Q2 2024 AeroVironment Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to Aerovironment for school year 2024 second 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 telephone please be it.
Today's conference is being recorded I would now like to hand, the conference over to your speaker today children. Peter Bolland. Please go ahead Sir.
Thanks, and good afternoon, ladies and gentlemen, welcome to Aerovironment for fiscal year 2024 second quarter earnings call.
This is John and Peter balance 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.
<unk> 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 on the Aerovironment website at Www Dot AZ I N C dot com or from our Investor Relations team.
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 content of this conference call contains time sensitive information that is accurate only as of today December five 2023. 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 Wahid.
And senior Vice President and Chief Financial Officer, Mr. Kevin Mcdonald.
We will now begin with remarks from Wahid Nabavi Wahid.
Thank you Joanna.
Welcome everyone to our fiscal year 2024 second quarter earnings Conference call.
I'll start by summarizing our performance and recent achievements after which Kevin will review our financial results in detail.
I'll, then provide information about our outlook, including our increased revenue projections for the remainder of fiscal year 2024.
Kevin genre and I will then take your questions.
I'm pleased to report that our second quarter results once again exceeded expectations and we remain 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 <unk>.
Second quarter revenue rose to $188 million up 62% year over year, representing a record Q2 for Aerovironment.
We also posted very strong bottom line results powered by record demand strong operating execution and effective supply chain management.
Second we have a healthy backlog of $487 million, which is higher than the start of our fiscal year and provide solid visibility for the quarters ahead.
Third on our last call, we announced our intention to acquire privately held Tomahawk robotics, which we successfully completed in September.
As I will review in a moment, we are well on our way to fully integrate the two businesses, while ravaging our combined technology across our portfolio.
And fourth we are updating guidance, including an increase to our revenue target, reflecting our strong performance and the impact from the Tomahawk acquisition.
Okay.
Overall, we're very pleased with our performance through the first half of this fiscal year, which included significant topline revenue acceleration and record EBITDA.
We remain optimistic about our future exemplified by higher growth improving operating results and enhanced value creation for our shareholders.
As we said last quarter. This reflects not only near term demand dynamics related to global complex, but also a long term shift in military strategy to the more frequent use of intelligent multi domain unmanned systems, which are easy to use highly effective and provide a compelling value proposition.
Yeah.
Our differentiated portfolio offers the greatest breadth and depth of unmanned solutions to meet the growing demands of our country and allies.
We are an industry leader in contested environment as well as AI enabled autonomous operations and governments are around the globe are witnessing design match capabilities effectively perform unreal and highly contested battlefields.
Okay.
As a testament to the incredible effectiveness of our innovative solutions. We now have nine different unmanned platforms deployed in Ukraine, all receiving a high levels of price.
We could not be prouder and more honored of how our solutions and team members are helping our customers successfully achieve their vital measures.
We're also pleased with our progress on fully integrating tomahawk robotics into our existing business.
As a reminder, tomahawk now part of our unmanned systems segment as a leader in AI enabled robotic common control systems and open standard communications.
As a company we are increasing in our connectivity and interoperability across our portfolio, making it easier for our customers to successfully manage their growing fleet of unmanned systems.
We have already received positive feedback from our customers and intend to leverage this combination to better support their current and future emissions.
We now offer an unmatched capability to integrate unmanned platforms across multiple domains, while providing a common operating picture for the warfighter.
For the reasons just mentioned, we remain confident in our ability to deliver strong value to our stakeholders in fiscal year 2024, we expect that our cutting edge solutions will be at the forefront of government decision, making for years to come.
Now, let me provide an update on current developments within our segments.
Starting with our unmanned systems segment revenue more than doubled year over year.
Shipments during the quarter continued to reflect strong demand across nearly all our product lines with significant growth in our Puma and jumped 20 systems.
We have nearly completed delivering all the Puma Lee at Puma, three AE systems, which were part of last year's large Ukraine Fms order.
We have received additional follow on orders for Ukraine, which we expect to fulfill later this fiscal year.
A portion of these new orders for Ukraine, or direct commercial sales to the government of Ukraine.
This is another testament to the battle proven and industry, leading capabilities of our Puma system.
We also began delivering the initial batch of jumped 20 systems to Ukraine as part of our previously announced $42 million Award under the Ukraine Security assistance initiative.
