Q1 2024 AeroVironment Inc Earnings Call

Good day, and thank you for standing by and welcome to the Aerovironment fiscal year 'twenty 'twenty four first quarter conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your touch.

Please be advised that today's conference is being recorded I would now.

I hand, the conference over to your Speaker today, Joe not Teeter Balan. Please go ahead.

Thanks, and good afternoon, ladies and gentlemen, welcome to Aerovironment for fiscal year 2024 first quarter earnings call. This is John and Peter <unk> Senior director of corporate development and Investor Relations.

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.

These statements involve many risks and uncertainties that could cause actual results to differ materially from our expectations.

Further information on these risks and uncertainties is contained in the company's 10-K and other filings with the SEC in particular in the risk factors and forward looking statements portions of such filings copies are available from the SEC.

Aerovironment website at Www Dot <unk> dot com or from our Investor Relations.

This afternoon, we also filed a slide presentation with our earnings release and posted a presentation to the investors section of our website under events and presentations.

The contents of this conference call contains time sensitive information that is accurate only as of today September five 2023.

<unk> undertakes no obligation to make any revision to any forward looking statements contained in our remarks today.

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, <unk>, and senior Vice President and Chief Financial Officer, Mr. Kevin Mcdonald we.

We will now begin with remarks from Wahid Milwaukee.

Thank you Jonathan and welcome everyone to our fiscal year 2024 first 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.

I will then provide information related to the outlook for fiscal year 2024, after which Kevin Joanne I will take your questions.

I am pleased to report that we're off to a very strong first quarter and we believe we're on track for our best year ever.

Our key messages, which are also included on slide number three of our earnings presentation are as follows.

First first quarter revenue rose to $152 million, a 40% increase year over year and our best Q1 in Av's history.

This reflects a robust demand for our market, leading intelligent unmanned systems domestically and abroad.

Second our funded backlog rose to a new record at $540 million up from $424 million at the start of fiscal year two.

2024.

This backlog reflects $268 million of new bookings during the first quarter.

Third we recently announced that <unk> will purchase privately held tomo robotics, enabling multi domain controller of a wide variety of unmanned solutions from one user interface.

And fourth we are raising our previously issued guidance for fiscal year, 2024, which I'll cover later in more detail.

Gross margin for the first quarter was $65 $7 million, an increase of 95% versus last fiscal year was $33 $7 million and our gross margin as a percentage of sales rose to 43% from 31% in fiscal year 2023.

We continue to expect gross margins remained strong in fiscal year 2024, as our revenue mix shifts to more favorable product sales.

Overall fiscal year 2024 is off to a great start and we're squarely on track to meet our increased outlook for the full year.

Global trends continue to support broader long term adoption of our solutions and we aim to take the company to new levels in both scale and performance this year and beyond.

In line with our strategy, we recently agreed to acquire Tomahawk robotics for $120 million a leader in AI enabled robotic common control systems and open standard communication technologies.

We believe this transaction will enable <unk> to provide a deeper broader and simpler integration between our own and other unmanned solutions, making it easier for our customers to successfully operate a variety of unmanned solutions in the field.

Tomahawks technology will streamline the operation of Abb's family of unmanned systems, enabling our users to achieve their missions with greater efficiency and simplicity.

Tomahawks Kinesis ecosystem provides unmatched tactical capabilities utilizing AI enhanced open architecture control system that operating that seamlessly integrate any unmanned asset providing a common operating picture for the operator.

We expect <unk> to enable these products to achieve an elevated modular open systems approach, which is in high demand by customers across the globe.

In addition, combining features of avs crystal less operating system with the kinesis platform means paring the best common controller technology with the most ubiquitous unmanned systems on the market today.

Avi and Tomahawk have been working together over the past few years integrating tomahawks kinesis control system with a small unmanned aircraft family of systems, including Raven and Puma three AE.

Through our partnership we have gained firsthand knowledge of the solutions that Tomahawk offers and we're confident that the combined experience and expertise of our two teams will result in a variety of unmatched unmanned expeditionary vehicles that meet our customers' emerging needs and exacting standards.

Once the transaction closes, which we expect to occur later this quarter tomo will operate as an additional product line reporting into our unmanned systems segment led by senior Vice President and general manager of trace Stevenson.

We expect this transaction to drive incremental revenues adjacent market growth opportunities and product performance synergies driven by the integration of our prospect respective technologies.

All of this should drive increased shareholder value.

Yes.

We will provide updated guidance during our second quarter earnings call, reflecting the impact of this transaction to our anticipated fiscal year 2020 for performance.

Before turning to the product line's results I want to remind everyone that we consolidated our businesses into three reporting segments at the beginning of this fiscal year unmanned systems loitering munitions and liquidity works.

Starting with our unmanned systems segment revenue grew 45% year over year to a record $98 2 million.

Shipments during the quarter were driven by strong demand across a broad range of products, particularly our Puma systems, which are urgently needed overseas.

We continue to deliver Puma AE and Puma three AE systems through last year's large Ukraine foreign military sales order, but are nearly.

Nearly through the $176 million ceiling value with a portion to be delivered in the second quarter.

Looking ahead, our backlog remains robust.

Moving to our jumped 20 system, we recently secured a $42 million contract from the U S Army for the Ukraine Security assistance initiative or use AI.

John <unk> will be the first group III UAS platform provided by the U S Department of defense to Ukraine.

This is also the largest aircraft platform that the USDA has provided to Ukraine. So far.

We plan to ship these systems during this our second quarter of this fiscal year.

We remain confident that our jumped 20 is the most mature and capable solution in its class.

We also recently finalized a 10 year tactical assistant agreement with Mexico for jumped 20 systems, allowing <unk> to continue providing UAS support and training to the government of Mexico is armed forces through the foreseeable future.

The Mexican armed forces continue to rely upon jumped 20 as the only group III UAS platform in their operations.

With an unmet ground vehicles or <unk>. We recently achieved received another order from the Danish Ministry of Defence for 'twenty, One ground robots systems, a mix of telematics and <unk> products, which are the first for that nation.

We've also delivered the initial batch of five <unk> systems to the Netherlands under our prior 30 robot contract.

At the same time, we continue to Mark progress, providing <unk>, Ukraine on an accelerated schedule, which are performing lifesaving EOG machines in the field.

Given our growing backlog across the entire unmanned systems segment, we're confident we're on track for another great year.

Moving toward loitering munitions segment I am pleased to say that growth continues with sales up 34% year over year.

This reflects switchblade shipments to an expanding number of allied countries across the globe.

Recent demand for Switchblade 306 hundred systems has been largely driven through the latest use AI in the U S government.

The U S Army recently awarded US another contract for Switchblade, 600, loitering munitions and support of the U S. AI.

At the same time, we anticipate the U S government will continue to backfill and increased depleted stockpiles.

Additionally, we are responding to a request for information or RFID related to the U S. Marine Corps organic precision fire or <unk> program.

Overall, we anticipate both U S and international demand for our loitering munition systems to remain strong through the rest of fiscal year 2024.

It is also important to mention that the last batch of our Switchblade 300 block tendency configuration has been shipped and we have transitioned to the next generation block 20 variant.

Switchblade 300 block 20 feature significantly more endurance, a tablet based fire control system and other enhanced performance capabilities.

Switchblade 300 block 20 has successfully completed the U S Army safety confirmation certification and is now being delivered to customers.

Moving to our <unk> segment I'm pleased to report that segment revenues also grew 31% year over year to $23 2 million.

We're also making solid progress in our stratospheric solar Haps program. We successfully completed further flight test using a smaller scale version of the new satellite aircrafts.

These tests allow our team to collect and analyze large amounts of data, which could not otherwise be obtained from computer based stimulations.

We will now apply these learnings to our next generation Zen glider while at the same time working with the FAA for type certification.

With that I would like to now turn the call over to Kevin Mcdonald for a review of the first quarter financials, Kevin. Thank you Wahid today, and I will be reviewing the highlights of our first quarter performance, which I will occasionally refer to both our press release and earnings presentation available on the website also there is an 8-K.

Available on our website, which recast our historical results into the new segments.

Overall, we started the first quarter extremely strong in terms of the backlog revenue adjusted gross margins and adjusted EBITDA as.

