Good day, ladies and gentlemen, and welcome to the AeroVironment Incorporated First Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after the management's remarks. As a reminder, this conference is being recorded for replay purposes. With us today and with the Company is President and Chief Executive Officer Mr. Wahid Nawabi; Senior Vice President and Chief Financial Officer, Ms. Teresa Covington; and Vice President of Investor Relations, Mr. Steven Gitlin. And at this time, I would like to turn the conference call over to Mr. Gitlin. Please go ahead, sir.

Thank you, Gini, and welcome to our first quarter fiscal 2018 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 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; availability of U.S. government funding for defense procurement and R&D programs; changes in the timing and/or amount of government spending; risks related to our international business including compliance with export control laws, potential need for changes in our long-term strategy in response to future developments; the extensive regulatory requirements governing our contracts with the U.S. Government and international customers, the consequences to our financial position, business and reputation that could result from failing to comply with such regulatory requirements, unexpected technical and marketing difficulties inherent in major research and product development efforts; the impact of potential security and cyber threats; changes in the supply and/or demand and/or prices for our products and services; the activities of competitors and increased competition; failure of the markets in which we operate to grow; uncertainty in the customer adoption rate of commercial unmanned aircraft systems and electric vehicles, failure to remain a market innovator and create new market opportunities; changes in significant operating expenses, including components and raw materials; failure to develop new products; product liability, infringement and other claims; changes in the regulatory environment; and general economic and business conditions in the United 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. The content of this conference call contains time sensitive information that is accurate only as of today, August 29, 2017. 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 will now begin with remarks from Wahid Nawabi. Wahid?

Thank you, Steve. On today's call, I will briefly review AeroVironment's first quarter financial results, then share with you the progress we made during the quarter on our fiscal year and long-term plans. Teresa Covington will review first quarter financials in detail, then I will discuss our outlook for the balance of the year. Following this, Teresa, Steve and I will take your questions. Our three primary messages today are as follows; first, we achieve our revenue expectations and exceeded our profitability expectations for the quarter. Second, we are on track to achieve our previously stated full-year guidance supported by our increased visibility during the first quarter; and third, we continue to execute on our growth initiatives successfully while positioning AeroVironment for long-term value creation. And now let's review first quarter financial results. In our fourth quarter earnings release we communicated our revenue and profitability expectations for the first quarter. As a reminder, our first quarter's tend to produce the lowest revenue and profit each year and by providing our expectations, we have sought to help recalibrate first quarter expectations going forward through fiscal 2018. First quarter revenue of $43.8 million was 21% higher than in first quarter fiscal 2017, and at the high-end of our expectations of $40 million to $44 million. Loss per fully diluted share of $0.19 was 63% smaller than in first quarter of fiscal 2017 and significantly more favorable than our expected loss of $0.32 to $0.40 per share. The smaller than expected loss per share resulted primarily from three factors. First, more favorable revenue mix of products and services; second, lower than planned operating expenses; and third, on income tax benefit of $1 million relating to our equity incentive plan. We experienced a healthy 9% sequential increase and funded backlog in the quarter. As…

Thank you, Wahid and good afternoon everyone. AeroVironment's fiscal 2018 first quarter results are as follows; revenue for Q1 was $43.8 million, an increase of $7.5 million or 21% from the first quarter of fiscal 2017 revenue of $36.2 million. The increase in revenue resulted from an increase in product sales of $15.4 million partially offset by a decrease in contract services revenue of $7.8 million. Looking at revenue by segment, UAS revenue was $36.3 million, an increase of $5.8 million or 19% from the first quarter of fiscal 2017 revenue of $30.5 million. The increase was due to an increase in product deliveries of $13.5 million and an increase in service revenue of $0.7 million partially offset by a decrease in customer funded R&D work of $8.5 million. EES revenue was $7.5 million, an increase of $1.8 million or 31% from the first quarter of fiscal 2017 revenue of $5.7 million. This increase was primarily due to an increase in product deliveries of passenger electric vehicle charging equipment. Turning to gross margin, gross margin for the first quarter was $11.6 million or 27% as compared to $6.7 million or 18% for the first quarter of fiscal 2017. The increase in gross margin was primarily due to an increase in product sales margins of $6.4 million partially offset by a decrease in service margins of $1.4 million. By segment, UAS gross margin increased to $9.8 million for the first quarter of fiscal 2018 from $5.4 million. As a percentage of revenue, gross margin for UAS increase from 18% to 27% primarily due to a decrease in product, warranty related costs and an increase in the proportion of product sales to total revenue. EES gross margin increased $0.5 million to $1.8 million for the first quarter of fiscal 2018 primarily due…

