of the year by no means is the supply chain constraints overall completely done and gone, it's actually improving but it's improving slowly.
And we don't see a risk on our fiscal year 'twenty three forecast as much.
Although theres always some uncertainty, but beyond that it's still a day to day week to week challenge of addressing them.
The other thing that has really helped us as we really plan our supply chain many quarters out upfront.
Since we actually have been building up inventory and buying materials at risk in building product. It allows us to execute on these orders and respond to the U S government any great conflict very very quickly are these.
These orders that we received we were expecting these orders before the timing of which was not really very firm. We had built ahead of that many of the modules and we were able to.
We're able to ship some of that majority of that this fiscal year. So it is a great Testament to our team's ability to execute and also plan for the growth that we expected this year and the year.
After this.
Okay, that's super encouraging.
Do you I don't know if you've seen the news that they're running out of Pi Mas rockets and now they're trying to sneak small diameter bombs onto our toy rockets and Ukraine.
Can you do the same with Switchblade six hundreds warhead, just given the job one production delays and supply chain issues could you put it different explosive on a stormy to work.
So the short answer is yes, but there is a big bite on that response.
We are definitely the number one supply chain constraint for Switchblade remains the warhead for Switchblade, both 300 600.
We have tackled all the other supply chain issues and we're getting those two from two major primes.
Primarily at general dynamics, and Northrop Grumman's and both of them have constrains in terms of the capacity of producing that warhead. We are actively not only working how we can secure more warheads for switchblade 300, 600, but also to put a new warheads as you indicated on your on your comments now the challenge with substituting the.
Warhead is that it has to go through our safety confirmation test and approval by the U S Army.
And that process is not only a non trivial but it also takes time, because they're backed up and a lot of other request and activities related to this.
Nonetheless, we are focused on multiple fronts, we feel very confident about our forecast for this fiscal year, we're really working on issues beyond this fiscal year, because we believe that the demand for our switchblade is going to continue to grow.
Gonna have one of the best years for our small UAS and Tms This fiscal year and I am confident that we are going to be positioned extremely well for the next year as well.
Order activity and demand is pretty robust both domestically and internationally and I expect that to continue and those to transfer transition into orders and leave US said this fiscal year with a pretty healthy strong backlog going into next year.
Thank you one moment please.
Our next question comes from the line of Pete Sobecki Alan.
<unk> Your line is open.
Hey, good evening guys.
Good evening.
Yeah. So sorry, if you addressed this already I got on the call a bit late guys, but on the $86 million small UAS contract.
I guess $176 million ceiling.
The Fms contracts, what's the timeframe for both of those portions that $86 million portion and the larger portion and then also is that the one country where multiple countries.
Pete that order is.
Historically, the largest Fms order we've ever recorded in the history of our company is an exciting big order for our Puma. It includes Puma, <unk>, and Puma AE systems, and spares and logistics.
<unk> $86 million of that contract is funded today.
The total ceiling value of that contract is approximately $176 million because it's a contract.
Involved delivering hardware and logistics support and training the tail of that will continue for another six to 12 months, even but majority of the hardware will be delivered.
Between.
The second half of this fiscal year, starting this quarter and the beginning of next.
Fiscal year.
In response to how many countries that is specific to one country, one country and it just shows the power of our systems and the value that our customers place on our system, thus part of their battle rhythms and they're complex.
No Switchblade has received a lot of notoriety and success in Ukraine, and also have sort of attention, but coolers are equally as effective and vital to the Ukraine enforces and their conflict against you.
Russia, and we believe that it's going to continue to be the case for not only Ukraine, but many of our other allies around the region and around the world.
Okay, that's good and extraordinary contract congrats on that.
Just last one for me on the on the meeting on the emulator.
Segment, the steep loss there this quarter on gross margin and operating margin.
I was just wondering was there some strategic reason there for that loss was there a surge in R&D or some unusual mix I'm just wondering because revenue was good this quarter and I ask because.
The loss was.
You know the largest since you acquired the firm so Im sure went on there.
Sure Pete So let me shed some light onto that this is a one time.
Really accounting.
Thing that took place and the math is pretty straightforward. We operate all of these sites as our cocoa contractor owned continental operated sites for the U S. So com because of the attention to Ukraine and the conflict with Russia. Many of the other activities around the world is getting less attention and lets focus so if the sites.
The other parts of the world are reduced or the op tempo has shrunk than by accounting GAAP rule accounting rules by definition. It means the inventory that we carry as the assets I'm sorry, the capital asset that we carry two to operate those sites.
Accelerated in terms of its depreciations on our books that charges directly result of that.
We still feel very solid and confident about our N UAS business in the long run as I said in my remarks, we want increment zero and income in one contract for FTE UAS, we're performing well against that contract. We've already start training the U U S. Army forces on those we have shipped the product to them and we're looking.
Forward to increment to award, which there is close to $100 million in the U S. Dod's budget programming government fiscal year 'twenty for so long term, we feel very strong about our UAS business and its prospects for growth. Both domestic internationally that was a onetime depreciate accelerated depreciation that resulted us out as a result of this slight reduction.
And so.
So kind of it was what $4 5 million in case, you missed it in our comments of the accelerated depreciation.
In the quarter and.
And even with that we still believe we're going to hit our gross margin targets for the year, yes.
Okay. That's great I appreciate the color guys. Thank you Youre welcome.
Thank you.
One moment please.
Our next question comes from the line of Ryan Rutenberg of Imperial Capital. Your line is open.
Yes. Thank you very much just a couple of follow ups real quick in terms of operating expenses can you give us a little bit of guidance for third and fourth quarter, how they look versus <unk>.
Second quarter in terms of R&D and SG&A.
Maybe give us directionally flat up down from the second quarter levels.
We don't normally give that level of guidance, but there's what he'd indicated I think we're 11%, 12% R&D for the for the year.
And generally we usually try to level load our R&D throughout the year because of capacity.
Capacity of head count and resources. So you don't usually see a major increase or decrease on a quarterly basis in our R&D spend Brian in general.
Great you talked about 11%, 12% R&D.
SG&A.
As a percentage it should drop from.
Second quarter kind of going to okay, great. Thanks very much.
It's the same situation.
Your SG&A expenses aren't going to bump way up with revenue in the in the next couple of quarters, we're going to get a lot of leverage with that increased in revenue. They will continue to increase primarily because there is some commissions and things like that and we are expanding our sales force activities and the BNP of bids and proposal activity.
And then high and will continue to be high but those are very positive signs Brian because it means that the demand there is a demand for our solutions and were competing for projects and our win rate generally is quite high.
Great. Thank you.
Youre welcome.
Thank you.
I'm showing no further questions at this time I will turn the call back over to Joseph <unk> for any closing remarks.
Thank you once again for joining today's conference call and for your interest in Aerovironment.
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