Good day, ladies and gentlemen, and thank you for standing by, and welcome to AeroVironment Incorporated's First Quarter Fiscal 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. With us today from the company is the Chairman and Chief Executive Officer, Mr. Tim Conver; Chief Financial Officer, Mr. Jikun Kim; Chief Operating Officer, Mr. Tom Herring; and Vice President of Investor Relations, Mr. Steven Gitlin. And now, I'd like to turn the call over to Mr. Gitlin. Please go ahead, sir.

Thank you very much, Huey. Welcome to AeroVironment's first quarter fiscal year 2014 earnings call. 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 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. For a list and description of such risks and uncertainties, see the reports we file with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date on which they are made. 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, August 27, 2013. 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. We'll now begin with remarks from Tim Conver. Tim?

Thank you, Steven. Good afternoon, and welcome to our first quarter 2014 conference call. On today's call, I'll update you on our Q1 performance and then review the status of our top priorities for the year and highlights for the quarter. Jikun will provide a detailed financial review, and then I'll review our growth strategy and work outlook for the year before Tom Herring, Jikun and I take questions. Now let's begin with Q1. The quarter finished about as expected. We're making good progress on our near-term priorities, and we're on track for the year. First quarter revenue of $44.1 million was in line with our expectations, which assumed continued contracting delays and was consistent with the guidance we provided on our Q4 fiscal '13 call. The loss per share was $0.32. The quarterly operating loss of $7.1 million was largely due to the lower level of revenue and one-time expenses associated with our workforce reduction in May. The fluctuating value of our CybAero investment contributed to the balance of the loss as other expense. Jikun will go into more detail, but our forward break-even run rate is where we expect it to be. Our funded backlog increased by 29% over the last quarter to $77 million, increasing our visibility for the balance of the year to about 77% of the midpoint of our revenue guidance range. These Q1 orders reflect ongoing demand for our existing business areas in both UAS and EES. Contracting delays continue. The previously delayed orders are being released as you saw with the recently announced receipt of the final portion of the government fiscal '12 Raven contract that we had expected in Q3 of last year. Moving on from Q1 results. I discussed 3 priorities for the year in our Q4 earnings call, and I…

Thank you, Tim, and good afternoon, everyone. AeroVironment FY '14 Q1 results are as follows. Revenue for the first quarter was $44.1 million, a decrease of 25% over Q1 last year of $58.7 million. Looking at revenue by segment. UAS revenue was $35.2 million, a decrease of 28% over the prior year. Year-over-year, revenue declines were driven by lower service revenues of $15.9 million, driven by a reduction in DDL retrofit activities of our Raven B systems and lower product deliveries of $1.6 million, due to the delay of a GFY '12 Raven funding. However, these decreases were offset by higher customer funded R&D revenues of $3.9 million. Key drivers of this increase were higher Switchblade program activity and a contract settlement funding for the Global Observer JCTD contract. EES revenue was $8.9 million, a decrease of 10% from Q1 last year, primarily due to decreased deliveries of our passenger electric vehicle charging systems and Electric Vehicle Test Systems. This was partially offset by increased deliveries of our industrial electric vehicle charging systems. Turning to gross margin. Gross margin in the first quarter was $12.5 million, down 36% from the first quarter last year. Gross margin, as a percent of revenue, was 28% versus 33% in the first quarter last year. 2 key components of the reduced gross profit percentage were the severance and compensation -- I'm sorry, were the severance and compensation expenditures related to the reduction in force we incurred in Q1, as well as lower overall volumes generating less overhead absorption. By segment, UAS gross margin was $10.6 million down 34% from the first quarter last year. As a percent of revenue, UAS gross margin was 30% down 3 points, compared to the first quarter last year. EES gross margin was $1.9 million, down 44% from the…