As Wahid mentioned his remarks revenue for the first quarter of fiscal 2024 was 100, $152 3 million, an increase of 40% as compared to the $108 5 million from the first quarter of fiscal 2023.

Slide five of the earnings presentation provides a breakdown of revenue by segment for the quarter, our largest segment during the quarter with unmanned systems or UAS, which is a combination of our small UAS medium UAS and <unk> businesses with revenue of $98 2 million, an increase of 45% from last year's 60 $788 million driven.

Primarily by our small UAS business unit with ship systems to eight international countries during the quarter.

Florida Munition systems, our LMS recorded revenue of $30 9 million or 34% increase compared to the $23 million land.

Last year during Q1, LMS demand continues to be driven by strong U S and international orders.

Revenue from them are Crazy work segment came in at $23 2 million, an increase of 31% compared to the $17 7 million from the first quarter of last fiscal year. We continue to see strong demand in <unk> services within the various agencies of the U S. Dod and U S government in particular increase in demand for our corporation of our computer vision economy in AI.

Capabilities.

In slide five of the earnings presentation, there's a breakdown between product and service revenue specifically during the first quarter product revenues accounted for 78% of total revenues a notable increase from 53% and a corresponding quarter of the previous year due to strong product revenues from our small UAS business.

A lesser extent from lower Mus cocoa service operations with the closure of all of the site locations for the remainder of fiscal 2024, we expect product sales to remain above 70% of total revenue, but expect LMS sale to increase as a percentage of product sales, which will have the impact of lowering overall product gross margins.

Now turning to gross margins slide six of the earnings presentation shows the trend of adjusted product and service gross margins on slide 12 reconciles the GAAP gross margins to adjusted gross margins, which excludes intangible amortization and other noncash purchase accounting items.

In the first quarter consolidated GAAP gross margin finished at 43% up.

Compared to 31% in the previous year the improvement in GAAP gross margins was largely a result of improved product service mix and strong product gross margins. In addition, gross margins were favorably impacted by a decrease of $4 million of depreciation on cocoa ISR assets.

Adjusted gross margin for the first quarter were 45% compared to 34% in the first quarter of last year. The improvement in adjusted gross margins was also driven by the improved service mix and strong product gross margins.

Adjusted product gross margin for the quarter were 49% versus 44% in the first quarter of fiscal of last fiscal year again to a higher mix of revenue from our small UAS products during the quarter in terms of adjusted gross service gross margins. The first quarter was at 28% versus 22% during the same quarter last.

Last year again due to the closure of the Mus cocoa operation sites.

We expect adjusted gross margin to continue to be strong during the first half of the year average our product mix shifts during the second half of the year. We expected expect adjusted gross margins to end up in the high <unk> for the year.

In terms of adjusted EBITDA Slide 13 of our earnings presentation shows the reconciliation of GAAP net income to adjusted EBITDA in the first quarter of fiscal 2024, adjusted EBITDA was $37 million, representing an increase of $24 million or 54%. The main factors contributing to this increase.

Our higher sales volume and favorable sales mix, which was partially offset by incremental SG&A expenses investments in R&D.

SG&A expense SG&A.

SG&A expense, excluding intangible amortization and acquisition related expenses for the quarter was $23 million or 15% of revenue compared to the first quarter of fiscal 2023 of $18 million or 16% of revenue.

While R&D expense increased modestly year over year in dollar terms R&D expense as a percentage of revenue was 10% versus 14% in the corresponding quarter of last year R&D.

R&D will run closer to 12% for the full year as we continue to invest in new products and upgrades to existing products to meet the evolving needs of our customers.

Now turning to GAAP earnings in the first quarter. The company generated net income of $21 9 million versus a net loss of $8 4 million recorded in the same period last year. The increase in net income of $30 3 million can be attributed to several factors, namely $31 $9 million increase in gross margin driven by a rise.

And sales volume and improvement of revenue mix of $3 $4 million decrease to intangible amortization and a $1 $3 million decrease in taxes. This was partially offset by a $1 $9 million increase in SG&A expenses of <unk> $4 million increase in R&D spending and a $2 million increase in unrealized loss.

Our equity related investments.

Slide 10 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted earnings per diluted share of $1 for the first quarter of fiscal 2024 versus <unk> <unk> per diluted share loss for the first quarter of fiscal 2023.

Turning to the balance sheet total cash and investments ended the quarter was $128 4 million, which is a decrease of $28 million from the fourth quarter of fiscal 2023 during the quarter, we reduced our <unk>.

Our long term debt by $5 billion to $130 million.

Unknown Executive: Thank you for standing by. Welcome to the AeroVironment fiscal year 2024 first quarter conference call. At this time, all participants are innocent only mode.

Inventories increased $37 million during the quarter of fiscal 2020 for.

Inventories will remain at these levels as we prepare for shipments in the coming quarters and carry extra inventory result of supply chain risk minimization with that said inventory as a percentage of backlog are in line with recent historical averages and down from Covid period averages.

Unknown Executive: After the speakers presentation, there will be a question and answer session to ask the question during a session, you need to press star 101 on your telephone. Please be advised that today's conference is being recorded.

Unknown Executive: I would not like to hand a conference over to you speak today.

We continue to have a strong balance sheet with over $100 million of cash and investments and approximately $100 million available under our working capital facility.

Jonah Teeter Bayland: Jonah Teeter Bayland, please go ahead. Thanks in good afternoon, ladies and gentlemen. Welcome to AeroVironment fiscal year 2024 first quarter earnings call. This is Jonah Teeter Bayland, senior director of corporate development and investor relations. 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. These statements involve many risks and uncertainties that could cause actual results to differ materially from our expectations.

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 2024 visibility as Wahid mentioned, our funded backlog at the end of the first quarter of fiscal 2024 was a record $540 million, an increase of 27% from the prior quarter visibility to.

The midpoint of our revised FY 'twenty for revenue guidance range is over 100% with our record setting revenue and backlog, we are positioned well for another record setting growth year in fiscal 2024, now I would like to turn things back to Wahid.

Jonah Teeter Bayland: Further information on these risks and uncertainties is contained in the company's 10K and other filings with the FEC. In particular, in the risk factors and forward-looking statement portions of such filings, copies are available from the FEC on the AeroVironment website at www.avinc.com or from our investor relations. This afternoon, we also file a slide presentation with our earnings release and posted a presentation to the investor section of our website under events and presentations.

Thanks, Kevin with a record backlog of orders and after a very strong first quarter, we're increasing our guidance for fiscal year 2024 as follows.

We anticipate revenue of between $645 million $675 million.

We anticipate non-GAAP adjusted EBITDA of between $117 million and $127 million.

Jonah Teeter Bayland: The contents of this conference call contains time-sensitive information that is accurate only as of today, September 5, 2023. The company undertakes no obligation to make any revision to any forward-looking statements, contained at our remarks today or to update them to reflect the events or circumstances occurring after this conference call.

Representing about 18% of revenue.

Net income guidance remains unchanged at $51 million to $59 million or $1 91 to $2 21 per diluted share.

Wahid Nawabi: Joining me today from AeroVironment are Chairman, President and Chief Executive Officer, Mr. Waheed Nawabi and Senior Vice President and Chief Financial Officer, Mr. Kevin McDonald. We will now begin with remarks from Waheed Nawabi. Waheed, thank you, Jonah.

This was primarily due to increased R&D investments in support of our strong growth.

non-GAAP earnings guidance also remains unchanged between $2 30, and $2 60 per diluted share.

We expect R&D investments to be closer to 12% of revenue this fiscal year.

Wahid Nawabi: Welcome everyone to our fiscal year 2024 First Quarter earnings conference call. I'll start by summarizing our performance and recent achievements after which Kevin will review our financial results in the greater detail. We will then provide information related to the outlook for fiscal year 2024 after which Kevin, Jonah and I will take your questions. I'm pleased to report that we are off to a very strong first quarter and we believe we're on track for our best year ever.

As a reminder, we expect a more balanced revenue distribution with roughly 50% of revenues expected to occur in each half of this fiscal year.

We now have nearly 100% visibility to the midpoint of our revised revenue guidance.

While we are confident in our ability to achieve our guidance. There are also numerous factors at play.