We remain confident that the jumped 20 system is also the most capable solution in its class and expect additional shipments to Ukraine in the third and fourth quarters.
Additionally, it is important to highlight two recent successful tests of the junk 'twenty.
First we successfully demonstrated a fully autonomous flight at the U S. Navy's hybrid fleet campaign in key West Florida.
During the exercise we showcase the jumped 20 <unk> ability to launch and recover from the vessel moving more than 20 nuts without user intervention.
Second our team supported the U S Army and several allies at their arcane Thunder exercise and Poland.
This event held in September utilized several of our systems as part of a demonstration of the Army's modernization initiative.
The customer response to the jumped 20 has been very positive and we plan to continue investing in this platform to meet our customers' future needs.
In summary segment growth this quarter was due to record deliveries overseas and the demand for our system is expanding.
There are multiple potential orders in the pipeline, which are not yet reflected in our backlog the global trends. We discussed previously plus our healthy pipeline of opportunities provide even more reason to be optimistic about our unmanned systems segment for the remainder of fiscal year 2024 and beyond.
Moving toward loitering munitions segment as anticipated this quarter's revenue was approximately flat year over year.
Our shipments are meeting expectations, and we continue to build inventory in anticipation of the numerous opportunities in our growing pipeline.
Namely, we're expanding sales to allied countries across the globe, continuing shipments to Ukraine, backfill Ing U S stockpiles and pursuing future <unk> program of record.
We're actively in negotiations with the U S government to secure a large multiyear sole source.
IQ contract for loitering munitions products, which will meet the substantial you guys deal with DNA International Allies demands.
There is also proposed legislation in Congress to continue supporting Ukraine, Israel, and Taiwan, which includes additional funding for Switchblade.
We continue to make progress with new international customers.
We are currently engaged with more than 20 countries, who wish to receive switchblade and about a third of those cases are actively in the U S. Dod's export approval process.
At the same time, we've responded to multiple U S. Dod customer rfps for multiyear programs of record acquisitions this past quarter.
These include the U S Marine Corps solicitation for its organic precision fires or op F program and the U S. Army's low altitude stocking a strike ordinance or lasso program.
The U S. Army recently stated that Aerovironment will receive a sole source contract to provide 100 switchblade six hundreds for last so increment one for testing and fielding.
We're optimistic about the future of this program due to the incredible real world performance of our Switchblade and our significant high volume manufacturing capacity.
We're also working on integrating switchblades onto other vehicle platforms, such as Abrams tanks.
The next generation optionally manned fighting vehicles and on helicopters through the long range precision Munition program.
To summarize the LMS pipeline is robust with many opportunities not yet reflected in our backlog and we remain optimistic about the future growth potential of this business we.
We expect the LMS segment to be a stronger contributor of revenue growth in the second half of this fiscal year.
Moving to our Mccrady works segment quarterly revenue was also roughly in line with last fiscal year. As this segment continues to focus on developing key technologies and incubating future solutions.
Our haps team continues to make progress on the development of a full scale next generation. Some glider while also working with the USDA on defense missions.
We expect to benefit from additional funding, perhaps and the government fiscal year 2020 for budget, which is awaiting approval by Congress.
In addition, we continue to see strong engagement and developing novel next generation Defense solutions last quarter, we spoke about DARPA ancillary program, where we have now been awarded a small contract for phase one of its development.
We're also progressing on a jointly funded program under development by the U S. Army's combat capabilities development command or deaf com in Natick, Massachusetts called the squad operations advanced resupply or SOR.
This large autonomous unmanned aircraft system will provide long range precision delivery within contested environments.
Flight testing of the first system is currently underway and we expect phase III development to be funded by the government fiscal year 2020 for budget as well.
As you can see we have many exciting and innovative development projects and our Maccready works pipeline and remain excited about the potential to develop new capabilities, which could lead to new lines of business from this segment.
With that I would like to now turn the call over to Kevin Mcdonnell for a review of the quarterly financials, Kevin. Thank you Wahid today I'll be reviewing the highlights of our second quarter performance, which I will occasionally refer to it both our press release and earnings presentation available on our website overall, we had another outstanding financial quarter.