Thank you, Teresa. Before addressing our outlook for the year, I'll comment briefly on the Federal budget request as it relates to our solutions. As we've been communicating budget line items typically account for a small portion of AeroVironment UAS revenue. Much of the funding for U.S. military procurement of our solutions comes in the form of urgent need statements, and a growing percentage is from international customers. The current government fiscal 2018 President's budget request includes approximately $50 million for relevant small UAS and Tactical Missile Solutions. These requested funds address small UAS for the Marine Corp and Army and Lethal Miniature Aerial Missile Systems or LMAMS for the Army. Recent news regarding increased U.S. troop deployment to Afghanistan has the potential to provide further opportunities for our solutions. In the short time since we spoke with you at the end of June, we have delivered on our expectation and advanced our business towards the long-term value creation was so focused on realizing. We are the leading publicly traded unmanned aircraft systems or drone company serving a roster of highly discriminative customers around the world. Our market positions remain strong across our tactical UAS, Tactical Missile Systems and Efficient Energy Systems businesses. Soon we will launch our commercial information solutions offering into a promising new commercial market and multiple Switchblade variants are progressing through development to production expanding the size of this market opportunity. We're also making good progress on internal initiatives relating to attracting and retaining the best people and making continuous improvement a cultural standard of how we do business. Given our effective performance to-date along with our increased visibility, we reiterate our state of fiscal 2018 guidance as follows; revenue between $280 million and $300 million with diluted earnings per share between $0.45 and $0.65, similar…

[Operator Instructions] And the first question comes from Ken Herbert from Canaccord. Please go ahead.

Wahid I just wanted to first ask about the guidance, I can appreciate the tax benefit maybe it looks like about a nickel in the quarter if my math is correct. Obviously maintaining the full year EPS guidance implies significantly down EPS in the next three quarters relative to last year even with better revenues. Can you just talk maybe about where we should see some of the pressure there obviously you're taking R&D down as well relative to last year, is it mix, is it maybe just a little bit more investment on any programs or just help reconcile some of that relative to maybe just what's some conservatism that you've built into the estimates?

As I said earlier in my comments, we are very pleased with the results on our first quarter. We achieved our revenue expectations and we overachieved in our EPS expectations. And we also feel comfortable with the full year guidance and that's why we reiterated and reconfirmed our guidance for the full year in terms of revenue and EPS. The reason I caution about the full year is primarily because this is only the first quarter and we got three more quarters to go number one. And number two, historically and consistent with historical this first quarter is the smallest of our four quarters. So we still have a longer way to go for the year in order for us to achieve our full year expectation. We’re committed to that, we feel confident about our ability to succeed in that. And last but not least also we benefited in terms of EPS on the first quarter because of those three primary reasons that I described earlier, one of which was the one-time tax benefit as a result of our incentive plan.

And can you provide any more specifics on the visibility you’ve highlighted a few times, is that what you're seeing internationally, is that maybe what you're seeing domestically on some of the programs you’re pursuing say around frequency relocation and other areas or maybe just a little bit more detail on specifics around the better visibility that would be helpful.?

As you heard from Teresa's comments, she broke down the visibility into specific pieces that we historically have been in the past. Our visibility has improved since the last time we spoke on the last earnings call for the fourth quarter which represents essentially now $154 million which is 53% of the midpoint of our guidance. In terms of the color of our business as I mentioned in my remarks and domestic small UAS, we continue to pursue specific opportunities one of which is the frequency relocation which we believe are positioned quite well. But it really depends on the customer's execution timing as to when they expect to execute that and how fast can they actually execute the plans that they have put in place, but we’re positioned well for that. And then in addition to that, we also have our Snipe solution that we delivered and there is a stated customer requirement for a potential program of record in long run which is referred to as a Soldier Borne Sensors or SBS program. We believe that our Snipe positions us quite well for that and then we have continued to say this before and I re-estate that the demand for our small UAS products and solutions internationally is strong and continues to be strong. We added one new Middle East customer. We also delivered - we signed a contract with the Australian Army on forces. And so these are what I referred to consistent strong signals from international markets and similar to the small UAS our Tactical Missile Systems business enjoys a very strong position in the market and we look forward to competing on various opportunities that are hopefully as part of our plan and is coming our way in the coming year.