Wahid Nawabi: Our key messages, which are also included on slide number three of our earnings presentation, are as follows. First, first quarter revenue rose to $152 million, a 40% increase year over year, and our best 2-1 in AB's history. This reflects robust demand for our market leading intelligent unmanned systems domestically and abroad. Second, our funded backlog rose to a new record at $540 million up from $424 million at the start of fiscal year 2024.

This includes working with suppliers to scale their businesses to match our needs as well as securing long lead items.

We remain well positioned to deliver nearly 20% growth in revenue higher margins and overall improved bottom line results.

The investments we're making this year should also position the company for continued growth in years to come.

While the overall geopolitical environment as well as battlefield trends towards significant greater use of unmanned platforms support our confidence in the future. We're mindful that the U S. Government is nearing the end of its fiscal year.

Wahid Nawabi: This backlog reflects $268 million of new bookings during the first quarter. Third, we recently announced that AB will purchase privately held Tomaq Robotics, enabling multi-domain control of a wide variety of unmanned solutions from one user interface, and Ford were raising our previously issued guidance for Fiscal Year 2024, which I will cover later in more detail. Gross margin for the first quarter was $65.7 million, an increase of 95% versus last Fiscal Year's $33.7 million, and our gross margin as a percentage of sales rose to 43% from 31% in Fiscal Year 2023.

We as with most defense contractors now regularly assume that a continuing resolution is more likely than not which could impact contract timing.

However, I would say unequivocally that Avi remains optimistic about our fiscal year 2024, given broad support for our systems and services.

We believe the current administration will continue to provide the necessary budget dollars and prioritization for the type of mission critical unmanned systems, we supply, particularly in contested environment operations.

We are at the forefront of developing and offering and demand solutions for autonomy automatic target recognition and tracking.

Wahid Nawabi: We continue to expect gross margins to remain strong in Fiscal Year 2024 as our revenue makes shifts to more favorable product sales. Overall, Fiscal Year 2024 is off to a great start and we're squarely on track to meet our increased outlook for the full year. Global trends continue to support broader long-term adoption of our solutions, and we aim to take the company to new levels in both scale and performance this year and beyond.

In addition, the USD EOG is investing more in loitering munitions and small unmanned systems areas, where we are well positioned to thrive.

Now let me once again summarize the key points from today's call.

First we delivered record first quarter results, which provides a solid start to fiscal year 2024.

Second our record funded backlog remains at historic levels, reflecting strong global demand for our solutions.

Wahid Nawabi: In line with our strategy, we recently agreed to acquire Tomahawk Robotics for $120 million, a leader and AI enabled robotic common control systems and open standard communication technologies. We believe this transaction will enable AV to provide a deeper broader and simpler integration between our own and other unmanned solutions, making it easier for our customers to successfully operate a variety of unmanned solutions in the field. Tomahawk's technology will streamline the operation of AV's family of unmanned systems, enabling our users to achieve their missions with greater efficiency and simplicity.

Third the acquisition of Tomahawk Robotics will further improve the outlook for interconnected unmanned solutions and opens new avenues for growth across our product portfolio.

And fourth overall, the fundamentals of our business look better and better than ever in our history and we are well positioned to continue our growth trajectory as Congress begins laying the groundwork for the fiscal year 2020 for budget.

Before turning the call over to questions. We're also excited to welcome Admiral fill Davidson to our board of directors.

Wahid Nawabi: Tomahawk's Kinesis ecosystem provides unmatched tactical capabilities utilizing an AI-enhanced open architecture control system that seamlessly integrates any unmanned asset providing a common operating picture for the operator. We expect Kinesis to enable AV's products to achieve an elevated modular open systems approach, which is in high demand by customers across the globe. In addition, combining features of AV's Chrysalis operating system with the Kinesis platform means pairing the best common control technology with the most ubiquitous unmanned systems on the market today.

We will fill Davidson brings extensive knowledge of battlefield operations, especially in the Endo pay Com theater and the deployment of new defense capabilities.

We look forward to the unparalleled strategic counsel envision he will bring to <unk>.

I would also like to thank Kathryn Marigold for her eight years of service on our board of directors as she is stepping down at our upcoming annual meeting.

Our passion for four and interest in our company's future were instrumental to our success during her tenure.

And as always my appreciation to our workforce goes without saying without such a dedicated and talented team of professionals, we would not have the market leading position powered by the cutting edge technological advancements that we enjoy today.

Wahid Nawabi: AV and Tomahawk have been working together over the past few years integrating Tomahawk's Kinesis control system with AV's small unmanned aircraft family of systems, including Raven B and Puma 3AE. Through our partnership, we have gained firsthand knowledge of the solutions that Tomahawk offers, and we're confident that the combined experience and expertise of our two teams will result in a variety of unmatched unmanned expeditionary vehicles that meet our customers. We expect our customers emerging needs and exacting standards.

We appreciate all of our employees every day, just as we do our long standing investors and other stakeholders in the company.

The future continues to look bright and we believe fiscal year 2024 will drive the company to new Heights.

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

Okay.

As a reminder to ask a question you will need to press star one one IRA telephone please.

Wahid Nawabi: One of the transaction closes, which we expect to occur later this quarter. Tomahawk will operate as an additional product line reporting into our unmanned system segment led by CD Vice President and General Manager Trace Stevenson. We expect this transaction to drive incremental revenues, adjacent market growth opportunities, and product performance energies driven by the integration of our respective technologies. All of this should drive increased shareholder value. We will provide updated guidance during our second quarter earnings call reflecting the impact of this transaction to our anticipated fiscal year 2024 performance.

Please standby, while we compile the Q&A roster respectfully ask that callers limit themselves to questions and return to the queue to ask additional questions.

One moment for our first question.

Yeah.

Our first question comes from the line of Gregory Conrad from Jefferies. Your line is open.

Good evening and great quarter.

Thank you Greg Thank you.

Maybe just to start on the outlook I mean, the revenue outlook.

Pretty big raise one quarter and can you maybe just talk about what's changed.

Wahid Nawabi: Before turning to the product line's results, I want to remind everyone that we consolidate our businesses into three reporting segments at the beginning of this fiscal year, unmanned systems, loitering munitions, and McWady works. Starting with our unmanned system segment, revenue grew 45% year of year, to a record $98.2 million. Shipments during the quarter were driven by strong demand across a broad range of products, particularly our Puma systems, which are urgently needed overseas.

Last quarter or has there been some risk retirements is that orders and just kind of what's driving that better revenue outlook for the year.

Sure. So we're very pleased with how great. Our team performed on the first quarter. Greg There are several factors why we raised that.

Out of our guidance.

For full fiscal year 2024, one is we've had a tremendous first quarter.

And our first quarter. This is a historic first quarter for the company second our backlog as you saw is.

Wahid Nawabi: We continue to deliver Puma LE and Puma 3AE systems through last year's large Ukraine Foreign Military Sales Order, but are nearly through the $176 million ceiling value, with a portion to be delivered in the second quarter. Looking ahead, our backlog remains robust. Moving to our jump 20 system, we recently secured a $42 million contract from the U.S. Army for the Ukraine Security Assistance Initiative or USAI. Jump 20 will be the first Group 3 UAS platform provided by the U.S. Department of Defense to Ukraine.

At our historic levels also we have another record on top of a record that we achieved this Q1 and then our visibility to the midpoint of our revised guidance is nearly at 100%. So.

You can look at that and say based on our inventory position and ability for us to be able to secure long lead items, we feel fairly strong that at this time, we can achieve the revised guidance range that we provided.

Wahid Nawabi: This is also the largest aircraft platform that the U.S. DOD has provided to Ukraine so far. We plan to ship these systems during our second quarter of this fiscal year. We remain confident that our jump 20 is the most mature and capable solution in its class. We also recently finalized a 10-year tactical assistant agreement with Mexico for our jump 20 systems, allowing ABE to continue providing UAS support and training to the government of Mexico's Armed Forces through the foreseeable future.

The demand for our solutions remained very healthy both domestically and abroad and I think the whole aerospace and defense industry is in a.

A point of inflection when it comes to small unmanned systems as a distributed architecture of warfare as well as loitering munitions, both categories, which we are essentially invented in the marketplace over the last two decades. So we are positioned extremely well the demand seems to be very strong even beyond fiscal 2024.