<unk> as a second quarter finished strong in terms of revenue adjusted gross margins and adjusted EBITDA and backlog.
That's why he mentioned in his remarks revenue for the second quarter of fiscal 2024, it was $188 million, an increase of 62% as compared with $111 6 million for the second 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 U S, which is the combination of our small UAS medium UAS <unk> and recently added Tomahawk businesses.
<unk> had revenue of $132 8 million in the quarter, which is up 115% from last year's $61 6 million driven primarily by strong international demand for our Puma systems.
Wahid mentioned, we began we also began shipments of the jumped 20 product to your brain during the quarter, which contributed to the revenue growth.
Alrighty munition systems or LMS recorded revenue of $30 2, million% to 3% decrease as compared to the $31 1 million last year. During Q2. The Switchblade 600 product was the primary driver of revenue during the quarter and at the same time, we are beginning to ramp up the production of the Switchblade 300 block 20 products, which.
As introduced earlier this year rare.
Revenue from them or creating work segment came in at $17 8 million a decrease of 6% as compared to the $18 8 million for the second quarter of last fiscal year. We continue to see strong demand for machine learning and autonomy capabilities with various agencies of the U S. Dod.
U S government agencies, which was offset by lower Softbank funded haps revenue.
In slide five of the earnings presentation, there is a breakdown between product and service revenue.
Specifically during the second quarter product revenue accounted for 81% of total revenues a notable increase from the 56% in the corresponding quarter of the previous year due to strong product revenue from our small UAS small UAS and to a lesser extent from lower cocoa surface operations.
For the remainder of fiscal 2024, although we expect product revenue to be close to 80% of total revenue. We also expect <unk> revenue to increase as a percentage of product revenue LMS revenues at lower gross margins relative to small UAS products. So we expect a shift to reduce product gross margins.
Speaking of gross margins slide six of the earnings presentation shows the trend of adjusted product and service gross margins, while slide 12 reconciles the GAAP gross margins to adjusted gross margins, which excludes intangible amortization expense and other noncash purchase accounting items in the second quarter consolidated GAAP gross.
Margins finished at 42% up from 23% in the previous year the improvement in GAAP gross margins was largely a result of improved product service mix and strong product gross margins from international small UAS.
Second quarter adjusted gross margin reached 43%, marking a substantial increase from the 27% recorded in the same period last year. This improvement was driven by the same factors as for the GAAP gross margins.
Adjusted product gross margins for the quarter were 47% versus 38% in the second quarter of last fiscal year due to the high mix of international revenue from our small UAS products during the quarter in terms of adjusted service gross margins. The second quarter was at 28% versus 12% in the same quarter last year.
Last year, we had accelerated depreciation on a portion of our assets, which negatively impacted our service gross margins.
We expect fiscal fiscal year 2024, adjusted gross margins to end up in the high <unk> to low <unk>. Following the anticipated increase in Laurean initial systems revenue in the second half of the fiscal year, both in terms of dollars and percentage of total revenues.
In terms of adjusted EBITDA Slide eight slide 13 of our earnings presentation. It shows a reconciliation of the GAAP net income to adjusted EBITDA in the second quarter of fiscal 2024, and adjusted EBITDA was $40 million, representing an increase of $33 million as compared to the $7 million or.
For the second quarter of last fiscal year. The main factors contributing to this increase were higher revenue and favorable revenue mix, which was partially offset by incremental SG&A expenses and investments in R&D.
SG&A expense, excluding intangible amortization and acquisition related expense for the second quarter was $26 million.
Our 14% of revenue compared to $19 million or 17% of revenue in the prior year.
While R&D expense increased year over year in terms of.
In terms of R&D expense as a percentage of revenue was 12% versus 15% in the corresponding quarter of last year, we expect R&D to continue run closer to 12% for the full year as we continue to invest in new products and upgrades of existing products to meet the evolving needs of our customers.
This also includes internal funding of our haps solar aircraft.
Now turning to GAAP earnings.
In the second quarter. The company generated net income of $17 $8 million versus a net loss of $6 7 million recorded at the same period last year. The increase in net income of $24 5 million can be attributed to several factors, namely a $49 $5 million increase in gross margin driven by a rise in sales volume in <unk>.
