AeroVironment, Inc. (NASDAQ:AVAV) Q1 2024 Earnings Call Transcript

AeroVironment, Inc. (NASDAQ:AVAV) Q1 2024 Earnings Call Transcript September 5, 2023

AeroVironment, Inc. beats earnings expectations. Reported EPS is $1, expectations were $0.4.

Operator: Good day, and thank you for standing by. Welcome to the AeroVironment Fiscal Year 2024 First Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jonah Teeter-Balin. Please go ahead.

Jonah Teeter-Balin: Thanks, and good afternoon, ladies and gentlemen. Welcome to AeroVironment’s fiscal year 2024 first quarter earnings call. This is Jonah Teeter-Balin, 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 statement portions of such filings.

Copies are available from the SEC on the AeroVironment website at www.avinc.com or from our Investor Relations section. This afternoon, we also filed a slide presentation with our earnings release, and posted the 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, September 5, 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 the events or circumstances occurring after this conference call. Joining me today from AeroVironment are Chairman, President and Chief Executive Officer, Mr. Wahid Nawabi and Senior Vice President and Chief Financial Officer, Mr. Kevin McDonnell.

We will now begin with remarks from Wahid Nawabi. Wahid?

Wahid Nawabi: Thank you, Jonah. 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. I 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. Our key messages, which are also included on Slide #3 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 of $540 million up from $424 million at start of fiscal year 2024. This backlog reflects $268 million of new bookings due in the first quarter. Third, we recently announced that AV will purchase privately-held Tomahawk Robotics enabling multi-domain control of a wide variety of unmanned solutions from one user interface. And fourth, we’re 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 continue to expect gross margins to remain 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 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 efficient and simplicity.

Tomahawk’s Kinesis Ecosystem provides unmatched tactical capabilities utilizing an AI-enhanced open architecture control system that operating, 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 Crysalis operating system with the Kinesis platform means pairing the best common controller technology with the most ubiquitous unmanned systems on the market today. 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 3 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, Tomahawk will operate as an additional product line reporting into our Unmanned Systems segment led by Senior Vice President and General Manager, Trace Stevenson. We expect this transaction to drive incremental revenues, adjacent market growth opportunities and product performance synergies driven by the integration of our prospective 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. 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 MacCready 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 LE and Puma 3 AE 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. 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 AV to continue providing UAS support and training to the government of Mexico’s armed forces through the foreseeable future.

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 received another 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. At the same time, we continue to mark progress providing UGVs to Ukraine, on an accelerated schedule which are performing life-saving EOD missions 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 to our Loitering Munitions segment.

I’m 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 300 and 600 systems has been largely driven through the latest USAI and the U.S. government. The U.S. army recently awarded us another contract for Switchblade 600 loitering munitions in support of the USAI. At the same time, we anticipate the U.S. government will continue to backfill and increase depleted DoD stockpiles. Additionally, we are responding to a Request for Information or RFI related to the U.S. Marine Corps Organic Precision Fire or OPF program. Overall, we anticipate both U.S. and international demand for our loitering munitions 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 10C 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. Moving to our MacCready Works 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 tests using a smaller scale version of the new Sunglider 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 Sunglider while at the same time working with the FAA [for Type Certification] (ph). With that, I would like to now turn the call over to Kevin McDonnell, for a review of the first quarter financials. Kevin?

Kevin McDonnell: Thank you, Wahid. Today, I will 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 8-K available on our website, which recaps our historical results into the new segments. Overall, we started the first quarter extremely strong in terms of backlog, revenue, adjusted gross margins and adjusted EBITDA. As Wahid mentioned in his remarks, revenue for the first quarter of fiscal 2024 was $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 was Unmanned Systems, or UMS, which is a combination of our small UAS, medium UAS and UGV businesses with revenue of $98.2 million, an increase of 45% from last year’s $67.8 million driven primarily by our small UAS business unit, which shipped systems to eight international countries during the quarter. Loitering Munitions Systems or LMS recorded revenue of $30.9 million, a 34% 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 MacCready Works 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 demands in MacCready 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 corresponding quarter of the previous year due to strong product revenues from our small UAS business and to a lesser extent from lower MUAS COCO service operations with the closure of all the site locations. For the remainder of fiscal 2024, we expect product sales to remain above 70% of total revenue, but expect LMS sales 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, while slide 12 reconciles the GAAP gross margins to adjusted gross margins, which excludes the intangible amortization of other non-cash purchase accounting items. In the first quarter, consolidated GAAP gross margins 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 COCO ISR assets. Adjusted gross margins for the first quarter were 45% compared to 34% in the first quarter of last year.

