As I continue covering the electric vehicle (EV) space, I will offer Seeking Alpha readers interviews with some of the industry's major players. In this article, I present a Q&A, conducted via email, with the SVP of AeroVironment's (NASDAQ:AVAV) Efficient Energy Systems (EES) segment, Mike Bissonette. EES focuses on the electric vehicle charging market.
Growth in EES helped fuel AVAV's recent bullish run. On May 16th, I recommended making AVAV part of an EV portfolio of stocks. At the time, the stock traded for about $28.59. It closed Tuesday's session at $31.60. After the company's June 21st earnings report, the stock traded as high as $36.49.
Rocco Pendola: Please tell us exactly what the EES segment at AVAV does?
Mike Bissonette: Our EES business segment addresses the increasing economic, environmental and energy security value of electric transportation solutions with market-leading products and services. EES produces and supports passenger and fleet electric vehicle solutions, electric vehicle test systems and charging systems for electric materials handling vehicles and airport ground support equipment.
The products and services we offer through our EES segment draw on decades of innovation that include our key role in the development of the General Motors (NYSE:GM
) Sunraycer solar powered car, the GM Impact (prototype for the EV1) and specialized electric and hybrid electric vehicles developed for government customers. AeroVironment’s other business segment, unmanned aircraft systems, has produced more than 15,000 electric unmanned aircraft that incorporate energy storage and battery charging technologies developed in our EES business segment.
RP: Tell us more about EV test systems. About how many customers do you count here? Who are the biggest? And what percentage of EES revenues do they account for?
MB: Developers and manufacturers of electric vehicles typically conduct a variety of tests on the electric propulsion and energy storage systems that form the core of their vehicles. These tests include simulating the consumption, conversion and storage of electricity through a range of operating scenarios, and include long-term testing to simulate the rigors of real-world driving. Developers of battery packs, electric motors, stationary power supplies, generators and fuel cells also test their devices to validate design hypotheses and identify potential operating issues. Electric vehicle and battery manufacturing facilities can also integrate our systems into the production floor to support “end-of-line” testing before shipping their products. Global interest in electric transportation solutions, including electric vehicles, has increased and has served as a driver of increased demand for electric vehicle and component test systems.
We haven’t provided exact numbers for customers, but in general this demand spans commercial, government, military and university research and development labs as well as commercial manufacturing facilities as more funding and attention are focused on clean transportation. Examples of the types of customers who use our test systems include automakers like General Motors, which uses more than 30 of these systems in its global battery laboratory, independent test labs and battery manufacturers. Our EV test system customers are based in the United States and, increasingly, internationally. We don’t break out revenue by specific product, but for the fiscal year ended April 30, 2011, EES segment revenue accounted for 15% of our total company revenue.
We believe that the markets for our electric vehicle charging systems and test systems continue to develop, and that continued diversification of our customer base and increasing adoption of alternative fuel vehicles will support increased penetration into target markets.
RP: Tell us more about EV charging docks/stations. And answer the same questions pertaining to customers as mentioned before.
MB: Our electric vehicle solutions consist of a comprehensive product and services offering for passenger and fleet electric vehicles comprising UL-certified Level 1, Level 2 and DC fast charging systems for public, fleet and residential use, installation services from a growing network of licensed electric contractors that currently spans 25 states across the U.S. and data communication systems supporting remote asset management and data collection from our smart charging systems. The evolution of our electric vehicle solutions business is a good example of our company’s long-term growth model.
Our initial EV charging technology emerged from our key role in the development of the GM Impact, the first modern EV. Over two decades we continuously improved our charging technology, deployed it to leading industrial markets, and adapted it for the next generation of EVs coming to the market today. This sustained commitment enabled us to fund and develop solutions to establish our technology leadership position; refine production products; understand the system and integration issues between vehicle, driver and host facilities; develop a scalable installation and service model; and design modular and customizable back-end support systems that allow our customers, such as automakers, to go to market quickly. The result is an integrated business, product and service solution that uniquely supports the practical use and broad adoption of electric vehicles. Our customer focus enables AeroVironment to translate our technology leadership to market leadership as customers increasingly adopt EVs.
As part of our strategy, we are developing relationships across multiple channels that provide complementary pathways to market. We have announced some of the most significant commercial charging solution implementation contracts to date with Nissan (OTCPK:NSANY
), BMW, TXU (TXU
), NRG Energy (NYSE:NRG
), Hawaii, Oregon and Washington state.
Our charging solutions are in use today in homes, at businesses and in the public. We have deployed thousands of charging stations in hundreds of communities across 25 states since we began rolling out production systems. In a very short amount of time we have built out one of the largest installed bases of Level 2 charging systems for passenger EVs in the world.
Again, we don’t break out revenue by specific products, but for the fiscal year ended April 30, 2011, EES segment sales accounted for 15% of our total company revenue.
RP: Should we expect the same growth rate in EES revenue going forward? What type of guidance can you offer in that regard?
