Good day, ladies and gentlemen, and welcome to the AeroVironment Second Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session after management's remarks. As a reminder, this conference is being recorded for replay purposes. With us today from 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. At this time, I would like to turn the conference over to Mr. Gitlin. Please go ahead.

Thank you, Victoria, and welcome to our second 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 research and development 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, December 5, 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. Good afternoon. Our strong second quarter results reflect continued momentum in fiscal 2018 as we successfully execute on our fiscal year 2018 and long-term plans and focus on creating value for our stockholders, customers, and employees. On today's call, I will briefly review AeroVironment's second quarter financial results, then share with you the significant progress we made during the quarter on our fiscal year 2018 and long-term plans. Teresa Covington will review second quarter financials in detail, and then I will discuss our outlook for the balance of the year. Following this, Teresa, Steve, and I will take your questions. Today’s three main messages are as follows: First, we successfully executed our plan in the second quarter and delivered strong results. Second, strong order flow in the quarter which was the fourth highest in AV's history, increased our visibility into full-year revenue objectives. And third, we are excited and remain focused on executing our strategy to create long-term value. Now let's review the strong year-over-year results our team delivered in the second quarter. Revenue of $73.8 million increased by 47%, gross margin of $31 million increased by 78%, and earnings per diluted share of $0.29 rose sharply from last year's second quarter loss of $0.18 per share. We continue to earn market leadership in small UAS globally, and in TMS EV charging, industrial EV charging, and EV test systems domestically. Robust demand for our products and services in the United States and Abroad drove funded backlog up to $127 million, which equates to us 49% increase from the end of our first quarter. This backlog significantly increased our revenue visibility for the current fiscal year. Across the board, we produced solid results in the quarter. During our fourth quarter of fiscal 2017 call, I shared with you…

Thank you, Wahid, and good afternoon, everyone. AeroVironment's fiscal 2018 second quarter results are as follows; revenue for Q2 was $73.8 million, an increase of $23.7 million or 47% from the second quarter of fiscal 2017 revenue of $50.1 million. The increase in revenue resulted from an increase in product sales of $23.6 million and an increase in contract services revenue of $0.1 million. Looking at revenue by segment, UAS revenue was $64 million, an increase of $23.2 million or 57% from the second quarter of fiscal 2017 revenue of $40.8 million. The increase was due to an increase in product deliveries of $23.1 million and a decrease in service revenue of $0.8 million, partially offset by a decrease in customer funded R&D work of $0.7 million. EES revenue was $9.8 million, an increase of $0.6 million or 6% from the second quarter of fiscal 2017 revenue of $9.3 million. This increase was primarily due to an increase in product deliveries of PosiCharge industrial electric vehicle charging systems. Turning to gross margin, gross margin for the second quarter was $31 million or 42% as compared to $17.4 million or 35% for the second quarter of fiscal 2017. The increase in gross margin was primarily due to an increase in product sales margin of $12.8 million and an increase in service margin of $0.8 million. By segment, UAS gross margin increased to $28.2 million for the second quarter of fiscal 2018 from $14.9 million. As a percentage of revenue, gross margin for UAS increased from 36% to 44% primarily due to an increase sales volume and an increase in the proportion of product sales to total revenue. EES gross margin increased $0.3 million to $2.8 million for the second quarter of fiscal 2018 primarily due to an increase in product sales…

Thanks, Teresa. We have been successfully delivering on our plan this fiscal year and have significantly enhanced our visibility into achieving our full-year results. We have also made significant progress, positioning our business for long-term value creation. Our products are recognized throughout our target markets as the solutions of choice for mission-critical applications. Our innovation engine continues to develop and deliver compelling and differentiated capabilities. And most importantly, a growing list of customers around the world are choosing AeroVironment and to supply them with solutions that help them proceed with certainty. To become our customers’ first choice, we must do more than provide outstanding products. We must provide service and support that ensure their success when they are used our solutions. In our military market, customers demand and rightfully expect their suppliers to deliver the right solution on time and according to contractual obligations. The U.S. Army for example, thoroughly and systematically evaluate its suppliers every year based on numerous criteria. These criteria include cost control, schedule, technical performance, management, and regulatory compliance. As part of it Superior Supplier Incentive Program, the Army and rank suppliers and groups them into three tiers, with Tier 1 being the highest ranking or Superior Supplier status. The 2017 rankings announced this past August revealed that AeroVironment had achieved Tier 1 ranking, a testament to the hard work and dedication of our team. This ranking is based on procurement of small UAS and Tactical Missile Systems and places us and the company of other much larger Tier 1 companies such as Boeing, Lockheed Martin, Raytheon, and Textron. It also places us above many other companies that are much larger than AeroVironment. In our EES business, our B2B and B2C customer and channel partner satisfaction scores measured routinely at our own e-commerce websites and other…

