Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Steven Gitlin – Director IR

Timothy Conver – Chairman & CEO

Stephen Wright - CFO

Analysts

Michael Lewis – BB&T Capital Markets

Timothy Quillin – Stephens, Inc

Chris Donaghey – SunTrust Robinson Humphrey

Brian Gesuale – Raymond James

Howard Rubel – Jefferies & Company

Michael Ciarmoli – Beonning & Scattergood, Inc.

AeroVironment, Inc. (AVAV) Q4 2008 Earnings Call June 24, 2008 4:30 PM ET

Operator

Good day ladies and gentlemen and welcome to the fourth quarter and full fiscal year 2008 AeroVironment earnings conference call. (Operator Instructions) With us today from the company are Chairman and Chief Executive Officer, Mr. Timothy Conver, Chief Financial Officer, Mr. Stephen Wright and Director of Investor Relations, Mr. Steven Gitlin. At this time I would like to turn the presentation over to Mr. Gitlin; please go ahead sir.

Steven Gitlin

Welcome to AV’s fourth quarter and full fiscal year 2008 earnings call. Before I hand the call over to management please note that on this call, certain information presented contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Forward-looking statements include without limitation any statement that may predict, forecast, indicate or imply future results, performance or achievements and may contain words such as believe, anticipate, expect, estimate, intend, project, plan or words or phrases with similar meaning.

Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties including but not limited to, economic, competitive, governmental and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements include but are not limited to reliance on sales to the U.S. government, changes in the supply and/or demand and/or prices for our products, the activities of competitors, failure of the markets in which we operate to grow, failure to expand into new markets, changes in significant operating expenses including components and raw materials, failure to develop new products, changes in the regulatory environment and general economic and business conditions in the Unites States and elsewhere in the world.

For a further list and description of such risks and uncertainties, see the reports we file with the Securities and Exchange Commission. We do not intend and undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. The content of this conference call contains time sensitive information that is accurate only as of today, June 24, 2008. The company undertakes no obligation to make any revision to the statements contained in our remarks or to update them to reflect the events or circumstances occurring after this conference call. With that it’s my pleasure to turn the call over to Timothy Conver.

Timothy Conver

Thank you Steven. Welcome to our fourth quarter and full fiscal 2008 conference call. On April 30th, we completed our second fiscal year-end as a public company and our solid organic growth is once again in line with our targets. At the beginning of FY08 we said we expected 20% to 25% revenue growth but 12% to 14% operating margin. Continued strong demand for our products and services made for a record fourth quarter revenue of $64.3 million and a total FY08 revenue of $215.7 million.

This represents a year-over-year revenue growth of 24% with an operating margin of 13%. Doing what we say continues to be a core value of the company in all of our relationships. In addition to delivering the financial results and supporting our customer needs, we made significant progress positioning the company for future growth across our businesses. Here are eight examples of that progress.

We successfully transitioned Wasp 3 into a full rate production in support of the BATMAV program with both the US Air Force and the US Marine Corp placing orders for these systems. We won a competitive award to develop our Global Observer stratospheric persistent UAS under a $57 million joint capabilities technology demonstration program. We grew our UAS spares and repairs business in support of the growing number of our Raven and Wasp systems used by our customers. We added to the number in international allied military customers for our small UAS. We achieved important milestones in several technology development programs including Global Observer, Switchblade and digital data link. We managed to increase and expand the number of architectural wind early adopter systems purchased by our customers and installed on their buildings. We successfully demonstrated our PosiCharge technology as fast charge infrastructure for on-road electrical vehicle demonstrations in both the United States and in Europe. And we grew our Human Resource strength which is the source of the high value we deliver to customers while maintaining a culture of innovation, agility and customer responsiveness.

These developments position us well to address what we believe are two important long-term global trends; one, the increased security and economic value of ISR, communications and force protection that is driving the adoption of UAS. And two, the increased economic and environmental value of energy efficiency which we believe will drive the adoption of clean energy and clean transportation.

With these accomplishments as a backdrop, I’d like to take a little more time then usual on this call to address two broader issues that may be on the minds of our investors, especially in the short-term. By far the most frequently asked question we receive when we speak with investors relates to, “What will happen as a result of the drawdown of US troops in Iraq as it relates to our small UAS business?” Here is my view. First it’s clear that UAS are here to stay. Newsweek’s recent headline “The hundreds of drones cruising over Iraq and Afghanistan have changed war forever.” is a good summary. The effectiveness of our small UAS is not limited to the mountains of Afghanistan or the cities of Iraq.