Thanks, Jikun. Our strategy combines innovation focused on customer needs, with market execution focused on competitive effectiveness. Successful execution of this strategy delivers compelling new value for customers, creates high compounded growth, reinforces our creative culture, and is the first way to build the greatest long-term value for our stockholders. A unique enabler of this strategy is our culture of innovation. Paul MacCready started a remarkable culture brewing in AV that enabled the run of innovation that put 7 of our first-of-a-kind vehicles into the Smithsonian Institution. And it created the new solutions that are now the leading businesses that make up AV today. The next generation of new growth opportunities we are currently moving toward full-scale adoption all came from a team that thrives in our culture of innovation. The economic returns on this innovation are realized by creating leading market positions in growing markets that deliver high long-term growth and strong financial results. While innovation enables our strategy formulation and development, cash enables our strategy execution. As we have said on previous calls, cash for us is a strategic asset. We have learned that closing the deal on adoption and securing an early and sustainable market share of future growth can require quick and decisive commitments of significant resources, within a critical but uncertain window of time. Our cash reserves ensure that we have the funding to move quickly and decisively when adopting customers already independent of capital market uncertainty. We have also learned that large customers are much more likely to take the risk of adopting an important innovation from a small company like us, when they see a long track record of successful persistence and a very strong balance sheet that demonstrates capacity and staying power. Successfully executing these adoption and market share transitions offers by…

And before we turn to the Q&A portion of today's call, I'd like to remind everyone that the purpose of today's call is to discuss our first quarter results and the initiatives we've just outlined. We thank you in advance for limiting your questions to this topic. We'll now open the call for questions. Huey?

[Operator Instructions] And our first question on the phone will come from the line of Noah Poponak with Goldman Sachs.

This is Omear Khalid for Noah. Just a quick question, following up on your prepared remarks regarding the UAS -- the commercial UAS market. Since you mentioned that -- you described the total available opportunity potentially as estimated by a third-party provider but how quickly do you think things can move from a commercial adoption perspective once the approval [ph] Is granted approximately in 2015?

Well, the market size, as you point out, that we referred to, was the national association that -- one of them that focuses in this market. And I think your point on transition to adoption in a new market is one that we should all pay a lot of attention to. I've noted probably more times than you wanted to hear during this conversation and most others I've had, that predicting the timing and the rate of adoption of an innovation in a new market is difficult. Having said that, they -- that market study focused on a revenue between 2015 and 2025. And judging from the required timing of the FAA rulemaking, the current progress that we're seeing in that area and the early adopter appetite for this capability, it does seem to me that looking at 2015 as an opportunity for revenue acceleration is reasonable to expect.

Just another quick follow-up. Again, you mentioned in your prepared remarks about the release of delayed orders from the DoD. But is there any additional color that can you provide us regarding the type and the quality of your communication with the DoD contracting officers? And any other insight that you guys have gained regarding the future, how they might unfold and award contracts here in the current year?

Well, we have a strong line of communication that we have had and we maintain with our customers, including the -- to the degree it's appropriate, with our -- the contracting officers in our customer organizations. I think we clearly see a continuation of this propensity for delay that's driven by the high level of budget uncertainty across the entire department. I think that's associated with the entire enterprise and not with any specific program or any specific office. So while we maintain a close contact with our customers, I believe that it's difficult for them to predict precisely what the timing that they'll be able to support is in many cases.

Our next questioner in queue comes from the line of Andrea James with Dougherty & Company. Andrea James - Dougherty & Company LLC, Research Division: Just in the EES business, it was down year-over-year and the gross margins fell. And I was just wondering if you could just give us a sense of what's behind the year-over-year change.

Yes. So from a revenue standpoint, I think in the prepared remarks, we had discussed the Electric Vehicle Test Systems being a little light compared to last year. And then on the gross profit side, the severance expenses that we incurred, a lot of that did get allocated into EES and you're seeing an amplification of the gross profit percentage as a result of that. Andrea James - Dougherty & Company LLC, Research Division: Okay, so that moderates after. And for my follow-up, can you talk about the FAA and the commercial market opportunity in the U.S.? And I was just wondering, do you guys look at the international opportunity at all? I've read about drones being used in mining and ag uses in other countries.

We do, Andrea. And there are other countries that have moved their rulemaking more rapidly than we have here in the United States. We have operated our family of systems in applications in other countries with significant customers. We believe that the commercial market for UAS will be global. And we are looking at opportunities not only domestically but internationally as well.

Our next questioner in queue comes from Peter Arment with Sterne Agee. Peter J. Arment - Sterne Agee & Leach Inc., Research Division: Tim, I guess my question really is to get a little more color behind -- Jikun laid out you kind of are at the 70% -- 77% of your kind of revenue target range going into your second quarter. How should we think about the delta or the whitespace being made up? Do you see it from international as you were just discussing in general or is it some other products? Or whether we're just seeing some additional bookings from the core Raven or Puma opportunity?