And we felt that at this time, we should raise our guidance to be able to achieve there are higher levels of.

Revenue outlook on the top line that we provided.

Okay, and then maybe just a follow up if you can talk about tomahawk a little bit.

Wahid Nawabi: The Mexican Armed Forces continue to rely upon Jump 20 as the only Group 3 UAS platform in their operations. With an unmanned ground vehicles or UGV, we recently achieved received an order from the Danish Ministry of Defense for 21 ground robot systems, a mix of telemax and teodor products which are the first for that nation. We've also delivered the initial batch of five UGV systems to the Netherlands under a prior 30 robot contract.

Had progeny and just kind of how you view the shift from maybe hardware to more software and integration and how you think about that kind of expanding the addressable market as you get more into kind of control and software side versus the hardware.

Sure. So I'm glad you asked that question, Greg because it is a really important point.

To make here there are several reasons why we decided to acquire Tomahawk, which we've known by the way for many many years, we worked with them in the past as I mentioned on my remarks, and we know the technology the products and their talent very very well, it's very similar to that project systems. There is a few key reasons I want to highlight one the OS.

Wahid Nawabi: At the same time, we continue to mark progress providing UGVs to Ukraine on an accelerated schedule which are performing life-saving EUD missions in the field. Given our growing backlog across the entire unmanned system segment we're confident we're on track for another great year. Moving to our loitering munitions segment, I'm pleased to say that growth continues with sales of 34% year-over-year. This reflects switchblade shipments to an expanding number of allied countries across the globe.

<unk> cut.

Customer.

Trends are.

When the war fighters are overwhelmed with so many robotic system small medium large extra large et cetera, et cetera loading munitions ground robots et cetera, it becomes very difficult for the warfighter to be able to carry multiple ground control stations in tablets and devices to control multiple uavs, so with Tomahawk does.

Wahid Nawabi: Recent demand for switchblade 300 and 600 systems have been largely driven through the latest U.S. AI and the U.S, government. The U.S. Army recently awarded us another contract for switchblade 600 loitering munitions in support of the U.S. AI. At the same time, we anticipate the U.S, government will continue to backfill and increase depleted EUD stockpiles. Additionally, we are responding to a request for information, or RFI related to the U.S. Marine course, Organic Precision Fire, or O.P.F, program.

It allows us not only aerovironment robotic systems, but also any other branded robotic systems to be able to simply integrate together and the battlefield to simplify the lives of our customers, meaning the warfighter and.

In addition to that it also enables a whole bunch of AI enabled features and technology, which we have been investing in their investing in as well so.

One thing Thats really not well known about our offering is that we've been investing in this category of autonomy GPS denied operations contested battlefield environments like the ones that we see and witness everyday in Ukraine Aerovironment has been investing in this area for several years and we expect that to continue.

Wahid Nawabi: Overall, we anticipate both U.S, and international demand for our lawyer-immunition systems to remain strong through the rest of fiscal year 2024. It is also important to mention that the last batch of our switchblade 300 block 10-C configuration has been shipped, and we have transitioned to the next generation block 20 variant. Switchblade 300 block 20 features significantly more endurance, a tablet-based fire control system, and other enhanced performance capabilities. Switchblade 300 block 20 has successfully completed the U.S. Army Safety Confirmation Certification, and is now being delivered to customers.

<unk>.

And we're positioned extremely well in that so what tomahawk does.

Helps us accelerate that deployment and adoption and to meet our customers' needs while better than anybody. So there are several reasons. It's a growth acquisition it allows us to grow.

Further and faster and allows us to deliver more value to our customers in order to simplify their what I call equals.

Ecosystem, an environment when the operating multiple Uavs.

Obviously, we just signed.

And we're going to close that this quarter and we expect to close it this quarter and we will provide more color on the financials at that time.

Wahid Nawabi: Moving to our McCready work segment, I am pleased to report that segment revenues also grew 31% year-of-year to $23.2 million. We are also making solid progress in our Stratospheric Solar Habs program. We successfully completed further flight tests using a smaller-scale version of the new Sun Glider aircraft. These tests allow our team to collect and analyze large amounts of data, which could not otherwise be obtained from computer-based simulations. We will now apply these learnings to our next generation Sun Glider while at the same time working with the FAA for tight certification.

Thank you.

Thank you.

And one moment for our next question.

Yes.

Our next question comes from the line of Peter Arment from Baird. Your line is open.

Yes. Thanks, so much good afternoon Wahid Kevin.

Perfect results.

Thank you thank you Peter.

Wahid.

Just a quick question on the product mix I don't think we've ever seen you have a report.

78% of the mix just kind of in the quarter for products and I was just wondering Gil.

Just given how well your backlog it is hitting new record levels is this just kind of what we should expect going forward throughout this year, just thinking about service versus product.

Kevin McDonald: With that, I would like to now turn the call over to Kevin McDonald for a review of the first quarter financials. Kevin? Thank you, Wahee. Today I want to be reviewing the highlights of our first quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on the website. Also, there is an 8K available on our website, which recaps our historical results into the new segment.

Peter as I said on our remarks, yes, we expect the product mix as a percentage of revenue to be more favorable towards products as it was on our Q1.

And as you know that product sales generally because we invest our R&D in our products and we sell them as majority of them not all of them as a commercial item we enjoy a higher gross margin in that regard because we invest in them and it's justified to our customers. So.

Kevin McDonald: Overall, we started the first quarter extremely strong in terms of backlog revenue, adjusted gross margins, and adjusted EBITDA. As Wahee mentioned it as remarks, revenue for the first quarter of fiscal 2024 was $152.3 million, an increase of 40 percent as compared to the 108.5 million from the first quarter of fiscal 2023. Slide five of the earnings presentation provides a breakdown of revenue by segment for the quarter. Our largest segment during the quarter was unmanned systems, or UMS, which is a combination of our small UAS, medium UAS, and UGB businesses.

For the remainder of this year, we expect a gross margin percentage and the mix.

Mix of revenue to be more favorable towards product sales and services for fiscal year 2024.

Okay. That's helpful. And then just on the backlog the record backlog.

Can you maybe talk a little bit about how.

The Fms activity that Youre seeing and just the opportunity there I know you've been able to expand the countries that switchblade is available for and of course, <unk> had a huge installed base and the and the <unk>.

Kevin McDonald: With revenue of 98.2 million, an increase of 45 percent from last year's 67.8 million, driven primarily by our small UAS business unit, which ships systems to eight international countries during the quarter. Lower eminition systems or LMS recorded revenue of 30.9 million, a 34 percent increase compared to the $23 million last year during Q1. LMS demand continues to be driven by strong U.S, and international orders. Revenue from our McCravy Works segment came in at $23.2 million, an increase of 31 percent compared to the $17.7 million from the first quarter of last fiscal year.

Small UAS category internationally, but how how is fms activity when we think about going forward. Thanks.

Sure. So overall our backlog as you know as I mentioned this at a record level again, we had a record backlog.

Entering first quarter of fiscal 2024 last quarter on our earnings call and we actually built beat that or increase that by almost another $100 million. This quarter. It is phenomenal how well we've been performing in terms of securing orders and working on growing our backlog.

Kevin McDonald: We continue to see strong demands in McCravy Works services within the various agencies of the U.S. DOD and U.S, government, in particular increasing demand for incorporation of our computer vision, autonomy, and AI capabilities. In slide five of the earnings presentation, there's a breakdown between product and service revenue. Specifically during the first quarter, product revenues accounted for 78% of total revenues. A notable increase from 53% in the course morning quarter of the previous year due to strong product revenues from our small UAS business, and to a lesser extent from lower MUAS cocoa service operations with the closure of all the five locations.

<unk>, many additional Fms cases remain <unk>.

Not to be in contract yet from our many allies for loitering munitions, we believe that over the next several quarters and maybe even beyond fiscal 'twenty four.

We will see more countries.

<unk> orders and contracting these demands that they have and the needs. They have for loitering munitions. The Ukraine conflict has essentially put an exclamation mark on how effective and important small unmanned systems and loitering munitions, our four near peer kind of conflict.