These systems provide unique value wherever our ground forces operate. Our customers have each determined that they require this capability throughout their force structures. We believe they will continue to buy these systems whether we’re fighting war or training similar to the adoption of other breakthrough technologies like night vision. We have found the congressional support for affordable force protection is wide spread and bipartisan. And we believe that any administration will provide similar support. If a drawdown of US forces from Iraq does take place, we believe it will take some time to complete and that it will require tools such as our systems that protect our troops during the process.

The main driver for our spares and repairs revenue is total flight hours of our aircraft. We believe the number of aircraft in use will continue to increase even if the Ops tempo decreases due to drawdown, reduces flight hours on each airplane. In that scenario we believe the net effect on our spares and repairs business is unclear but I think the net result will be determined primarily by the total use of the system. Finally we believe that the new UAS capabilities that we are developing and the new markets and applications that are emerging will continue to drive UAS market growth and our revenue growth.

The second question we’re often asked is, “What will happen when we face significant competition?” which I believe refers to competition from large prime contractors. It’s important to remember that each and every full and open competition we’ve entered has included a significant number of competitors including large aerospace prime contractors. We have managed to win each of the three competitions for DoD programs of record to date as well as the one-and-a-half year competition for the Global Observer JCTD award.

There are a number of reasons for our success in the market. First we are competing in market segments that we created and we’ve been focused on for years. Second we’ve built a competitive strategy from the ground up to be uniquely good at anticipating and delivering on our customers’ most important needs. And third our capabilities are focused on a limited set of markets where we’re committed to winning every competition we enter and expanding every customer relationship we have. I think the voice of the customer speaks most clearly through market share and market share favors us in small UAS and stratospheric persistent UAS precisely because of the strategic advantage afforded by our small size relative to others, our focus and our agility.

Let’s now review our three business segments beginning with UAS. With the $56 million fourth quarter UAS produced record revenues of $186.6 million for FY08 an increase of 27% over FY07. There are five aspects of our UAS business that we believe will continue to drive future growth. First is sale of existing products to existing customers. Raven continues to dominate the small UAS market but our Wasp line is ramped up and is now contributing to revenue as well. The Marine Corp is issuing their Ravens to the Battalion level while they are issuing their Wasps to the Platoon level. We have already received inquiries from other customers regarding Wasp and we’re pursuing them actively.

Second are our services that sustain our deployed system. As the total number of aircraft in use increases we benefit from increased spares, repairs and training revenue. Our logistics group has also added turnkey flight services to its portfolio. Third product upgrades will continue to drive revenue. Our customers have already been upgrading their previously purchased Ravens to Raven B configurations and we are actively working with them to define the next Raven product improvement program.

We anticipate that our digital data link will be broadly adopted after it becomes available during FY09 for initial military assessment. Fourth are new products. The Global Observer program is ramping up and will contribute meaningfully to our FY09 revenue. Global Observer intends to provide affordable persistence in the stratosphere and that’s a [gain] changer. We believe the six government customers who are funding the Global Observer three year development program are a strong indication of broad interest in this capability. Switchblade, another customer funded initiative is bringing to reality yet another unique capability. Switchblade combines the visual information provided by our small UAS with a precision [munitions] delivery ability. This will deliver an entirely new level of precision and response time while significantly minimizing collateral damage.

Each of these programs represents a significant market opportunity that has never before been address successfully. And fifth, new markets and applications. We benefited this year from growing international adoption of Raven during FY08, receiving orders from Denmark and Spain. Shortly after the end of FY08 we also received our first Raven order from the Netherlands and we are pursuing actively a number of additional international opportunities. We believe that our international customers are following the earlier adoption pattern of our US DoD customers and represent potential long-term future growth order flow as they gain the same experience and confidence in our solutions that all of our earlier customers have.

We also remain convinced of the broader potential of our small UAS in applications such as border patrol, law enforcement infrastructure monitoring and emergency response, when regular use of UAS in national airspace is approved. In addition to the growing interest in UAS there’s also an increased interest in efficient energy solutions which leads us to a review of our other operating segments, PosiCharge and energy technology.

This will be the last time we report PosiCharge and energy technology centers individual segments. In May we announced that we would combine these two groups into a single operating segment called efficient energy systems, or EES. Starting with our Q1 FY09 cycle we will report these as a single segment. This is essentially the organizational combination that worked very well for us two years ago when we combined the group that was performing UAS R&D with our small UAS production business.