[Operator Instructions] And we have Howard Rubel from Jefferies. Please go ahead.

Wahid couple of questions, first - if your R&D is down or flat a little bit is your headcount down or are you just reallocating resources?

Yes, so in the first quarter our operating expenses in general were slightly lower than we expected and that was one of the contributors to our better than expected performance on the EPS on first quarter. R&D is made up of generally both in-house R&D work that we do and also some work that we outsource to sub - third-party subcontractors. In general, our headcount is somewhat of a flat. We have not decreased or increased it significantly one way or the other. However, we do intend to achieve our full year R&D expectations which we provided which is between 9% to 10%. And so I would say that we had a slower start with the beginning of the year not necessarily because of our headcount changes but primarily because of customer funded R&D projects that take usually a priority over our internal funded R&D and when that happens our headcount gets more allocated to this customer funded R&D projects, as well as some subcontract that we could phase in later throughout the year.

It’s a high-class problem if customers want more work from you, so I mean that could very well continue and it would be – it's a high-class problem if you miss it because your customer R&D is better, I guess it’s fair?

Yes, I would agree with you Howard and that's why I said we’re pleased with our results and obviously it’s above our expectations but it's favorable so we’re pleased with the results.

The second thing is, could you talk for a moment about your commercial market progress. I know - there's a lot of moving parts and some of it's a function of what the FAA does and I mean every day it seems as if that market changes a bit - and I know that elements of this are still speculative. But maybe if you could keep us grounded a little bit on sort of the parameters that you're thinking about and the progress you've made in I guess launching some of the new information solutions that might be helpful please?

So that’s a great question and very obviously a hot topic these days in the market in general. We believe that Commercial Information Solutions as we refer to at CIS represents a long-term very large opportunity for AeroVironment for our customers and shareholders. So for the long run, I would say that our position hasn’t changed much at all. And we still believe that there is a large opportunity and growth potential for AeroVironment there. In terms of the short-term we’re really focused from now until the end of this calendar year sort of very focused on the sales and marketing and channel distribution strategy related to our solutions. As we have discussed before, we unveiled the product line the Quantix and DSS solution set. We believe that the hardware and software and service solutions that we offer is highly differentiated and compelling to the market and to the competitors that are playing in the market. And we believe that we offer a compelling value proposition to this market and our customers in that space. But right now we got to make sure that we get the right product, the right solution to the market and ship it successfully to initial early-adopter customers. And then once we do that, I will refer to that to gated approach when we get to that phase in that gate, we can then assess our position, the response in the market, the macro-level climate that's going on in this whole space, and then inform you of our plans and our findings. In terms of the FAA, we've always known and we continue to believe that FAA will play and is going to play a critical role as an enabling factor for the adoption of this market. There are certain applications that the FAA role is less significant than in some other application. So for example, you could argue that a small farmer has visual line of sight on flying a drone over their farm. However, if you consider for example the electric utilities which has hundreds if not thousands of miles of transmission and distribution lines, would require solution that can go much further linearly which will be beyond visual line of sight. And so in that case, the FAA ruling would have a significant influence or a factor in it. So in general we’re excited about the long run, we are focused on the short-term which is get the product to the market and then test the market and inform our decision for the next gate.

And then finally the last thing to go back to the Navy and Blackwing, and it seems as if there are - if I'm not mistaken there's incremental applications that are being developed and tested, can you provide any further color on that?

So as we said before, Blackwing is one of the variants of our Switchblade family of systems which we have been able to publicly talk about based on our customer's permission. And we believe that Blackwing offers a tremendously differentiated and compelling value proposition for submarines. And about a year ago, if you recall we demonstrated this capability to the Navy and U.S. DoD. The feedback was very favorable. And they decided to proceed with a pilot program of deployment of our initial pilot systems into a submarine. And the results of that were favorable and now as I mentioned in my remarks today, we've been - we look forward to further funding to progress the development and maturation of the product with further field testing and deployments and that will hopefully we believe that eventually will lead to a larger adoption in the long run. But it is a process that we have to follow and work with our customer to able to essentially transform this capability into a solution set that delivers value for all our stakeholders.

[Operator Instructions] And I will turn the call back over to Mr. Gitlin for final remarks.

Thank you very much Gini and thank you all for your attention today and your ongoing interest in AeroVironment. An archived version of this call, along with all SEC filings and relevant company and industry news can be found on our website, avinc.com. We look forward to speaking with you again following next quarter's results. Good day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating and we now disconnect.