Kevin McDonald: For the remainder of fiscal 2024, we expect product sales to remain above 70% of total revenue, but expect LMS sales to increase the percentage of product sales, which will have the impact of lowering overall product gross margins. Now turning to gross margins, slide six of the earnings presentation shows the trend of adjusted product and service gross margins, while slide 12 reconciles that gap gross margins to adjusted gross margins, which excludes the intangible amortization, other non-cash purchase of counted items.

The one that they are facing with Russia. So our systems have been incredibly vital and I believe that this is an inflection point as we go into multiple years beyond now. This is something that we worked for very hard as a company. We've been saying this for a long time, we believe in this value proposition of our solution and I think our customers are starting to realize that.

Kevin McDonald: In the first quarter, the solidated gap gross margins finished at 43% up compared to 31% in the previous year. The improvement in gap gross margins was largely result of improved product service mix and strong product gross margins. In addition, gross margins were favorably impacted by a decrease of $4 million of depreciation on cocoa ISR assets. Adjusted gross margins to the first quarter were 45%, compared to 34% in the first quarter of last year.

And that's accelerating their needs and requirements for acquiring dosing things. So in short backlog is very strong for this year, we expect that to remain strong throughout the whole year and I believe that many additional Fms cases for Switchblade 306 hundred.

It remains to be not contracted yet it's going to be contracted and future those cycles take a little longer but theres, a very healthy pipeline that's being built as.

As we progress throughout this fiscal year, which will help us in future years.

I appreciate it thanks.

Youre welcome Peter.

Thank you one moment for our next question.

Kevin McDonald: The improvement in adjusted gross margins was also driven by the improved service mix and strong product gross margins. Adjusted product gross margins of the quarter were 49% versus 44% in the first quarter of fiscal of last fiscal year, again to a higher mix of revenue from our small UAS products during the quarter. In terms of adjusted gross, service gross margins, the first quarter with that 28% versus 22% during the same quarter last year.

And our next question comes from the line of Ken Herbert from RBC. Your line is open.

Yes.

Yeah.

Hello, Steve.

Hey, Wahid I wanted to see if I could start out and ask a question on the.

On the backlog again.

We will to parse out how much of the growth in backlog is maybe direct with.

Kevin McDonald: Again, due to the closure of the MUAS cocoa operation sites. We expected adjusted gross margins to continue to be strong during the first half of the year. However, as our product mix shifts during the second half of the year, we expected adjusted gross margins to end up in the high 30s for the year. In terms of adjusted EBITDA, slide 13 of our earnings presentation shows the reconciliation of gap net income to adjusted EBITDA.

USAID to Ukraine versus maybe international customers or other U S domestic opportunities.

Ken.

Unfortunately, because of customer sensitivity I'm not able to.

All right.

Go further deeper into the colors of the backlog and what but what I can say is that in.

In general our backlog is really strong in all three of our business segments. Our unmanned systems segment are loitering munitions segment and our Maccready works segment. So we have seen significant growth in all of them. The backlog for loitering munition is made up primarily because we only sell those to the U S government, including four.

Kevin McDonald: In the first quarter of fiscal 2024, adjusted EBITDA was $37 million, represented an increase of $24 million or 54%. The main factors contributing to this increase were higher sales volume and favorable sales mix, which was partially offset by incremental SGA and expenses investments in R&D. SGA expense, excluding intangible amortization and acquisition rate expenses for the quarter was $23 million or 15% of revenue compared to the first quarter in fiscal 2023 of $18 million or 16% of revenue.

<unk> <unk>.

International opportunities U S <unk>, so far decided to.

Fill those request all through an Fms or USA Ik's Fms cases coming through the U S. Army. So really the contracting office that handles our switchblade family of systems for both domestic and international customers.

Kevin McDonald: While R&D expense increased modestly year over year in dollar terms, R&D expenses a percentage of revenue was 10% versus 14% in the corresponding quarter of last year. R&D will run closer to 12% for the full year as we continue to invest in new products and upgrades to existing products to meet the evolving needs of our customers. Now turning to gap earnings. In the first quarter, the company generated a net income of $21.9 million versus a net loss of $8.4 million recorded in the same period last year.

Has been and remains to be the U S military and U S Army.

The mix of customers in that area is pretty broad I'm not able to comment on a specific contract or amounts of them because of the sensitivity of the conflicts that we have around the world and our customers, but it's healthy across the board.

And I believe that is going to stay that way.

For the foreseeable next this year and beyond I'll, hopefully as well because as I said, we'll continue to build on our momentum and Thats one of our fundamental goal and priority last several years to continue to build our backlog to also.

Kevin McDonald: The increase in net income of $30.3 million can be attributed to several factors, namely $31.9 million increase in gross margin, driven by a rise in sales volume and improvement of revenue mix, a $3.4 million decrease to intangible amortization, and a $1.3 million decrease in taxes. This was partially offset by a $1.9 million increase in SGA and A expenses, a $0.4 million increase in R&D spending, and a $0.2 million increase in unrealized loss of equity related.

<unk> level load our revenue based on a quarterly basis and as you can see we expect this year to be nearly 50 50 between first half and second half of the year, primarily because of our backlog.

That's great. Thanks, and if I could there's been a lot of press recently around some newer starts within the United States, whether it be the <unk> program will replicate or or others.

Kevin McDonald: Investment. Slide 10 shows the reconciliation of gap and adjusted or non-gap diluted EPS. The company posted earnings for diluted share of $1 for the first quarter of fiscal 2024 versus 8th cents for diluted share loss for the first quarter of fiscal 2023. Turning to the balance, she total cash and investment to end the quarter was 128.4 million, which is a decrease of 28 million from the fourth quarter of fiscal 2023. During the quarter, we reduced our long-term debt by $5 million to $130 million.

I'm not sure how much you can talk about these but can you maybe just talk about how well you believe your position from some of the newer efforts.

With the U S Army and the Marine Corps in other parts of the U S government on some of these new competition and how meaningful they could perhaps be in 'twenty four and fiscal 'twenty five for you.

So Ken I could not agree more with you in terms of the relevance of these large very high priority focus areas for the USD Woody you mentioned a couple last so thats been recently been.

Announced by the U S Army, we're tracking all of these we are engaged with our customers very closely.

Kevin McDonald: Inventories increased $37 million during the quarter of fiscal 2024. Inventories will remain at these levels as we prepare for shipments in the coming quarters and carry extra inventory result of supply chain risk minimization. With that said, inventory is a percentage of backlogs are in line with recent historical averages and down from COVID period averages. We continue to have a strong balance sheet with over 100 million of cash and investments in approximately $100 million available under our working capital facility.

One of the things that we pride ourselves is that we.

We spent a lot of energy, making sure that we're very very close and intimate with our customers. So we can.

Solve their problems the best way possible better than anybody and some of these requirements are squarely.

Focused around the area that we as a business are offering as a pure play player. There is no. One on this planet that I can think of that has the breadth and the depth of our portfolio when it comes to unmanned systems and robotics.

Kevin McDonald: I'd like to conclude with some highlights of our backlog metrics. Slide 8 of the earnings presentation provides the summary of our current fiscal 2024 visibility. As Wahey mentioned, our funded backlog at the end of the first quarter of fiscal 2024 was a record $540 million and increased of 27% from the prior quarter. Visibility to the midpoint of our revised F-24 revenue guidance range is over 100%. With our record setting revenue and backlog, we are position well for another record setting growth year in fiscal 2024.

The replicator, which was just recently announced by the U S.

In Pentagon.

It's very much. Another example of the type of capabilities that our defense customers use duty specifically is looking too.

Sort of acquire over the next several years, that's very much focused around our system. So I think we're positioned really well I believe we will be able to participate in these opportunities. The details of that of course, I'm not able to disclose right now because its quite early and sensitive to our customers' operations and business.

Wahid Nawabi: Now I'd like to turn things back to Wahey. Thanks, Kevin. With a record backlog of borders, and after a very strong first quarter, we're increasing our guidance for fiscal year 2024 as follows. We anticipate revenue of between $645 million and $675 million. We anticipate non-gap-adjusted EBITDAO of between $117 million and $127 million, representing about 18% of revenue. Net income guidance remains unchanged at $51 million to $59 million or $1.91 to $2.21 per diluted share.

Great. Thanks, a lot.

You're welcome Ken.