EES is designed to address the increasing economic and environmental value of efficient electric energy solutions. It will use the critical mass of its combined resources to focus on two major areas; clean transportation and clean energy systems. PosiCharge for industrial vehicles, PosiCharge for on-road vehicles, electrical vehicle test equipment and architectural wind are representative of the innovative solutions we intend to offer from this integrated group. We increased PosiCharge revenue slightly over FY07 and believe that we maintain approximately 50% of the fast charge market. There is not doubt that PosiCharge has increased productivity, enhanced safety and improved energy efficiency for our customers. They continue to adopt and deploy our systems across their enterprises although we have not seen the broader market adoption that we anticipated.

Based on our data PosiCharge is the most widely used electric vehicle fast charge system in the world supporting thousands of electric lift trucks used heavily every day. I think we have the best technology in the market and we will continue to work creatively to expand awareness and adoption of the PosiCharge solution. PosiCharge was developed by our energy technology center which I’ll now discuss in more detail.

The purpose of our ETC has been twofold; to develop advanced electric technologies that support our existing businesses and to develop entirely new solutions targeting new opportunities for significant market adoption. Our electric vehicle test equipment has seen an uptick in sales as more and more organizations work on electric and hybrid electric vehicle development programs. Our ETC team has delivered state-of-the-art subsystems for energy generation, energy storage and propulsion that are critical to achieving the performance targets of our revolutionary Global Observer system.

We are also seeing more interest in clean energy solutions such as architectural wind which has increased the number of customer funded, earlier adoption systems installed and operating. We are working with electric vehicle companies and potential customers to present our fast charge technology as an infrastructure solution. With that as an overview for our business, Stephen Wright, our CFO, will review our financial results.

Stephen Wright

Good afternoon. Revenue for the fourth quarter was $64.3 million, and increase of 27% over fourth quarter of prior year of $50.7 million. Looking at revenue by segment, UAS revenue was $56 million, an increase of 25% over the prior year. The growth in UAS revenue was due to higher product sales and project R&D, partially offset by slightly lower services. PosiCharge revenue was $3.9 million, an increase of 45% from Q4 last year primarily due to higher revenue from sales to the automotive market. And energy technology center revenue was $4.4 million, an increase of 43% from Q4 last year due to higher power processing equipment deliveries.

Turning to gross margin, gross margin in the fourth quarter was $23 million, up 20% from Q4 of last year. Gross margin as a percentage of revenue was 36% versus 38% in Q4 last year. By segment UAS gross margin was $20.1 million up 18% from Q4 of last year and as a percent of revenue UAS gross margin was 36% versus 38% last year. This decrease in gross margin rate is primarily due to higher program costs. PosiCharge gross margin was $0.7 million, up $0.3 million from Q4 last year primarily due to higher sales volume. As a percentage of revenue PosiCharge gross margin was 19% versus 16% in Q4 last year. Energy technology center gross margin was $2.1 million, up $0.5 million from Q4 last year due to higher sales volume.

SG&A for the quarter was $9.1 million or 14% of revenue, compared to $7 million also 14% of revenue in the prior year. SG&A growth is primarily due to higher selling and marketing expense. R&D for the quarter totaled $4.7 million or 7% of revenue compared to the prior year amount of $4.7 million or 9% of revenue. Customer funded R&D during the quarter was $11.3 million or 18% of revenue, compared to $7.1 million or 14% of revenue in the prior year. And total R&D both internal and customer funded, totaled $16 million or 25% of revenue versus $11.8 million or 23% of revenue in the prior year.

Operating income for the quarter totaled $9.1 million or 14% of revenue. Operating income was 22% higher then Q4 prior year primarily due to higher gross margin partially offset by higher SG&A. And net income for the quarter was $6.4 million or $0.30 per fully diluted share compared to $5.6 million or $0.27 per fully diluted share last year.

Now moving quickly to our full year results, revenue for the full year totaled $215.7 million, up 24% from the prior year and by segment, UAS revenue was $186.6 million, up 27% from the prior year, PosiCharge revenue was $18.6 million, up 6% from the prior year, and energy technology center revenue was $10.5 million, up 90% from the prior year. Gross margin for the full year totaled $78.5 million, compared to $68.5 million in the prior year. Gross margin as a percentage of revenue was 36% versus 39% in the prior year.