Movements in revenue mix and to pay out the $2 $9 million decreased to intangible amortization and other acquisition related expenses were partially offset by a $11 $6 million increase in taxes of $6 $7 million increase in SG&A expense of $5 $4 million increase in R&D spending and a $3 $8 million increase in <unk>.
Likewise losses and equity related investments.
Slide 10 shows the reconciliation of GAAP.
Adjusted or non-GAAP diluted EPS, the company posted adjusted earnings per share of diluted.
Diluted per share up 97% for the second quarter of fiscal 2024 versus a one cents per diluted share for the second quarter of fiscal 2023.
Turning to our balance sheet total cash and investments at the end of the quarter was $121 5 million, which is a decrease of $6 9 million from the second quarter of fiscal 2023.
During the quarter, we reduced our term our term debt by $50 million to $80 million inventory increased 6 million during the second quarter of fiscal 2024, primarily driven by the time of <unk> acquisition inventory.
Inventories remain at these higher levels as we prepare for shipments in coming quarters and extra carry extra inventory as a result of supply chain risk minimization.
Continue to have a strong balance sheet with over $100 million of cash and investments and approximately $100 million avere.
Available under our working capital facility.
I'd like to conclude with some highlights of our backlog metrics.
Eight of the earnings presentation provides a summary of our current fiscal 2024 visibility as well as Wahid mentioned, our funded backlog at the end of the second quarter of fiscal 2024 finished at $487 million.
Visibility to the midpoint of our revised FY 'twenty for revenue guidance range is 98% now I'd like to turn things back to Wahid.
Thanks, Kevin.
Given our strong quarter.
Performance and the addition of Tomahawk robotics, we have revised our guidance and increased revenue outlook for fiscal year 2024 as follows.
We anticipate revenues of $685 million to $705 million.
Net income guidance of $45 million to $51 million or $1 66 to $1 90 per diluted share.
This decrease reflects tomahawk acquisition related expenses.
non-GAAP adjusted EBITDA of $119 million to $127 million.
And non-GAAP earnings of $2 46 to $2 70 per diluted share.
We expect unevenly distributed second half revenue split between each of the remaining two quarters of this fiscal year base.
Based on our record first half performance and a strong backlog, we now have almost full visibility to the midpoint of our revised revenue guidance.
And as expected gross margin for the second half of this fiscal year is anticipated to be lower than first half primarily due to product mix.
Lastly, while the situation in Washington has led to slower decision, making we know our solutions are crucial to our customers and the U S and around the world.
While operating under a continuing resolution slows down new program starts we remain optimistic that budget priorities will be resolved and that our programs will eventually get funded.
We hope that our supporters on both sides of the aisle can achieve consensus in the very near future.
We are very pleased with our position midway through the fiscal year as we continue to meet the needs of our growing customers.
The trends, we see now represent an inflection point in our growth, which should drive greater demand beyond our current fiscal year.
As I've stated in the past our nation and allies are realizing the immense value proposition of our distributed autonomous unmanned solutions enabled by AI.
We expect strong growth, even when the active conflicts wind down as there will be still an underlying need for deterrence with many new programs supporting further adoption of our innovative and battle tested solutions.
Okay.
We continue to lead the industry in contested environment operations autonomous missions and true loitering munitions capability.
Aerovironment solutions can identify threats.
<unk> them in real time, and neutralize them with maximum effectiveness, while minimizing collateral damage.
We will continue to invest in our innovative solutions to ensure they meet our customers exacting standards and perform when needed in real world environments.
Now let me once again summarize the key points from today's call.
First we delivered record second quarter results exceeding expectations and raised our revenue outlook for fiscal year 2024.
Second our backlog remains strong reflecting global demand for our innovative and combat proven solutions.
Third we successfully completed the Tomahawk robotics acquisition and are on track for Onboarding. This business into our unmanned systems segment.
And fourth the outlook for Aerovironment solutions continues to improve due to the strength of our product lines and accelerating global demand.
We're well prepared to execute in the second half of this fiscal year and now expect further double digit topline growth in fiscal year 2025.
Before turning the call over to questions. We're excited to welcome retired general Joseph Hotel to our board of directors.
General Hotel brings extensive knowledge of today's military operations and strategy, especially with joined special operations Command.
Jay Sock and central command or Centcom.
His guidance will be instrumental in helping.