Thank you one moment for our next question.

Okay.

And our next question comes from the line of Brian Sandberg from William Blair. Your line is open.

Wahid, Kevin and John and good afternoon.

Hello, There Heng.

Wahid you referenced how the $176 million, Ukraine, Puma IQ is nearly fully drawn do you expect to be able to renew this contract.

Wahid Nawabi: This is primarily due to increased R&D investments in support of our strong growth. Non-gap earnings guidance also remains unchanged between $2.30 in $2.60 per diluted share. We expect R&D investments to be closer to 12% of revenue this fiscal year. As a reminder, we expect a more balanced revenue distribution with roughly 50% of new revenues expected to occur in each half of this fiscal year. We now have nearly 100% visibility to the midpoint of our revised revenue guidance.

So.

The answer is we are already engaged on additional contracts. So the short answer is yes is it going to be exactly the same type of contract and the same exact amount no.

But there is definitely a lot of demand for our systems for Ukraine.

As you all know as I mentioned before.

Ukraine has made many public statements that.

Our Puma system as the workhorse.

Ukraine, and our Switchblade family of systems is also one of them very critical capabilities that has helped them.

Wahid Nawabi: While we are confident in our ability to achieve our guidance, there are also numerous factors at play. This includes working with suppliers to scale their businesses to match our needs as well as securing long-lead items. We remain well positioned to deliver nearly 20% growth in revenue, higher margins, and overall improved bottom line results. The investments we're making this year should also position the company for continued growth and years to come. While the overall geopolitical environment, as well as battlefield trends towards significant greater use of unmanned platforms, support or confidence in the future, were mindful that the US government is nearing the end of its fiscal year.

Defend our nation and defend their independence against Ukraine, So far.

I believe that that's going to continue we are in.

Engage with the USD with you in a very very close and regular basis.

There are several additional requests for our systems and the USDA is working with us to be able to fulfill those needs as they see appropriate.

As you can see some of that is also you in fact reflected our backlog today. So the strong backlog does include additional orders for our unmanned systems and small UAS as well as loitering munitions, but I expect that to grow and continue to expand over the next several quarters as we move forward because I think that as I said, there is an inflection point.

Wahid Nawabi: We, as with most defense contractors, now regularly assume that a continuing resolution is more likely than not, which could impact contract timing. However, I would say unequivocally that AV remains optimistic about our fiscal year 2024, given broad support for our systems and services. We believe the current administration will continue to provide the necessary budget dollars and prioritization for the type of mission critical unmanned systems we supply, particularly in contested environment operations.

Many of these countries, including Ukraine want to have more and more of our types of systems, which are far far less expensive than much more expense other platforms and they are much more effective in what they are trying to do and how they are fighting the conflict with Russia.

Great. Thanks, Tony.

Youre welcome.

Thank you Andrew.

As a reminder that started one one for a question star one one.

One moment for our next question.

Okay.

Wahid Nawabi: We are at the forefront of developing and offering end-to-man solutions for autonomy, automatic target recognition and tracking. In addition, the USDOD is investing more in literally munitions and small unmanned systems, areas where we are well positioned to thrive. Now, let me once again summarize the key points from today's call. First, we delivered record-first quarter results, which provides a solid start to fiscal year 2024. Second, our record-funded backlog remains at historic levels, reflecting strong global demand for solutions.

Okay.

And our next question comes from the line of Pete Skibinski.

Wahid Nawabi: Third, the acquisition of Tomahawk Robotics will further improve the outlook for interconnected unmanned solutions and opens new avenues for growth across our product portfolio. And fourth, overall, the fundamentals of our business look better than ever they have in our history, and we're well positioned to continue our growth trajectory as Congress begins laying the groundwork for the fiscal year 2024 budget.

Alembic Global your line is open.

Yes, nice quarter guys.

Yeah.

Thanks, Peter Thank you again.

Just you touched in your opening comments I think.

Supply chain issues can you update us on what Youre seeing in terms of as you ramp and volume issues with GE UI as any other components that you are having.

As lead times are extended.

So Pete.

We believe that the revised guidance, we gave we're pretty we're confident that based on our indicators today.

To be able to achieve the revised increased guidance on the topline we have secured.

Pretty much most of our long lead items and as Kevin mentioned in his remarks.

We have intentionally raised our inventory levels to some extent.

Primarily because our systems are in high demand.

And sense of urgency, but with.

Within our USD Woody as well as our allies is very high as soon as they contract with us they would like us to deliver the systems.

Wahid Nawabi: Before turning the call over to questions, we're also excited to welcome Admiral Phil Davidson to our Board of Directors. Admiral Phil Davidson brings extensive knowledge of battlefield operations, especially in the Indo-Pay Com Theater, and the deployment of new defense capabilities. We look forward to the unparalleled strategic counsel and vision he will bring to AV.

It's never a perfect situation.

Supply chain is a game of a I call. It a whack a mole game ever.

Every day every week there is some sort of a new issue, but overall, we have handled this and manage this extremely well throughout the entire.

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Wahid Nawabi: I would also like to thank Catherine Merigold for her eight years of service on our Board of Directors, as she's stepping down at our upcoming annual meeting. Her passion for an interest in our company's future were instrumental to our success during her tenure. And as always, my appreciation to our workforce goes without saying. Without such as dedicated and talented team of professionals, we would not have the market leading position powered by the cutting-edge technological advancements that we enjoy today. We appreciate all our employees every day just as we do our longstanding investors and other stakeholders in the company.

Here's of the Covid pandemic, the supply chain constraint et cetera, so for fiscal 'twenty four overall, we're in a very good position.

And but there's challenges that arise everyday and we tried to address that I mean, we've actually done a really good job of managing those things. Another challenge that we are also facing that we're tackling is not only do we have to manage the supply chain and making sure. The parts are there our revenue has grown considerably over the last two or three years and with.

This growth we need to also make sure that we bring up the production capacity of some of our smaller suppliers and that there's something that doesn't happen overnight and it requires effort on our part.

For them to increase capacity, they've got a scale up their production and their manufacturing in their operations and we're working with many of them that are strategic to us to make sure that we don't have any bottlenecks.

Wahid Nawabi: The future continues to look bright, and we believe fiscal year 2024 will drive the company to new heights.

Unknown Executive: And with that, Kevin Jonah and I will now take your questions. As a reminder to ask a question, you need to press star 101 on your telephone. Please respectfully ask that scholars limit themselves to questions and return to the queue to ask additional questions. James, one moment for our first question.

Very pleased with the progress that our team is making and we've made a concerted effort and focus for ourselves as a priority of the company and his leadership team to focus on that for the last three years to four years and I think that is starting to pay dividends for us as we see the kind of growth that we've been able to achieve and deliver to our shareholders.

Okay I appreciate it and last one for me on the Tomahawk deal.

My question is why buy this company is fairly young right only five years old why buy them instead of maybe team with them on an ongoing basis or some other business arrangement. It's this whole area of ground control systems.

Gregory Konrad: Our first question comes from Ryan of Gregory Konrad from Jeffries. Your line is open. Good evening and great quarter. Thank you, Greg. Thank you. Maybe just to start on the outlook, I mean the revenue outlook. It's a pretty big raise, one quarter in. Can you maybe just talk about what's changed since last quarter? You know, has there been some risk retirements? Is it orders and just kind of what's driving that better revenue outlook for the year?

I guess you would have to have a comfort level that their IP is so high that it would other competitors would have a hard time.

Overcoming that could you can you share your thoughts on why you pulled the trigger on this deal sure. So as you said that's a very good question Pete one we've known them for many many years and.

And we've known them since they are.

Founding days in fact.

Gregory Konrad: Sure, so we're very pleased with how great our team performed on the first quarter, Greg. There are several factors why we raised our guidance for full fiscal year 2024. One is we've had a tremendous first quarter and our first quarter, this is a historic first quarter for the company. Second, our backlog as you saw is at a historic level as also. We have another record on top of a record that we achieved this Q1 and in our visibility to the midpoint of our revised guidance is nearly at 100%.

So I personally known that one of the founders through the industry of course for a long time. The reason why we did this is because it allows us to accelerate and achieve our growth objectives faster for ourselves as well as for our customers.