By segment UAS gross margin was $68.6 million, up 19% from prior year, PosiCharge gross margin was $5.5 million, down 10% and energy technology center gross margin was $4.5 million, down 6%. SG&A for the full year totaled $33.7 million or 16% of revenue, compared to the prior year of $24 million or 14% of revenue. The prior year SG&A included the [surp] reversal of $2.2 million or 1% of revenue. R&D for the full year totaled $16.4 million or 8% of revenue, compared to $13.9 million also 8% of revenue in the prior year. And total R&D, internal plus customer funded, was $44.7 million or 21% of revenue, compared to $33 million or 19% of revenue in the prior year.

Full year operating income was $28.4 million or 13% of revenue. Operating income was 7% below the prior year amount. The effective tax rate for the full year was 34%, down from the prior year rate of 36%. The federal R&D tax credit expired in December, 2007 and thus we expect a higher effective tax rate in fiscal year 2009 unless the tax credit is renewed. Net income for the full year was $21.4 million or $1.00 per fully diluted share compared to $20.7 million or $1.22 per fully diluted share last year.

Looking at backlog, funded backlog ended fiscal year 2008 at $82 million, up $21.1 million or 35% from prior year-end. Turning to our balance sheet cash equivalents and investments at the end of the fiscal year totaled $118.4 million, up $7.6 million from our prior quarter amount of $110.8 million. This positive cash flow is largely due to income and working capital partially offset by capital expenditures. Investments at the end of the fiscal year were $13.4 million, down from the previous quarter amount of $30.8 million. The decrease in investments was due to net redemptions of municipal auction rate securities. We funnel redemptions largely to US treasury bills which will limit our ability to earn higher interest income going forward. We currently hold about 80% of our cash and treasuries earning an average taxable interest rate of less then 2%.

Subsequent to our fiscal year-end we were able to redeem $4 million of auction rate securities at par and as of today the company holds approximately $9.4 million of these securities. The auction rate securities are backed by municipal bonds rated A minus or higher and rated AA or higher with their insurance. At the end of the year our accounts receivable including unbilled, totaled $50.4 million, up $6.5 million from the prior quarter. Total day sales outstanding were approximately 71 days, compared to 81 days at the prior quarter end.

Taking a look at our inventory, inventories were $15.9 million at the end of the fiscal year, compared to $17 million at the end of the third quarter. Days in inventory were approximately 35 days compared to 53 days at the end of the third quarter. Turning to capital expenditures in the fourth quarter we invested approximately $1.3 million or 2% of revenue in property improvements and capital equipment. Of this CapEx approximately 90% was related to growth.

Now I’d like to turn things back to Timothy to discuss expectations for the new year.

Timothy Conver

Thanks Stephen. We look forward to continued growth and opportunities across the entire business. We believe we will grow revenue in fiscal 2009 by 20% to 25% with 12% to 14% operating profit. As we have discussed on multiple occasions, history demonstrates that our quarterly results can be bumpy. Last year timing of orders and operational issues contributed to this bumpiness. During the first half of our fiscal 2009, we will be implementing a customer funded change in the radio frequencies that our small DoD unmanned aircraft system customers use to transmit and receive information.

We have fully tested these changes that will implement the frequency upgrade and we are well prepared for this changeover. We are cutting in this change during our Q1 2009. We will temporarily halt shipments of new Raven and Wasp systems while we reconfigure the hardware to the new configuration then upgrade systems currently in the field and resume production shipments. Later in FY09 we expect to introduce our new digital data link as a product improvement and that will also incorporate this frequency capability along with other important enhancements to our small UAS.

This frequency change is anticipated in the guidance for FY09 that I just shared a moment ago.

I’d like to thank you all for your continued interest in AV and at this point, Stephen and I would be pleased to answer any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Lewis – BB&T Capital Markets

Michael Lewis – BB&T Capital Markets

I was wondering would you be able to provide us with a breakout of the logistics component of the UAS sales in both FY08 and the fourth quarter.

Stephen Wright

We provide that breakout at the total company level, in Q4 products were 61%, services 21% and project R&D.

Michael Lewis – BB&T Capital Markets

Do you have it for the full year?

Stephen Wright

Full year, 57% for products, 30% for services and 13% for project R&D.

Michael Lewis – BB&T Capital Markets

And about the Raven B conversion, how many Raven A systems have you completed thus far and also what’s the total number of Raven A systems left for conversion at this time?