So I think we will continue to see new orders from our core products in both segments. And I believe, last call, we stated we thought we would see incremental growth and -- from Switchblade and international UAS, as well as the EES segment on the electric vehicle charging products. And I think that's pretty much the view that we maintain right now. Peter J. Arment - Sterne Agee & Leach Inc., Research Division: And it -- does that incorporate also kind of -- how long of a continuing resolution do you kind of bake into your revenue guidance range?

Well, until we see a change, we're continuing to assume an environment of delayed contracts that's driven by the uncertainty around government in general and DoD in particular funding in the near term. So I'm not assuming any optimistic change in that environment until we see it actually happen.

Our next questioner in queue comes from the line of Josephine Millward with The Benchmark Company.

The Switchblade, do you think we'll see an acceleration on that product soon? I understand the Army has had an outstanding urgent requirement for a while. And since this is crime-fighting season in Afghanistan, can you talk about -- can you tell us what's been holding this up?

Well, it -- I did address that issue of expectations on Switchblade in my prepared remarks, Josephine, and to the point that we believe that our customers are coalescing around an adoption of this capability in significant higher levels than they -- than we have seen in the past. We will be able to know what happens after it happens, and I'll go back to my difficulty in predicting the timing and the rate of adoption of innovative solutions statement. But we see -- everything we see go -- happening in our ongoing dialogue with our customers supports the fact that this is a compelling new capability that they are likely to proceed with.

That's very helpful. Can you talk about the DoD's potential Puma upgrade? Do you think this is an AV fiscal year '14 event? And how would it be funded?

Well, I mentioned a number of new capabilities that we demonstrated with Puma in the prepared remarks. And we have found that all of the customers that have adopted Puma to date have found it to be valuable. I can't think of a customer yet that hasn't increased their usage after their initial experience. And as we extend the range and add payload capabilities to that platform, it dramatically increases the flexibility and the areas that this can be extended into. Again, referring back to the comments I made earlier, with the package of capabilities that's now available on the Puma long-endurance variant, we're poking into an area of -- that has previously been available only from much larger Tier 2 systems that tend to be priced at an order of magnitude higher level. So I think that's an ongoing opportunity. I can't tell you where the -- any specific funding would be coming from in the short term, but I do believe that, that capability is increasingly compelling.

Our next question will come from the line of Howard Rubel with Jefferies.

First, Tim, the 77% number that you talked to, have you back-tested that? And how does that sort of compare with prior points along the way?

Sure. So last year, at the end of Q1, we had 69%, almost 70% visibility. So the visibility is a little higher this year than last year.

And then just to talk about cash for a moment. Inventories were up. CapEx was up a little bit. Jikun, was there any particular reason for both of those? I mean, in one case, with sort of challenging revenues, one would have thought inventory might have been down and CapEx clearly is a little strong for the first quarter.

Yes. So on the inventory front, if you remember the inventory started building at the end of third quarter. And basically, this is pretty much in preparation for the balance over GFY '12. And so instead of holding it up, we just decided to build it out. So we should be selling that off with this new order coming up here. On the CapEx front, if you remember last quarter, our CapEx was pretty high also at $4.5 million. So 2 quarters that we have $4.5 million, $4.5 million. The couple -- we do have a couple of products than are transitioning into production, as well as preparing for some of the non-mission services-related services contract that we have.

Our next questioner in queue will come from the line of Michael Ciarmoli with KeyBanc Capital Markets.

It's actually Kevin Ciabattoni on for Mike here. I'm just wondering what you guys have been seeing with your international customers in terms of contracting delays. Has it been similar to what we've seen domestically? Or it's -- are the orders and contracts flowing any better internationally relative to what we've seen here?

No, I don't see a lot of difference, Kevin. There may be, and I believe are, different motivations. And circumstances vary from country to country. In some cases, we've seen significant delays that have extended beyond a year in the procurement timing of planned adoptions. But in those cases, there's been no change in the intent, just a pushout. In other cases, it's more a matter of what we've -- of a pattern that I believe is more typical of such procurements. In that as much as we find our own government procurements to be a little difficult to predict the timing of, I think in the international arena, it's always been a little more difficult than that. So I -- in balance, I think we see those delays all over the world, different reasons in different places.