As an independent company, while they continue to work with US we won't be getting the level of priority and preferential treatment as we would like because at the end of the day. It's all about the mission of more customers the warfighters and most of our customers have already.

Gregory Konrad: So you can look at that and say based on our inventory position and ability for us to be able to secure longly items, we feel fairly strong that at this time we can achieve the revised guidance range that we provided. The demand for solutions remain very healthy both domestically and abroad and I think the whole aerospace and defense industry is in a point of inflection when it comes to small unmanned systems as a distributed architecture of warfare as well as loadering munitions, both categories which we have essentially invented in the marketplace over the last two decades.

Joseph to go down the path of selecting their system Tomahawk systems as the open architecture to connect multiple unmanned and manned devices. So think about a battlefield, where there are tanks armored vehicles ground robots Uavs etcetera USPS.

And you need to make sure that you provide a common operating picture for the for the operator for the Warfighter and so what Tom off does it brings all of those things that it connects them and integrate them and also introduces a lot of predictive AI features feature set so in order for us to deliver those those capabilities to our customers.

Gregory Konrad: So we're positioned extremely well that the demand seems to be very strong even beyond fiscal 2024 and we felt that at this time we should raise our guidance to be able to achieve the higher levels of revenue outlook on the top line that we provided.

Foster and also integrate deeper in terms of our product Roadmaps technology investments.

We felt that the acquisition was a better way to go and lastly, I would say we're also growing in terms of our talent.

Wahid Nawabi: And then maybe just a follow-up. If you can talk about Tomahawk a little bit, you had progeny and just kind of how you view the shift from maybe hardware to more software and integration and how you think about that kind of expanding the addressable market as you get more into kind of control and software side versus the hardware. Sure. So I'm glad you asked that question great because it's a really important point to make here.

Tom Art Robotics is primarily based out of Florida, and it's an area that we'd like to get access to more talent. So their site in Florida allows us to expand our workforce outside of California, and areas, where they're closer to our customers. So there are several reasons their talent base their IP their product their progress with customers as well as <unk>.

To support our growth in the years to come so.

I really feel strongly that this is a very good decision for our company and our shareholders.

It's also a great outcome for our customers. So far the feedback has been very positive and it positions us to basically Mary.

Wahid Nawabi: There are several reasons why we decided to acquire Tomahawk which we have known by the way for many many years. We work with them in the past as I mentioned on my remarks and we know the technology, the products and their talents very very well. It's very similar to the progeny systems. There's a few key reasons I want to highlight. One, the overall customer trends are when the warfighters are overwhelmed with so many robotic systems.

First the most ubiquitous unmanned systems provider, which is aerovironment with the most advanced common control our technology enabled by AI from Tomahawk to be a integrated system solution for our customers.

Wahid Nawabi: Small, medium, large, extra-large, etc., etc., loading munitions, ground robot, etc., it becomes very difficult for a warfighter to be able to carry multiple ground control stations and tablets and devices to control multiple UAVs. So what Tomahawk does, it allows not only air or rhyme in robotic systems but also any other brand of robotic systems to be able to simply integrate together in the battlefield to simplify the life of more customers, meaning a warfighter.

Okay I appreciate all the color. Thank you.

Youre welcome.

Thank you.

No further questions in the queue I'd like to turn the call back over to Joni Theater Balan for any closing remarks.

Great. Thank you once again for joining today's conference call and for your interest in Aerovironment. As a reminder, an archived version of this call all SEC filings and relevant news can be found under the investors section of our website.

We wish you a good evening and look forward to speaking with you again following next quarter's results.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Wahid Nawabi: And in addition to that, it also enables a whole bunch of AI-enabled features and technology, which we have been investing and they're investing in as well. So one thing that's really not well known about our offering is that we've been investing in this category of autonomy, GPS denied operations, contested battlefield environments, like the one that we see in witness every day in Ukraine. AeroVironment has been investing in this area for several years.

Okay.

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Okay.

Wahid Nawabi: And we expect that to continue and we're positioned extremely well on that. So what Tomahawk does, it helps us accelerate that deployment and adoption and to meet the customers need well, well, better than anybody. So there are several reasons if a growth acquisition, it allows us to grow further and faster and allows us to deliver more value to our customers in order to simplify their, what I call, the ecosystem in environment when they're operating multiple UAVs. Obviously, we just signed and we're going to close that this quarter. We expect to close the this quarter and we'll provide more color on the financials at that time. Thank you. Do I have a record?

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Okay.

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Peter Arment: And one moment for our next question. Our next question, conflina, Peter Arment from Baird, if your line is open. Yeah, thanks so much for afternoon, Waheed and Kevin, terrific results. Thank you, Peter. Waheed, I just a question on the product mix. I don't think we've ever seen you have or for 78% of the mix just kind of in the quarter for products and just wondering, you know, just given how well your backlog is hitting, you know, new record levels.

Peter Arment: Is this just kind of what we should expect going forward throughout this year, just thinking about service versus product? Uh, Peter, as I said on our remarks, yes, we expect the product mix as a percentage of revenue to be more favorable towards products as it was on our Q1. And as you know, that product sales generally, because we invest our Indian or products and we sell them as majority of them, not all of them, as a commercial item, we enjoy a higher gross margin in that regard because we invest in them and it's justified to our customers. So for the remainder this year, we expect a gross margin percentage and the mix of revenue to be more favorable towards product sales than services for fiscal year 2024.

Peter Arment: Yeah, that's helpful. And then just on the backlog, the record backlog, can you maybe talk a little bit about, you know, how the FMS activity that you're seeing and just the opportunities there? I know you've been able to, you know, expand the countries that switchblade is available for and of course, you've had a huge install base in the small UAS category internationally. But how does FMS activity, you know, when we think about going forward?

Peter Arment: Thanks. Sure. So overall, you know, our backlog, as you know, as you as I mentioned, is at a record level again, we had a record backlog entering first quarter of fiscal 2024 last quarter in our earnings call. And we actually built, beat that or increased that by almost another $100 million this quarter. It is phenomenal how well we have been performing in terms of securing orders and working on growing our backlog.

Peter Arment: Many additional FMS cases remain not to be in contract yet from our many allies for loyalty munitions. We believe that over the next several quarters and maybe even beyond fiscal 24, we will see more countries placing orders and contracting these demands that they have in the Ukraine conflict has essentially put an explanation mark on how effective and important small unmanned systems and loyalty munitions are for a near-peer kind of a conflict with the one that they are facing with Russia.

Peter Arment: So our systems have been incredibly vital and I believe that this is an inflection point as we go into multiple years beyond now. This is something that we work for very hard as a company. We've been saying this for a long time. We believe in this value proposition of our solution and I think our customers are starting to realize that and that's accelerating their needs and requirements for acquiring those certain things.

Peter Arment: So in short, backlog is very strong for this year. We expect that to remain strong throughout the whole year. And I believe that many additional FMS cases for switchblade 300 and 600 remains to be not contracted yet. It's going to be contracted in the future. Those cycles take a little longer but there's a very healthy pipeline that's being built as we progress throughout this fiscal year which will help us in the future. I appreciate it, thank you. You're welcome, Peter. Thank you. One moment for our next question.

Ken Herbert: And our next question comes from a line of Ken Herbert from RBC. You're on his open. I wanted to see if I could start out and ask a question on the on the back log again.

Ken Herbert: Is it possible to parse out how much of the growth in back log is maybe direct with USA to Ukraine versus maybe international customers or other US domestic opportunities? Ken, unfortunately, because of customer sensitivity, I'm not able to go further deeper into the colors of the back log and what. But what I could say is that in general, our back log is really strong in all three of our business segments. Our unmanned system segment, our murdering munitions segment and our McCready work segment.

Ken Herbert: So we've seen significant growth in all of them. The back log for murdering munitions is made up primarily because we only sell those to the US government, including for international opportunities. The US DOD has so far decided to fill those requests all through an FMS or USAICase. FMS case is coming through the US Army. So really, the contracting office that handles our switchblade family of systems for both domestic international customers has been in remains to be the US military and US Army.

Ken Herbert: The mix of customers in that area is pretty broad. I'm not able to comment on a specific contract or the amounts of them because of the sensitivity of the conflicts that we have around the world and our customers. But it's healthy across the board. And I believe that it's going to stay that way for the foreseeable next year and beyond hopefully as well. Because as I said, we'll continue to build on our momentum.