Timothy Conver

I don’t have the specific numbers off the top of my head, however I think the majority of the Army’s Raven A’s have now been converted to the Raven B configuration.

Stephen Wright

We don’t know exactly how many Raven A’s are left to be converted but our understanding is contractually there are about 170 Raven A systems that have yet to be converted. Those may be converted at the discretion of the Army or not, we don’t have any orders putting those into conversion mode.

Michael Lewis – BB&T Capital Markets

You put out the release on the $7 million Netherlands order, have you delivered any of this product to date?

Timothy Conver

No.

Operator

Your next question comes from the line of Timothy Quillin – Stephens, Inc.

Timothy Quillin – Stephens, Inc.

In terms of the production halt that you’re talking about on Raven and Wasp, how should we think about that in terms of the potential revenue impact in 1Q?

Timothy Conver

Well I think overall it’s positive. It’s a directed change funded by the customer and that has an overall positive effect on revenue. In Q1 we expect it will have other things equal, a negative effect because we’ll be deferring some production shipments while we cut in that change.

Stephen Wright

As Timothy mentioned, in cutting in that change we’ll defer revenue into the balance of the year. We probably don’t want to get into giving specific guidance by quarters and just stick with our annual guidance for all the reasons that we’ve discussed in the past but since we are talking about this, probably the way to think about it is this cut-in will—in Q1 will reduce our product revenues on the order that they would be running on the order of about two-thirds of the level that we were at in Q4.

Timothy Quillin – Stephens, Inc.

Can you give us some sense of just in general what the Raven backlog and pipeline looks like right now. I know you still have some remaining backlog from your $46 million order from the Army, are you anticipating additional orders this quarter or should we expect the backlog, the funded backlog to decline by the end of July?

Stephen Wright

Well our funded backlog currently at $82 million is higher then it was last year but if you look at the trend, we’ve never had multi year backlog. We’ve never had huge levels of backlog so we’re continuously getting orders and filling them. Probably the metric we have talked about in the past with respect to Raven is the Army acquisition objective of 1,900 systems. Through Q4, we are about 43% delivered against that Army acquisition objective.

Timothy Quillin – Stephens, Inc.

The energy technology center revenue bumped up quite a bit, is that solely the power processing equipment and is that sustainable and also is there some Global Observer revenue that’s booked there and some that’s booked in UAS or how do you record the Global Observer project?

Timothy Conver

The energy technology for the full year is up about $900,000, probably the—surprisingly the single largest contributor to that variance was architectural wind. Power processing would be the other main component of that, again on a full-year basis. Global Observer revenues are all in UAS. Even a number of the engineers in the energy technology center support Global Observer but the revenue is all recorded under UAS.

Timothy Quillin – Stephens, Inc.

The energy technology center, was up $2 million quarter-to-quarter, $4.4 million versus $2.3 million in 3Q 2008.

Timothy Conver

That growth would be power processing systems.

Timothy Quillin – Stephens, Inc.

And is that sustainable?

Timothy Conver

What Stephen is referring to power processing systems is the fast charge test equipment and I don’t know that sustainable is the right term, but clearly more and more organizations on a global basis, whether they are automotive companies, start-ups or battery or fuel cell firms are devoting an increasing amount of their energies to developing both electric and hybrid electric vehicles and that is the primary driver for revenue in that product line for us.

Timothy Quillin – Stephens, Inc.

What do we expect the tax rate to be in fiscal 2009?

Stephen Wright

Assuming the R&D credit does not get renewed, I would think of something in the high 30s, approximately 37% and if the R&D credit gets renewed as it has a number of times in the past, I’d knock a couple of points off of that to 35%.

Operator

Your next question comes from the line of Chris Donaghey – SunTrust Robinson Humphrey

Chris Donaghey – SunTrust Robinson Humphrey

I was wondering if you could update us on kind of the congressional outlook for the wind tax credit given the focus on energy these days by congress.

Timothy Conver

Well I can tell you what I know; I don’t know if that will count as a meaningful update or not. There is language in both the energy bill and the agriculture bill that address small wind. Although the language in each of those bills is less then what we are looking for, and what we’re looking for is parity in terms of investment tax credit with small solar. So we expect that it’s likely that we’ll get some help in that existing language but that we’ll be continuing to look for a bill that provides parity across the board. There seems to be bipartisan support for renewable energy and for the concept of parity in the investment tax credit but you know as well as I do how difficult it is to predict legislation.