The improvement in adjusted gross margin was also driven by the improved service mix and strong product gross margins. Adjusted product gross margins for the quarter were 49% versus 44% in the first quarter 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 year. Again, due to the closure of the MUAS COCO operation sites. We expect adjusted gross margins to continue to be strong during the first half of the year, however, our product mix shifts during the second half of the year, we expect 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 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 were higher sales volume and favorable sales mix, which was partially offset by incremental SG&A expenses and investments in R&D. 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 in 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 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 a 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 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 SG&A expenses, a $0.4 million increase in R&D spending, and a $0.2 million increase in unrealized loss on 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 $0.8 per diluted share loss for the first quarter of fiscal 2023.

Turning to the balance sheet. Total cash and investments at the end of 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. 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 as a percentage of backlog 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 and approximately $100 million available under our working capital facility.

I’d like to conclude with some highlights of our backlog metrics. Slide eight of the earnings presentation provides a summary of our current fiscal 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 mid-point of our revised FY24 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’d like to turn things back to, Wahid.

Wahid Nawabi: 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 and $675 million. We anticipate non-GAAP adjusted EBITDA 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. This is 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. 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. 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 business 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, were mindful that the U.S. government is nearing the end of its fiscal year.

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. We are at the forefront of developing and offering in-demand solutions for autonomy, automatic target recognition and tracking. In addition, the U.S. DoD 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 solutions. 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. 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 Paycom theatre and the deployment of new defense capabilities. We look forward to the unparalleled strategic council and vision he will bring to AV. I would also like to thank Katharine Marigold for her eight years of service on our Board of Directors as she is stepping down at our upcoming annual meeting. Her passion for 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.

We appreciate all 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, Jonah and I will now take your questions.

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Q&A Session

Operator: [Operator Instruction]. Our first question comes from the line of Gregory Konrad from Jefferies. Your line is open.

Greg Konrad: Good evening and great quarter.

Wahid Nawabi: Thank you, Greg.

Greg Konrad: 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, has there been some risk retirements? Is it orders and just kind of what’s driving that better revenue outlook for the year?

Kevin McDonnell: Sure. So, we’re very pleased with how great our team performed on the first quarter, Greg. There are several factors why we raised out our guidance for full fiscal year 2024. One is, we’ve had a tremendous first quarter, and our first quarter, this is historic first quarter for the company. Second, our backlog, as you saw, is at a 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.

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 Loitering Munitions, both categories, which we have essentially invented in the marketplace over the last two decades. So, we’re 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 the higher levels of revenue outlook on the top line that we provided.

Greg Konrad: 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?

Wahid Nawabi: Sure. I’m glad you asked that question, Greg, because it’s a really important point to make here. 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 war fighters are overwhelmed with so many robotic systems, small, medium, large, extra-large, etcetera, etcetera, Loitering Munitions, ground robots, etcetera. It becomes very difficult for an war fighter 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 AeroVironment 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 our customers, meaning a war fighter.

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 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 every day in Ukraine, AeroVironment has been investing in this area for several years. 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 customer’s need, well 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 ecosystem and environment when they’re operating multiple UAVs. Obviously, we just signed and we’re going to close this quarter.

We expect to close it this quarter and we’ll provide more color on the financials at that time.

Greg Konrad: Thank you.

Wahid Nawabi: You’re welcome, Greg.

Operator: And one moment for next question. Our next question comes from the line of Peter Arment from Baird. Your line is open.

Peter Arment: Yeah, thanks so much. Good afternoon, Wahid and Kevin, terrific results.

Wahid Nawabi: Thank you, Peter.

Peter Arment: Wahid, just a question on the — 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’m just wondering, just given how well your backlog 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?

Wahid Nawabi: Peter, as I said in my remarks, yes, we expect the product mix as a percentage of revenue to be more favorable towards products as it was in 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 it and it’s justified to our customers. So, for the remainder of this year, we expect the gross margin percentage and the mix of revenue to be more favorable towards product sales than services for fiscal year 2024.

Peter Arment: 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 you’re seeing and just the opportunities there. I know you’ve been able to expand the, the, the countries that Switchblade is available for. And, of course, you’ve had a huge installed base in the small UAS category internationally, but how is FMS activity we think about going forward?

Wahid Nawabi: Sure. So, overall, our backlog, as you know, 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’ve been performing in terms of, securing orders and working on growing our backlog. Many additional FMS cases remain, 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 2024. We will see more countries placing orders and contracting these, the 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 are for a near peer kind of a conflict. 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 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 sorts of 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 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 future years.