Meet the current and future needs of our country and allies abroad.
And finally, thank you to our investors for their unwavering support of our mission and thank you to our customers for putting their faith and aerovironment.
Our success is due to the talent of our team who go above and beyond to continuously improve our products strive for new innovative solutions effectively manage the company supply chain and meet our customers' needs in a timely and expeditious manner.
We are honored to support our country and allies at this critical time and we expect further success during the remainder of fiscal year 2024 and beyond.
And with that Kevin and John and I will now take your questions.
Certainly as a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.
We respectfully ask that callers limit themselves to two questions and return to the queue to ask any additional questions. One moment for our first question.
And our first question.
Comes from the line of Greg Conrad from Jefferies. Your question. Please.
Good evening and great quarter.
Thank you Greg.
Maybe just to start and might have missed it but did you give any color around the contribution from tomahawk and the revised guidance or how do we think about the higher guidance from core versus the Tomahawk contribution.
So Greg.
<unk> robotics is now part of a product line within our unmanned systems segment and as you know we don't break down the details of each of our product lines, because we have several of them. However.
However, what I can say is that in terms of our guidance. The increased revenue topline guidance is attributed to both organic demand and growth in our business as well as the a portion of it is related to the acquisition of Tomahawk. We believe that both of these two are fairly equally represented in terms of the demand.
For the second half of the year, we see strong growth.
Across our product lines, and our core businesses as well as the addition of tomahawks. So we're very excited about both.
And then maybe just for the second one staying on Tomahawk you mentioned integration can you maybe provide roadmap and kind of timing and major milestones. When you think about that integration and maybe potential revenue synergies and how youre thinking about timing and magnitude of some of those events.
Of course for sure so.
The feedback so far from our customers, which is the most important thing for me in particular has been extremely positive about the acquisition and the synergies that we're going to be able to deliver in terms of improving our customers' experiences in a common operating picture for the Warfighter in terms of integration, we have a very detailed multi phase in.
<unk> plan.
Are on track or ahead of our schedule.
We are now already integrated with our business in terms of being part of our unmanned systems segment.
We have actually expanded role and responsibility of the two co founders of Tomahawk robotics there.
Theyre now general managers of our larger businesses within Aerovironment Theyre very excited about the prospects of the future in terms of the Roadmaps. We're already working some of those were very excited and in fact, we're more bullish now than we were even before that there is tremendous synergies between our capabilities in our products and technologies, namely.
And if you sit foreseeable future, we're going to be able to integrate pretty much all of our products are unmanned ground vehicles are unmanned Uavs air vehicles.
All with the Tomahawk robotics common controller as well as would allow us to actually integrate other third party platforms.
Now that effort is a multi year effort because there are lots and lots of demand for integration from external customers. Even in partners, but also an oxide there's significant opportunities for integrate the last thing I want to mention is that their location in southern Florida, and Eastern Florida actually has very.
Positive for us too.
They've got a tremendous team, we're very excited and encouraged by their talent.
Both engineering and business.
And we're going to actually start to scale our resources in terms of head count even at their facility. So it actually gives us a better footprint in the east coast, where most of our customers are as well as allow us to hire and grow our talent as our growth desires are that requires it.
Thank you.
Welcome Greg.
Thank you one moment for our next question.
And our next question.
It comes from the line of Peter Arment from Baird. Your question. Please.
Yes.
Good afternoon, Wahid, Kevin and Jonah.
Good afternoon Peter.
Hey, Wahid can you give us the latest status update of the Switchblade 600, I know there's been some recent articles out there about some of the.
Eastern European countries looking to start to take delivery of that product where are we in terms of the potential production for the Switchblade 600.
Sure. So I'm glad to report that we have had many several of the U S government and <unk> leadership as well as congressional leaders visit us in the last couple of weeks related to our Switchblade production.
We have a significant amount of production capacity, which we've invested in we were very fortunate and thats a major plus because we can deliver switchblade by one thousands now and we can deliver them at.
<unk> program of record quality and caliber and maturity.
Secondly, there are several about 20 different countries.
That we're engaged in in terms of their interest in acquiring switchblade or wanting to.
I received switchblade about a third of those cases are already in active department of state and department of defense export.
Approval process.
So I expect in the next six months or so that this process will go faster than before because the demand is very high and the U S.