Chris Donaghey – SunTrust Robinson Humphrey

Just from the development of that product, from the deployment perspective what are you looking for from a milestone perspective before you really open the throttles on business development activities in trying to put that out in the market aggressively?

Timothy Conver

I think that that investment tax treatment is a significant objective of ours. We are also being careful to move reasonably slowly as early adopters get real-world experience with the system. I think I’ve mentioned before we’re currently on the third generation of this technology and we’re in the midst of developing generation four. So far we’re very pleased with how it’s behaving and how it’s being received but it’s an entirely new concept and I think it’s prudent for us and our customers to know what the real-world experience is. So I would think a number of months of additional real evaluation insight is appropriate.

Chris Donaghey – SunTrust Robinson Humphrey

And then on the Raven program, you mentioned that you’re going to offer DDL as a product improvement later this year, are there other improvements that will work this towards a Raven C type of upgrade or how would you expect DDL to be deployed? Does it involve a complete replacement of the system to upgrade to DDL?

Timothy Conver

Well let me take that in two pieces; one is DDL itself. I think our current expectation is that will be introduced and rolled out independent of other product improvements, and before other product improvements. It will require both hardware and software upgrades on the airframe and in the ground control system. The list of other product improvements that we’re working on with a broad set of Raven customers range from payloads and imagery to other characteristics of the system. There’s a lot of energy in the customer community about that opportunity and we’re optimistic about that but we think that will follow the introduction of DDL.

Chris Donaghey – SunTrust Robinson Humphrey

Is there any way to estimate at this point what that—what a DDL conversion would run per system? Is it 50% of the original system cost, is it 25% is it 75%? Is there any way to quantify that at this point?

Timothy Conver

We haven’t put a specific price point on that and in general we haven’t [inaudible] about specific prices. It’s certainly not a 50% kind of price of the original system.

Stephen Wright

I think we’d probably have to hunt that one down the road, we haven’t priced it and we can’t talk about it here.

Chris Donaghey – SunTrust Robinson Humphrey

Do you have an IDIQ backlog number?

Stephen Wright

Yes, and again firm backlog is what we really look at, IDIQ unfunded backlog as of Q4, $384 million.

Operator

Your next question comes from the line of Brian Gesuale – Raymond James

Brian Gesuale – Raymond James

I wanted to kind of chat a little bit about this frequency conversion just to make sure that I understand it. Will you still be delivering Wasp product and is that why you’ll still have kind of that one-third of the product run rate? And then maybe how many of the Ravens are you under contract now to swap out the frequencies when you do that upgrade phase and when should we expect that to start? And then maybe, if you look at this in the context of your contract mix, what is this going to do to your cost plus mix and maybe your overall contract mix as you shut the line down before ramping it back up in the second quarter?

Timothy Conver

Well this change affects both Wasp and Raven and it affects all systems that DoD uses. And there’s a slight—as we implement it we’ll be implementing Raven first, then Wasp second. It will affect—once the cut the change over then all future production under contract will be delivered with the new frequency capabilities.

Stephen Wright

Let me answer that two ways, for Q1 as I said earlier, we don’t want to get into a lot of detail on it that could be construed as guidance. I would just say the product revenues in Q1 will be about a third lower then the levels we had in Q4 based on what we see today. The broader issue of mix let me talk about the full year. In fiscal year 2008 we had 57% products, 30% services and 13% project R&D as I indicated earlier. As we go into fiscal year 2009 we will see growth in all areas but there will be more growth in project R&D, primarily due to Global Observer [relative] to the other areas so in terms of overall mix as we look out into 2009, we would expect the project R&D to grow from the 13% up somewhere into the low 20s. And then the other areas to both the products and the logistics as a share of the total to go down a little bit.

Brian Gesuale – Raymond James

As far as the backlog goes, you know as you mentioned record funded backlog here, given the conversion and kind of the disruption on the product line, is it correct to think that most of these or a good portion of the recent orders you’ve had are really tied to this frequency conversion and of a cost plus nature? Or how actually do we look at that?

Timothy Conver

Some of it has been cost plus. I think most of the conversion work will be done under a CLS contract. And again these conversions are for our DoD customers. We’re not—it doesn’t go beyond there.

Brian Gesuale – Raymond James

And I guess in terms of targeting—give us some magnitude or a timeline in terms of—from I think Tim you mentioned phase one is shut the line down and halt shipments, phase two is upgrade the existing inventory and then third is production units getting shipped out with the new features. When is that phase three kind of kick in as you notionally see it today?