MB: We do not provide guidance at a business segment level, but we expect our electric vehicle solutions to continue growing at a high rate in our fiscal year 2012, which started on May 1. The rate of growth and market opportunity ultimately will be driven by the adoption of electric vehicles, as well as the plans of businesses, utilities, municipalities and other stakeholders to build out charging infrastructure in preparation for the increased penetration of electric vehicles. With major automakers either selling electric vehicles or planning to introduce plug-in models in the coming years, the potential for continued growth is promising.
RP: Where is most of the R&D money going with relation to EES?
MB: R&D is integral to our business model of long-term growth through practical innovation. Our research and development activities focus on creating capabilities that support our existing product portfolios as well as new solutions that potentially create new market opportunities. These activities are funded both by customers and by internal R&D investments.
As an example from our electric vehicle solutions business area, we have been developing products, services and capabilities that result in what we believe to be the most comprehensive offering available today. We are the only company today that offers a complete range of UL-certified Level 1, Level 2 and DC fast charging systems for both residential and commercial use. UL-certification is important because it requires that our systems pass hundreds of tests to confirm their safety and operating characteristics in a wide range of environmental conditions. UL is a critical R&D investment for any company producing electric systems for consumer use.
For the fiscal year ended April 30, 2011, AeroVironment’s internally-funded R&D totaled 12% of revenue for the company as a whole. We don’t break out R&D investments by business segment or by program.
RP: Give us an idea about the scale and scope of the EV charger market in terms of the type of penetration we've seen thus far in building the necessary infrastructure to support considerable EV adoption. It is in its infancy? How big do you expect it to become? Where does it need to be in order for EVs to be on par with hybrids, for instance, in terms of adoption.
MB: There are numerous market projections for the number of plug-in vehicles expected to be sold globally. Some research reports estimate that in 2030 there could be millions of battery electric vehicles sold – and that doesn’t take into account a larger number of plug-in hybrids that run on both batteries and internal combustion engines. President Obama stated a goal of putting one million plug-in vehicles on U.S. roads by 2015. Given that there were very few plug-ins on the road in 2010, this represents potentially significant growth over the next few years and beyond. Whatever the actual sales number turns out to be, even conservative estimates imply a significant market opportunity for EV charging and support services.
RP: It's much easier to build out an EV charging infrastructure than it is one related to hydrogen vehicles, yes?
MB: Building any type of new, widespread vehicle refueling infrastructure presents challenges. Electric vehicle charging infrastructure simply builds on the existing ubiquitous electric grid, making it relatively easy to install home and public charging stations. Additionally, as renewable energy production sources such as solar and wind are added to the grid, the EVs that plug-in effectively become cleaner and cleaner.
In terms of EES, what companies are your biggest competitors? American Electric Power (NYSE:AEP
), Ecotality (ECTY), NRG, and Coulomb?
MB: Our revenue in this emerging market comes from hard fought commercial competition. We think our success thus far positions us very well to compete effectively for market share as initial government funding for infrastructure declines. As large entrenched competitors have reacted to the emergence of plug in electric vehicles with their own charging solutions, we have continued to win contracts and relationships with major customers.
Among these wins: two major automaker contracts, with Nissan North America and BMW; state and local government contracts, including installing up to 320 Level 2 charging systems across the islands of Hawaii; EV charging “ecosystems” comprising Level 2, DC fast charging systems and data communications networks in Houston and in Dallas/Fort Worth with NRG Energy; and site selection, hardware and installation services support of Oregon and Washington Departments of Transportation’s “green” I-5 corridor. In addition, our distribution arrangement with Milbank Manufacturing further amplifies our reach.
RP: Tell us about the "Green Highway" along I-5 in Oregon. How big will that become not only in length, but in number and frequency of chargers? And where else is it being/will it be duplicated across the country?
MB: Our project in Oregon will comprise eight DC fast charging systems along a 150-mile span of the I-5 corridor from the California state line to the Willamette Valley. We are analyzing driving distances, common destinations, vehicle range and other factors in the selection of the EV fast charging sites at eight interchanges identified by the Oregon Department of Transportation along this segment of highway. We expect to see other states and municipalities duplicate a similar vision of a safe and consistent charging infrastructure, and in fact, Washington recently selected us for a similar type of project, also along I-5.
Do you partner with Best Buy (NYSE:BBY
), Walgreens (WAG), and other retailers like NRG and others do? Will you, if you have not? From a use standpoint, are chargers at a retail outlet where somebody might only spend a few minutes to a half hour practical? How far along is the technology to get a good enough charge in that situation and where's it headed? And how fast?
MB: We are engaged in multiple agreements, which we announce as they become finalized. Retail outlets can take advantage of both our Level 2 AC charging stations and our DC fast charging systems that can recharge an EV in less than 30 minutes. AC charging stations are appropriate for home, work and some retail charging locations such as shopping malls that encourage long “dwell time.” Our DC fast charging systems can refuel a vehicle quickly, and are appropriate in locations and situations in which customers don’t have time to linger. Although we believe most charging will take place overnight at home, workplace, retail and other opportunistic charging locations will encourage refueling confidence in EV drivers by offering them options outside of the home. Retail locations specifically represent interesting and practical recharging sites. We are currently partnered with NRG and are installing both our Level 2 AC and Level 3 DC fast charging stations at major retailers’ stores for NRG’s eVgo ecosystems.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.