Rob.
Defense organizations as well as the department of state has very favorable towards helping us.
Equip these countries what switchblade, we have delivered quite a good chunk of those switchblade six hundreds and three hundreds so far to the USDA D. All of these cases, so far for Switchblade remained to be Fms cases. So a were delivered a lot. There's five countries that are already spoken for them and they've gone public about it and made it statements.
There is a total of 20 countries, we're actively involved with and about a third of those are actively in the export approval process, which is really really encouraging and positive. In addition to that Peter I also want to mention that we are actively negotiating with the USDA on a very large multi year.
IQ sole source switchblade contract that allows the USD <unk> to purchase large quantities of switchblade for multiple years from Aerovironment and then actually fulfill the needs for Ukraine for the USDA stockpiles and programs as well as for our allies in Fms cases.
That actively as an in process that will take some time, but it's very encouraging.
That's all great color I appreciate that Wahid and Kevin maybe just a quick one for you on you made some comments about that.
As expected the gross margin adjusted gross margin for the year to end up in the low 40 percents to high 30 may.
You could just that implies I guess in the second half of the year, if youre going to be in the high <unk> that you would see that gross margin come down I guess, maybe the mid mid mid thirty's or so is that primarily tied to the LMS revenue ramp or can you maybe highlight maybe some of the puts and takes there. Thanks.
Right right. So you kind of have a combination of a little bit lower small UAS revenue and then thats kind of replace by the lower margin LMS coming in the second half.
Okay, great. Thanks, again nice results.
Thank you Peter Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Ken Herbert from RBC capital markets. Your question. Please.
Yes, hi, good afternoon everybody.
Hey, good afternoon, Ken.
Hey, Wahid, maybe if I could just to sort of put a finer point on the mix impact in the second half of the fiscal year, what's your outlook for growth specifically within LMS.
Within the <unk> segment for the second half of the year I mean second quarter.
Growth there I mean, consistent with your expectations, but flattish down slightly.
How much of the second half growth is going to come from that segment relative to UAS umas or Maccready works.
So Ken I am glad you asked that question first of all this fiscal year.
Loading munitions as a whole we expect it to be the strongest driver of our growth overall, it's going to be very very robust growth for the whole year, that's our expectation.
As we expected and as I said on my comments the first half of the year is very much in line to our expectations on how we thought it's going to play out primarily because the contracts for our switchblade or very large lumpy contracts.
We had a very strong fourth quarter. If you remember last fiscal year, which we had a record shipments and record bookings that has allowed us to ship on the first quarter and our second quarter. According to our plans.
Second half is going to be very dominant in terms of growth and revenue.
<unk> for switching products Switchblade 306 hundred we have a robust pipeline for switchblade that is not able to get not only going to fuel our second half performance in terms of revenue and bookings, but it's also going to fuel our fiscal 'twenty five and beyond.
The pipeline for Switchblade 306 hundred looks extremely promising.
It just takes a little while primarily because of the nature of the product the government contracting process and the Fms approval process that we have to go through for all these exports, but overall I think second half is going to be dominant by our loitering munitions business. Both in terms of bookings as well as in terms of revenue performance for the year.
<unk>.
Okay. That's helpful. Thank you and maybe wahid or Kevin.
What's your outlook for full year free cash flow.
Used 36, or so through the first half of the year significant investments in working capital do we expect much relief and positive free cash in the second half of the year or how do we think about the full year from a cash basis.
I mean, I'm not banking too much on a lot of relief I think the working capital levels will stay around this mark here in the third and fourth quarter, maybe even up a little in the third quarter, and then come down a little bit in the fourth quarter.
And then I think youll start to see some improvement at least as a percentage of overall sales in FY 'twenty five.
Okay, great. Thank you very much.
You're welcome Ken.
Thank you and as a reminder, if you do have a question at this time. Please press star one on your telephone one moment for our next question.
And our next question comes from the line of Pizza Kubicki from Alembic Global your question. Please.
Hey, good afternoon guys.
IP.
Yes.
One for me how do you guys.
When you think about the kind of the timeframe or the path to improve LMS gross margins and what are the major factors that impact that through the midterm.
So Pete.
We actually have seen fair.