Timothy Conver

That will all kick in, in Q1 so it’ll be wham, bam, and wham. That sort of hiatus really is, was in the middle of Q1 and production bought before Q1 concludes.

Brian Gesuale – Raymond James

If we look at the UAS mix, it looks like that maintenance line has been very bumpy on a quarter-to-quarter basis as you would expect, and so is the product side. I think your UAS product revenue was up more then twofold from the third quarter, as we kind of move out and you talk about that growth in product, how much of that was Raven versus Wasp and are we starting to see some of these products that you’ve worked for several years to get to production rates, are we really starting to see that contribution come out in that balance here? Is that really the strength of the business that we’re seeing?

Timothy Conver

I think the—in Q4 the part of that significant increase in products was picking up some—what you saw as a relatively low shipment of products in Q3, and that was driven as I think I mentioned in my comments, order flow and some operational issues. And secondly it’s the ramp up of Wasp so we got full rate of production approval earlier in the year. As we began to roll that out we had the—we don’t find surprising as early start-up challenges but we’re on track and shipping those out at an increasing rate now. So I think it’s a long answer to your question to say yes, we’re starting to see significant contribution now from Wasp as a new product.

Operator

Your next question comes from the line of Howard Rubel – Jefferies & Company

Howard Rubel – Jefferies & Company

I think you said that production rate for the first quarter would be down by a third, is that correct?

Stephen Wright

Yes, from the Q4 level.

Howard Rubel – Jefferies & Company

Could you give us a sense of the number of customers in NATO that are now interested in either Raven or Wasp?

Timothy Conver

We are working with over a dozen customers, potential customers right now, international customers, primarily interested in Raven and a number of those now with the production introduction of Wasp. There’s a growing interest there. So I don’t think I can get into a specific number in NATO, but hopefully the more then 12 baker’s dozen is helpful.

Howard Rubel – Jefferies & Company

There’s only 20-odd in NATO so I figure that’s still a good stab at that by any stretch of the imagination. Where are you with getting Switchblade into the field? I know that there have been a number of issues that you need to overcome.

Timothy Conver

Well the issues are more a matter of demonstration of this new capability. We are doing very well on the second generation demonstration contract that we are working on now with our—from our original customer. We’re expecting to do full scale demonstrations late summer, early fall on that program. And we now have a second—a contract from a second customer for a Switchblade derivative and we have very significant interest from other customers that we expect to show up as we go forward. Our current view is that we should see increasing revenues from Switchblade throughout this fiscal year. We think most of those will probably continue to fall in our R&D category and we think it’s not likely that it would transition to production orders yet this fiscal year.

Howard Rubel – Jefferies & Company

You might call them [l-rip] at this point, would that be a fair way to think about it or is that--?

Timothy Conver

I’m not sure that I’d—certainly not at this point, we are not in what I would call an [l-rip] phase at this point. I think we’re still demonstrating specific capabilities to customers and as we move farther down that line we’re going to go I think through more demonstration units and then into [l-rip] and then into production and whether we’re in the latter part of this year or beginning next year when we get to that point, it’s a little hard to pin down.

Howard Rubel – Jefferies & Company

So what you’re finding is that the demonstration of the vehicle is creating more interest by other customers?

Timothy Conver

Yes, I think that’s been a very clear outcome and further I think there’s a very broad level of interest looking at the results of the demonstrations of the second stage contract that we’re currently in and those demonstrations as I mentioned, would happen late summer early fall.

Howard Rubel – Jefferies & Company

There were a couple of other high-flying UAS contracts I think awarded to either Boeing or Lockheed, one of them was called something like Vulture or something like that; ultra-high UASs I believe. Is this just an alternate solution and you weren’t competing or how do you sort of look at that market either opportunity or challenge or how would you define it?

Timothy Conver

Well Global Observer is a JCTD program that’s funded out of the office of Secretary of Defense and is—or originated out of the office of the Secretary of Defense and it’s funded by six different customers and managed by SOCOM. Its intent is to produce a complete system and do a full demonstration of military utility for a handful of specific applications. Vulture, that you mentioned, is a program sponsored by DARPA. Its objective as published is to develop an airplane that flies up to 100,000 feet for five years at a time, and it’s a very long-term R&D focused program to develop a capability that is well beyond any current technology. We did put a proposal in for Vulture with DARPA and we did not get an award. They awarded three different contracts.

I guess I should point out that prior to developing the Global Observer system, the core technology that led to that was our solar unmanned aircraft program that we conducted for over a decade with over 50 flights and on throughout that program we set and currently hold the world altitude record for any kind of airplane in level flight. So I think we have a huge percentage of the world’s experience in that flight regime.

Howard Rubel – Jefferies & Company

My sense would probably be a huge percentage of the patents in that regime as well.

Timothy Conver

Well we’ve been plowing early, unpreviously unplowed ground in that area for a long time.

Howard Rubel – Jefferies & Company

I just want to talk about energy for a moment and architectural wind, how many customer installations do you have now and then how do your customers think about carbon credits and is this sort of something that really would play in Europe?

Timothy Conver

I think we have less then 10 current installed customers on architectural wind. Right now carbon credits aren’t playing a significant role in the early evaluation adoption of these systems from my perspective but I do think that as a production business, it becomes a significant factor.

Operator

Your next question comes from the line of Michael Ciarmoli – Beonning & Scattergood, Inc.

Michael Ciarmoli – Beonning & Scattergood, Inc.

Relating to the frequency conversion in Q1, what impact do you think that has on gross margins if any?

Stephen Wright

I don’t think we have anything to comment on there. We really don’t want to get into guidance by quarter. We’ve baked it into our full year guidance.

Michael Ciarmoli – Beonning & Scattergood, Inc.

Just this most recent quarter, product revenues of $39 million and product gross margin 36%, so you had a high on the revenues there and a low in the gross margin, is there anything to read into that? Was that a function of the programs or customer mix? Can you just elaborate on what was going on there?

Stephen Wright

I think it’s really just the programs that we were working on in the quarter, there’s nothing—no significant messages there.

Operator

Your next question is a follow-up from the line of Timothy Quillin – Stephens, Inc.

Timothy Quillin – Stephens, Inc.

With regards to PosiCharge gross margins, I think 29% or so for the year, is that how we should be thinking about those going into fiscal 2009 and regarding Wasp and where you think the Army is at as far as evaluating the Wasp for lower unit level deployment?

Stephen Wright

I think the 29%--first we won’t be breaking it out go forward. But just as it stands 29%, we wouldn’t normally—we wouldn’t guide on gross margin levels period much less within the segment, but I guess my editorial is the 29% is lower then we would like to see it generally. As it is a commercial business we’d like to eventually see higher gross margins in PosiCharge.

Timothy Conver

Regarding the Army and Wasp, the Army has not bought Wasp. Right now our only two Wasp customers in production are the Air Force and the Marine Corp. The Army and other services and other customers are looking at Wasp and the relative benefits and trade-offs that it provides compared to Raven and as I think I’ve indicated in the past, its my view that the ultimate opportunity for small UAS gets down to the squad level because that’s where the systems are actually used. In the case of the Army they’re issued at the brigade level but then used by squads. So I know that there is a level of interest but it’s hard for me at this point to quantify it or to put it in any kind of a timeframe.

Operator

Your final question is a follow-up from the line of Michael Lewis – BB&T Capital Markets

Michael Lewis – BB&T Capital Markets

With regard to the one-third of product revenue coming out of UAS in the first quarter, now the question is how you do expect that we’ll pick that back up? Will that be evenly flowing through the rest of the year or would there be a proportional ramp through the remaining three quarters?

Stephen Wright

I’d say that latter, proportionally ramp it through the balance of the year.

Michael Lewis – BB&T Capital Markets

Cash flow from operations for the full year?

Stephen Wright

Yes, we were positive fiscal year 2008. We were positive.

Michael Lewis – BB&T Capital Markets

Do you have that actual number?

Stephen Wright

Yes, $15.5 million for the year.

Michael Lewis – BB&T Capital Markets

And your depreciation and amortization for the year?

Stephen Wright

Yes, $3.8 million with $1.2 million of that in Q4.

Michael Lewis – BB&T Capital Markets

And then just finally you had offered the customer funded R&D in the fourth quarter, I missed that number, what was that again?

Stephen Wright

Customer funded R&D in Q4 was $11.3 million.

Operator

And at this time there appear to be no further questions; I’d like to turn the conference back over to management for any additional or closing comments.

Timothy Conver

Well thank you all for your continued interest and support of the company. We look forward to reporting to our progress for the first quarter of fiscal 2009.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: AeroVironment, Inc. F4Q08 (Qtr End 04/30/08) Earnings Call Transcript
This Transcript
All Transcripts