Okay, that's helpful. And then just as a follow-up, can I get some color on what you saw in Q1 in terms of order flow against that $248 million small UAS IDIQ? Just kind of relative to what you saw in fourth quarter, any changes there in terms of the task order flow? And then whether you're kind of still seeing -- I think you mentioned last quarter, you were seeing roughly 90% share against that -- in orders against that contract? Just wondering what you saw in 1Q here.

We're still running very close to that. The IDIQ process, as you said, is a $248 million contract that we received December of last year. To date, I believe, we -- the government has released about $18 million of orders against that and are -- we're running just slightly ahead of 90% in terms of what we've received against that contract.

Our next questioner in queue will come from the line of Patrick McCarthy with FBR. Patrick J. McCarthy - FBR Capital Markets & Co., Research Division: Maybe a quick follow-up on the CapEx question previously, was any of that CapEx international? Or is it all domestic?

If you could help me understand that question a little better. Patrick J. McCarthy - FBR Capital Markets & Co., Research Division: I was just wondering if you're ramping up your facilities internationally. Or is all of that investment here in the states?

No, it's mostly domestic at this point in time. Patrick J. McCarthy - FBR Capital Markets & Co., Research Division: Okay, great. The contract settlement for Global Observer, I'm assuming that drop rate brought rate down to the bottom line. And could you give us a size of what it was?

Yes, the -- in general, the contract closeout process entails little to no fees. But it was about half of the delta that we saw for the $3.9 million on the R&D revenue pickup.

Our next question will come from the line of Andrea James with Dougherty & Company. Andrea James - Dougherty & Company LLC, Research Division: Is it fair to say the Q1 result does not include any of the Switchblade orders against the Army sole source contract?

I think that's fair. But I'm hesitating here because if there were any of those revenues, they would not have been significant, I think, is a fair statement. Andrea James - Dougherty & Company LLC, Research Division: That's still to -- that's sort of a still-to-come kind of thing?

That's our expectation. Andrea James - Dougherty & Company LLC, Research Division: Okay. And then forgive me if you just -- Jikun, you might have just said this, but I want to make sure. Last quarter, you guys had said that AV was winning 90% of the task orders off the $248 million IDIQ. Is that still holding steady?

Yes, it is. There's no significant change since the last time we spoke.

Next questioner in queue is from Howard Rubel with Jefferies.

With the restructuring charges that you took in the quarter, Jikun or Tim, could you give us a general idea now of what you would expect your SG&A to be?

Yes. So looking at Q1 G&A and -- it's probably an accurate measure of the run rate for the rest of the year.

Our next question comes from Brian Ruttenbur with CRT Capital Group.

Two things. One, you partially addressed the EES revenue growth on the year. Do you think that it's going to -- there is going to be positive growth on the year? Is that correct, number one?

That's our current expectation, yes.

Okay. And then the EPS guidance that you gave of $0.35 to $0.50, that GAAP EPS, which includes the -- your charges in the first quarter, is that correct? Your one-time events in the first quarter?

Yes. So the $0.35 to $0.50 fully diluted EPS includes those charges. However, it does not include the CybAero notes -- the fair market value fluctuations.

Okay, so it does -- it's not a GAAP number, so there's $3.4 million of charges that aren't included in the $0.35 to $0.50. Correct?

Correct.

Okay. Is there anything else that's going to be backed out of that $0.35 to $0.50 number that you're aware of?

One more time, please.

I'm sorry, is there anything else to back out of that $0.35 to $0.50 number besides the CybAero notes, the $3.4 million?

No. However, that -- those -- we will be making an adjustment on a quarterly basis as the CybAero stock fluctuates. So there's another 3 opportunities for that to move up or down as a function of that stock price.

Okay, and then just one other question. On the gross margin on the year, do you anticipate to be similar to last fiscal year's overall or weaker because of the quarter, this first quarter start?

Yes. So -- yes, we don't explicitly guide on gross margins. But you can see that our SG&A and R&D run rate is a little lower this year relative to last year. So -- and again, I think we've got it on the share count EPS and the tax rates, so you should be able to get to an off-margin [ph] And then back up from there.

And that does conclude our time for questions. I'd like to turn the program back over to Mr. Gitlin for any additional or closing remarks.

Thanks, Huey, and thank you all for your attention and your interest in AeroVironment. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website, www.avinc.com. We look forward to speaking with you again following next quarter's results. Have a good day.

Thank you, presenters. And thank you, ladies and gentlemen. Again, this does conclude today's call. Thank you for your participation and have a wonderful day. Attendees, you may now disconnect.