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

Hi. Good afternoon, everybody.

Hi, Ken.

Hi. Wahid or Teresa, I just wondered if you could provide a little more detail on the strong gross margins within UAS in the quarter and maybe any specific color on within the mix of either TMS versus the legacy systems or international versus domestic sales. I know you don't typically give the exact percentages, but any color just to help with some more granularity on the strong gross margins in that segment in the quarter would be appreciated?

Sure. Ken as you know on any given quarter, our revenue mix of products versus services, cost-plus contract versus fixed price contracts, domestic customer orders versus international customer orders all attribute to the gross margin percentage of that quarter. And so throughout our business across our entire portfolio as I mentioned in my remarks, we saw strong healthy demand and we made strong progress across all of our products. We don't typically as you know break the product revenue or gross margin percentages by product line, primarily because we feel that it could lead to false conclusions based on very short quarterly results. So therefore, we are very pleased with the results of this quarter across all of our businesses and all product lines, and we're focused on long-term value creation and we're on track to achieve our objectives for the fiscal year 2018.

Thanks, Wahid. Can you provide any detail on what kind of growth you saw just within international demand or international market specifically for UAS?

Sure. So we respect our customer’s confidentiality in terms of providing any specifics on about customer details. In general, we saw as I said strong demand across all of our product portfolio as we continue to see demand in our international markets. We've been growing that business over the past several years at very healthy pace. There's also strong demand for our Tactical Missile Systems business as I mentioned in my remarks. So across the board, Ken we saw very healthy progress and we also established our logistics repair and logistics facility in Australia for the competition that we won and the products that we will be delivering in the years to come in Australia. So across the board very healthy and we are very pleased with our results and focused on execution for the remainder of the year.

Okay. Just one final question. You highlighted, again the $100 million opportunity over several years for the TOGA, the FCS opportunity combined. Based on your current visibility, how much of that would you potentially see coming in as part of fiscal 2018 versus perhaps fiscal 2019 and 2020, and what are some of the key variables around the timing on that aside from I guess just the obvious which would be timing of the sort of the fiscal 2018 budget?

Sure, so Ken that is a really difficult question to answer primarily due to the timing and the predictability of how these opportunities and programs progress through the U.S. DoD in the government approval process and budgeting process. As I mentioned in my remarks, we do expect that to keep moving. It has made progress although slowly, but progressively over the last several months and year. We believe that we’re positioned quite well. We do anticipate the customer has obviously shared with us details that I've mentioned in my remarks, but there's obviously never a guarantee as to whether that's going to happen exactly the timeframe that they mention. Overall, we believe that we’re positioned quite well and overall it’s roughly about $100 million worth of opportunity for us to compete and win.

Our next question comes from Joseph DeNardi from Stifel. Please go ahead.

Yes, thank you very much and nice quarter. Wahid, on a scale of 1 to 10 with 1 being really disappointed and 10 being really happy, if CIS does $10 million in revenue in calendar year 2018, where would your emotions fall on that scale?

Thanks, Joe. So that is a very difficult question to answer at this point, because we really focused on the execution of launching the solution to the market. As I mentioned in my remarks Joe, we have about three phase approach of launching and introducing this product and our capability to the market. We have completed Phase I and II we’re in the process of and very soon we would be shipping this product and making it available for the markets in North America as well as in Brazil. We don't have any more data to give us any indicator whether the adoption is going to be fast or slow as to what space and to what trajectory. And for that reason, we do not provide any more details that we don't feel confident about as the prospects. At the same time, we're excited about the solution; the response from the customer in the market so far has been extremely positive or we still believe that our solution has some very compelling differentiated value proposition that we believe is unmatched in the industry and once we ship the product in the larger scale to the market and make it available, we'll have more information that we can inform you and will be pleased to provide you a progress report at that time.