Fairly strong improvement on the gross margin of our Switchblade product line as a whole relative to the last several years and we continue to make even more progress.
Having said that our small UAS, especially international contracts and orders are by far the most profitable products because we've invested for many many years and that product line and we're able to sell those as a commercial item to a lot of our international customers.
While our small UAS is set up very very high bar in the industry, if not only just for Aerovironment slip.
Switchblade.
Gross margins and profitability is fairly strong and it is improving.
How well, but it's going to be you know usually our hardware is are in the upper 40, <unk> the low forties and switchblade. They are in the mid to high Thirty's. So it's not that much off of our small UAS and it's improving we have several activities and strategies on improving that one of which of course is of course is <unk>.
Volume.
And lowering the cost inputs and allowing us to actually get more efficient in production, which we are making significant improvements and our team has managed that really well and the second thing is also in terms of improving the cost in terms of the block 20.
Switchblade plus 20, and the next generation systems are actually easier to manufacturer has less labor content and much more automation in terms of its manufacturing capability. So we've got several activities, which many of them have already paid some dividends and they'll continue to pay dividends going forward as well.
Okay. That's great color I appreciate it just one more for me.
I just want to understand guys in terms of this big Switchblade IQ just coming down the Pike.
How will that product sort of.
And how that meets army requirements, how would that differ from the lasso contract for the army assuming you win.
So at some point I don't know if the timeframe is on that but it seems like similar products. So I don't know if <unk> is deemed as a mid to long term replacement for for the Switchblade IQ or what's the right way to think about that.
Sure Pete So let me add some comments or color to this thing historically U S. Army has been the main contracting office for procuring switchblades for U S <unk> as well as for our allies and that remains still the case right now for the most part.
And if he used to have a large contract that we bought under for multiple years and since the demand has gone up so much higher that contract has reached the ceiling. So now the U S government basically buy these on individual ucas are underpenetrated contract action items actions, which is laborious for both the government as.
Well as for US what they have started to do is to actually initiate another very large multiyear sole source <unk> contract, where all switchblade both for U S duty as well as our allies. So the last contract and some of the other ones until that large multiyear contract with in place will still be.
It and awarded to US based on these you guys.
But.
Long term, what we want is a larger contract vehicle that allows the U S government to buy for many customers. Many many opportunities and funding sources and fulfill those much easier. So we're very pleased that the U S Army and USDA has taken that initiative, we're actively working that it's going to take some while because of this.
Our situation as well as with the bandwidth of USD <unk> in terms of contracting resources, but we feel very good we've already turned into our proposals we are negotiating.
The rate structures, and I think it's going to be more a matter of win versus F and when that goes into effect than it actually allows a lot more volume to go through in a lot more procurement to happen much faster and Trump diverse timing and so we're looking forward to that and it will be very very poor.
Positive for us and for our customers.
Okay. Thanks, so much guys.
Thank you.
Thank you one moment for our next question.
Okay.
And our next question comes from the line of Louie Dipalma from William Blair. Your question. Please.
Wahid, Kevin and John and good afternoon.
Good afternoon.
I'm following up on.
Several of the recent questions.
You mentioned the.
The army.
Dancing that they awarded Aerovironment 100 Lasso systems.
Are those 100 systems already in backlog and whats the general expected timeline for the last out program in terms of.
Phase one and subsequent phases.
Sure. So Louie that particular contract award has two very positive.
Aspects to it and that's why I highlighted it number one it is the first initial tranche of debt last so program of record potentially which puts us in a very very good position. So eventually as you know these programs will be compete it but to be already selected on the first phase and have product go into the U S Army for testing and <unk>.
Building is very very positive secondly that order is not in our backlog so.
While our switchblade loitering munitions business.
Backlog is pretty healthy.
Many of these opportunities that I mentioned on the on my comments is not reflected on our current backlog all of these opportunities are additional.
Orders and contracts that we expect to book in the next six to 12 months and in fact that demand continues to increase rather than decrease in terms of its pace as well as the top line. So our pipeline and our portfolio looks very robust for switchblade, both 306 hundred.
And domestically we've got several programs internationally, we've got lots of countries and we're also working on many other platforms to integrate switchblade onto such as their humvees, the Abrams and <unk> et cetera et cetera. So all in all we've got a lot more upside on our switchblade product lines over the next six months six to 12 months in terms of <unk>.
Yes.
Great and I think you and Kevin.
<unk> mentioned that the second half of the year should be heavy in terms of bulk switchblade three hundreds and switchblade 600 and.
Well Switchblade 600 also be shipped to those five.
International customers in the second half or some of those five internationally.
Yes, the answer is yes Louie.
Many of those international customers I can't specifically name any of them because of their.
Respecting confidentiality for our customers, but vast majority if not all of those customers.
Desire and have requested both Switchblade 306 hundred and same is true for the supplemental budget that is in front of Congress for Ukraine to $100 billion plus budget item. The supplemental package. That's in front of Congress that is for Israel, Ukraine, and potentially Taiwan there are.
Your line items for both Switchblade 306 hundred for those three countries and so we feel pretty strong that long term.
Since Switchblade 600, its a fairly newer product in terms of its like.
And the market is going to be equally as large of a product and revenue generator for us.
300, and obviously the selling price of the 600 is significantly higher because it's a much bigger.
Loitering munition.
Great and one last one for Kevin.
Do you expect.
Softbank are for both of you do you expect Softbank to continue funding <unk>.
Apps and Aerovironment prepared to continue funding like hats and sung <unk>.
On its own.
Softbank drops out.
Sure. So a softbank is very committed to this program.
We are working with them very closely they continue to fund us although the funding for them has been reduced slightly because of their financial situation over the last couple of years.
Much bigger discussion and known variables in the Japan's economic <unk> situation and the pandemic et cetera, that's affecting that number one.
The underlying reasons, so, but however, softbank is very committed to us we're actively engaged with them were dial we're talking to them all the time at very regularly.
And we're.
<unk> that process.
No.
Do not expect them to stop funding our southern glider anytime soon they're committed to the mission. They still believe in the platform and they believe in the long term value proposition of our perhaps.
Just that they have intentionally slowed down over the last two years because of the overall macroeconomic situations that they are faced with.
Secondly, we are funding it to some small amount.
Primarily because there is IP involved that we would like to make sure that we own and we protect we've always done that and we'll continue to do that and lastly, we have received our initial contract award from the U S. D O D.
And there is additional funding a significant amount of funding actually relatively speaking and the government fiscal year 'twenty for budget for haps and the U S duties budget.
So when the government fiscal year 'twenty for budget is approved we expect that eventually to.
<unk> transitioned into a contract to aerovironment.
And we are actively working this program with the USD Theres very strong support and desire for this capability in the U S duty as well.
Excellent. Thanks, Wahid, Thanks, Kevin Jonas swaps.
You're welcome.
Thank you one moment for our next question.
And our next question is a follow up from Ken Herbert from RBC capital markets. Your question. Please.
Yes.
Yes, hi, good afternoon.
Wanted to follow up on on the EPS guidance I mean, you did just under $2 and adjusted EPS in the first half.
The guidance implies 60 to 70 cents in the second half of the year at the upper end of the range aside from mix as you as you really ramp.
<unk> sales is there anything else in particular of the EPS.
Sort of driving the significant step down first half the second half.
We definitely expect a step up in R&D in the second second half of the year. So.
That's going to be part of the equation there for the EPS. So.
So you can see a little bit lower margins youre going to see a step up of the R&D expense in the second half.
Okay, So mix and R&D I guess would be how we should think about that.
That's right normally our ears are all reversed around so there's a little bit of a backwards here, yes, I said to Ken on my remarks as you saw we have an exciting number of other programs and projects, where there's a lot of demand for those systems, including the DARPA ancillary the SOR program with the U S Army and what the OSB for.
A large contessa logistics capability and those programs are getting a lot of traction and.
And we do not want to.
Slowed down those efforts and make sure that even though if there is a continuing resolution we accelerate those things because the desire and demand by the USDA for those for those capabilities is very high and we also believe that were very unique and that's in a sense that our solutions are considered the most innovative.
And the most capable in these categories that use duty is feeling very strongly about so we're going to expect to actually ramp up R&D investments in the second half to support those developments in order to fuel our future growth and shareholder value creation.
Okay, Great I appreciate it. Thanks go ahead Kevin.
You're welcome.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Joseph <unk> for any further remarks.
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 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.
Okay.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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