Ken Herbert: That's one of our fundamental goal in priority last several years to continue to build our back log to also level load or revenue based on a quarterly basis. And as you could see, we expect this year to be nearly 50 50 between first half and second half of the year, primarily because of our backlog. That's great. Thanks.

Ken Herbert: Well, he and if I could, there's there's been a lot of press recently around some newer starts with the United States, whether it be the master program or replicator or others. I'm not sure how much you could talk about these. But can you maybe just talk about how well you believe your position from some of the newer efforts with the US Army and the Marine Corps and other parts of the US government on some of these new competitions and how meaningful they can perhaps be in 24 and fiscal 25 for you.

Ken Herbert: So, Ken, I could not agree more with you in terms of the relevance of these large, very high priority focus areas for the US DUD. You mentioned a couple last so that's been recently been announced by the US Army. We're tracking all of these. We are engaged with our customers very closely. One of the things that we pride ourselves is that we spend a lot of energy making sure that we're very, very close and intimate with our customers so we can solve the problems the best way possible, better than anybody.

Ken Herbert: And some of these requirements are squarely focused around the area that we as a business are offering as a pure play player. There's no one on this planet that I can think of that has the breath in the depth of our portfolio when it comes to unmanned systems and robotics. So, the replicator which was just recently announced by the US DUD in Pentagon is very much another example of the type of capabilities that are defense customers.

Ken Herbert: The US DUD specifically is looking to sort of acquire over the next several years that's very much focused around our system. So, I think we're positioned really well. I believe we will be able to participate in these opportunities. The details of that, of course, I'm not able to disclose right now because it's quite early and sensitive to our customers' operations and business. Thanks, Wahid. You're welcome, Kenneth. Thank you.

Unknown Executive: One moment for our next question.

Bryce Sandberg: And our next question, Comfort line of Bryce Sandberg from William Blair. Realign is open. Wahid, Kevin and Jonah, good afternoon. Hello, good afternoon. Hi there. Wahid, you referenced how the $176 million Ukraine Puma IDIQ is nearly fully drawn. You expect to be able to renew this contract? So, the answer is we are already engaged on additional contracts. So the short answer is yes, is it going to be exactly the same type of contract and the same exact amount?

Bryce Sandberg: No. But there's definitely a lot of demand for systems for Ukraine. As you all know, as I mentioned before, Ukraine has made many public statements that our Puma system is the workhorse in Ukraine and our switchblade family systems is also one of their very critical capabilities that has helped them defend their nation and defend their independence against Ukraine so far. I believe that that's going to continue. We are engaged with the USDUID in a very, very close and regular basis.

Bryce Sandberg: There are several additional requests for our systems and the USDUID is working with us to be able to fulfill those needs as they see appropriate. As you can see, some of that is also in fact reflected our backlog today. So the strong backlog does include additional orders for our unmanned systems and small UAS as well as loading munitions, but I expect that to grow and continue to expand over the next several quarters as we move forward because I think that, as I said, there's an inflection point.

Bryce Sandberg: Many of these countries, including Ukraine, want to have more and more of our types of systems, which are far, far less expensive than much more expensive other platforms and they're much more effective in what they're trying to do and how they're fighting their conflict with Russia. Great. Thanks, Oheed. You're welcome. Thank you. As a reminder, that's Star-1-1 for questions, Star-1-1. One moment for our next question.

Pete Skibitzky: Next question. Comforter line of Pete Skibitzky from Alembic Global. Your line is open.

Pete Skibitzky: Nice quarter, guys. I like about that. Thank you. Again, just, Oheed, you touched in your opening comments, I think. Supply chain issues. Can you update us on what you're seeing in terms of, you know, as your rampant volume issues with GUIs, any other components that you're having, you know, whose lead times are extended? So, Pete, we believe that the revised guidance we gave were pretty, were confident that, based on our indicators today, we're going to be able to achieve the revised increased guidance on the top line.

Pete Skibitzky: We've secured pretty much most of our long lead items, and as Kevin mentioned, his remarks, we have intentionally raised our inventory levels to some extent, primarily because our systems are in high demand and sense of urgency within our USDUD as well as our allies is very high. As soon as they contract with us, they would like us to deliver the systems. So, it's never a perfect situation. You know, the supply chain is a game of a, I call it a whack-a-mo game.

Pete Skibitzky: Every day, every week, there's some sort of a new issue. But overall, we have handled this and managed this extremely well throughout the entire, you know, years of the COVID pandemic, the supply chain constrained, et cetera. So, for fiscal 24, overall on a very good position. But, you know, there's challenges that arise every day, and we try to address them. And we've actually done a really good job of managing those things.

Pete Skibitzky: Another challenge that we are also facing that we're tackling is, not only we have to manage the supply chain and making sure the parts are there, our revenue has grown conservatively over the last two or three years. And with this growth, we need to also make sure that we bring up the production capacity of some of our smaller suppliers. And that is something that doesn't happen overnight. And it requires effort in our part, and for them to increase capacity, they've got to scale up their production and their manufacturing and their operations.

Pete Skibitzky: And we're working with many of them that are strategic to us to make sure that we don't have any bottlenecks. And I'm very pleased with the progress that our team is making. And we've made it a considered effort and focus for ourselves as a priority as a company and a leadership team to focus on that for the last three to four years. And I think that is starting to pay dividends for us as we see the kind of growth that we've been able to achieve and deliver to our shareholders.

Pete Skibitzky: Okay, I appreciate it. Last one from me on the Tomahawk deal. My question is why buy this company? It's fairly young, right? Only five years old. Why buy them instead of maybe team with them on an ongoing basis or some other business arrangement? It's this whole area of ground control systems. I guess you would have to have a comfort level that their IP is so high that it would other competitors would have a hard time overcoming that.

Pete Skibitzky: Can you share your thoughts on why you pull the trigger on the steel? Sure, so as you said, that's a very good question, Peter. One, we've known him for many, many years and we've known him since their founding days, in fact. So I've personally known that one of the founders through the industry, of course, for a long time. The reason why we did this is because it allows us to accelerate and achieve our growth objectives faster for ourselves as well as for our customers.

Pete Skibitzky: As an independent company, while they continue to work with us, we won't be getting the level of priority and preferential treatment as we would like, because at the end of the day it's all about the mission of our customers, the war fighters. And most of our customers have already chosen to go down the path of selecting their system, Tomahawk systems, as the open architecture to connect multiple unmanned and man devices. So think about a battlefield where there are tanks, armored vehicles, ground robots, UAVs, etc., USVs, and you need to make sure that you provide a common operating picture for the operator, for the war fighter.

Pete Skibitzky: And so what Tomahawk does, it brings all those things and it connects them and integrates them and also introduces a lot of predictive AI features set. So in order for us to deliver those capabilities to our customers faster and also integrate deeper in terms of our product road maps, technology, investments, we felt that the acquisition was a better way to go. And lastly, I would say we're also growing in terms of our talent.

Pete Skibitzky: Tomahawk Robotics is primarily based out of Florida and it's an area that we like to get access to more talent. So their site in Florida allows us to expand our workforce outside of California and areas where they're closer to our customers. So there's several reasons, their talent base, their IP, their product, their progress with customers, as well as ability to support our growth in the years to come. So I really feel strongly that this is a very good decision for our company or shareholders.

Pete Skibitzky: It's also a great outcome for our customers. So far the feedback has been very positive. And it positions us to basically marry the best, the most ubiquitous unmanned systems provider, which is air of air environment, with the most advanced common control technology enabled by AI from Tomahawk to be an integrated system solution for customers.

Jonah Teeter Bayland: Okay, appreciate all the car. Thank you. You're welcome. Thank you. I would know for the questions in the queue. I'd like to turn the call back over to Jonah, Teeter Bayland for any clear remarks. Great. Thank you once again for joining today's conference call and for your interest in air environment. As a reminder and archive version of this call, all FCC filings and relevant news can be found under the investor section of our website. We wish you a good evening and look forward to speaking with you again following next quarter's results.

Unknown Executive: This concludes today's conference. Thank you for participating. You may now disconnect everyone.

Unknown Executive: Have a great day.