Okay.

And at the same time, we’re very focused on execution.

Yes, fair enough. I guess the way that I think about the UAS business and I know this is kind of rough order of magnitude but a third of it is TMS, a third is International and then third is core small UAS domestic; international and TMS seem to be doing pretty well growing domestic UAS, so little less clear. So can you just talk about that aspect of the business, the core domestic UAS side and just $100 million TOGA opportunity is that just the frequency relocation and then SBS and Border Patrol are additional opportunities for that business?

That's right. So the $100 million approximate number that I provided is a number that our customer has essentially budgeted for the frequency relocation and I refer to as a TOGA and controller – ground control station, our future control station. And so that total opportunity for that particular project or program is roughly about $100 million, which we by the way as I mentioned in my remarks, won a small contract upfront that we delivered and we are advancing quite positively. In addition to that, we also are pursuing a bit multiple other opportunities with the U.S. Coast Guard as well as I mentioned with the Department of Homeland Security and specifically for the U.S. Customs and Border Patrol. Those are separate opportunities in addition to that $100 million that I mentioned. And obviously on top of that, we are pursuing this SBS program with our Snipe UAV, which our customer has indicated that they are planning on eventually taking it to a program of record, the timing of which is uncertain and hard to predict, even from a customer's perspective. And so we have multiple opportunities into your broader question of demand and various products and [mark parts] [ph] of our business. We as a leadership team are encouraged and quite positive, the prospect of our business across all of our product portfolio. We’re very focused on execution, it’s still the first half and we still have another second half of the year to complete or execute and deliver and we're very pleased with our result so far.

[Operator Instructions] And we have another question from Joseph. Please go ahead.

Thanks. So I guess Wahid, the guidance for the year implies revenues are kind of down, it looks like in the back half of the fiscal year or so, can you just talk about what would be driving that or is it just some conservatism around timing of the budgets getting passed, so little bit more color there? Thank you.

Sure, Joe. So Joe, as we mentioned on our fourth quarter earnings call, we expected the revenue break up to be between 40% to 60% between the first half and the second half of the year. And as you saw from our results so far, we're very much on track and on target with those expectations and predictions that we made. So we're very pleased with that. In terms of the second half, you roughly correct that, we're still living in continued resolution environment in terms of the DoD budgeting. That could be good or bad for us. Of course, there is pluses and minuses to that. We've always generated majority of our revenue from unplanned programs and historically speaking. And we expect to given our results and given what our model and our indicators tell us that we're looking forward to execute in the second half of the year. And it's going to roughly equal to about a 60% as we've mentioned before. And we also expect R&D to be between 9% to 10% of revenue as we projected at the beginning of this fiscal year. And we're on track on that metric and that measure as well. So overall, we're very pleased with our results. We're focused on our execution for the second half. We still have two more quarters to go and we will obviously provide you update as we progress throughout the year. And generally we're focused on creating value for our three stakeholders short and long-term.

Okay. And then just on the distribution strategy for the commercial business, I guess you talked, I guess at a very high level what you're going to do. Is there going to be a time in the near future where you're going to feel comfortable providing a little bit more detail?

Of course, as we progress through our market introduction and third phase, Joe, we are vary ourselves very curious and very interested in learning of what is the – how this is going to progress and what is it going to take for us to be successful in this market in what pace at what level. We do already have – plans as I mentioned in my remarks that the products will be available from our own website as well as through precision Ag dealers across the country. And we are in that process and engagement in that process. We're signing up those dealers as we go. And as we get more traction in the market, we'll be able to provide you with hopefully a lot more clarity and details as we are informed as well. End of Q&A

I am showing no further question at this time.

Okay, great. So thank you, Victoria and thank you all for your attention and for 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, avinc.com. We wish you healthy and happy holiday season and New Year, and we look forward to speaking with you again following next quarters results. Good day.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect.