Good afternoon, ladies and gentlemen, and welcome to the AeroVironment's Fourth Quarter and Full Fiscal Year 2019 Earnings Call. This is Steven Gitlin, Vice President of Investor Relations for AeroVironment. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after management's remarks. As a reminder, this conference is being recorded for replay purposes. Joining me today from AeroVironment are President and Chief Executive Officer, Mr. Wahid Nawabi; and Senior Vice President and Chief Financial Officer, Ms. Teresa Covington. 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 they 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. For further information on these risks, we encourage you to review the risk factors discussed in AeroVironment's periodic reports on Form 10-K and Form 10-Q filed with the SEC and the Form 8-K filed today with the SEC, along with the associated earnings release and the Safe Harbor statement contained therein. The content of this conference call contains time-sensitive information that is accurate only as of today, June 25, 2019. The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today 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, and welcome to our fourth quarter and full fiscal year 2019 earnings conference call. On today's call, I'll emphasize three key messages. First, our team delivered outstanding results in fiscal year 2019 across nearly every aspect of our business. Second, we achieved great progress in our growth initiatives; and third, we continue to successfully transform AeroVironment to achieve our long-term value creation objectives. I'll start by summarizing our outstanding fiscal year 2019 performance and discuss our key achievements during the fourth quarter and full fiscal year. Next, Teresa will provide a more detailed summary of financial performance in the year, and I'll discuss our goals for fiscal year 2020 before Teresa, Steve, and I take your questions. Now for our fiscal year 2019 financial highlights. Throughout the year, our team executed our plan effectively, delivering financial results across our business that met and exceeded our guidance. Fiscal year 2019 results are as follows. Revenue of $314.3 million increased 17% over last year and exceeded our guidance range. Gross profit of $128.4 million increased 19% while gross margin of 41% increased 80 basis points. Income from continuing operations of $33.8 million, increased by 11%. We delivered outstanding results across our portfolio. Small UAS revenue of $183.2 million increased 9%. Tactical Missile Systems revenue of $65.1 million increased 3%. HAPS revenue of $55.4 million increased 87%, and other revenue, mainly customer funded R&D in our MacCready US group and CIS of $10.6 million increased 35%. International revenue including small UAS and HAPS represented 52% of total company revenue in the fiscal year surpassing domestic revenues for the first time. Fully diluted earnings per share from continuing operations of $1.74 increased by $0.83, meeting the higher end of our guidance range. For the first time, we delivered balanced revenue across…

Thank you, Wahid, and good afternoon, everyone. AeroVironment fiscal 2019 fourth quarter results are as follows. Revenue from continuing operations for the fourth quarter fiscal 2019 was $87.9 million, a decrease of $25.7 million or 23% from the fourth quarter of fiscal 2018 revenue of $113.6 million. The decrease was due to a decrease in product deliveries of $25.4 million, as well as a decrease in service revenue of $0.3million. Fourth quarter fiscal 2019 revenue by major product line/ program is as follows. Small UAS was $52 million; TMS was $16 million; HAPS was $17.4 million and other was $2.5 million. Gross margin from continuing operations for the fourth quarter fiscal 2019 was $37 million or 42% of revenue compared to $50.6 million or 45% of revenue for the fourth quarter of fiscal 2018. The decrease in gross margin was primarily due to a decrease in product margin of $12.3 million and a decrease in service margin of $1.2 million. Gross margin as a percentage of revenue decreased from 45% to 42%, primarily due to an increase in the proportion of service revenue to total revenue, unfavorable service revenue mix and higher CIS inventory reserve. Looking at the rest of the income statement. SG&A expense from continuing operations for the fourth quarter of fiscal 2019 was $20.3 million or 23% of revenue compared to SG&A expense of $15.3 million or 13% of revenue for the fourth quarter of fiscal 2018. The increase in SG&A was primarily due to a CIS fixed asset impairment charge. The rate of adoption for our Quantix and AV DSS solution has been slower than we expected. In the fourth quarter, we lowered our future outlook for unit sales and as a result of the lower forecast took an impairment charge of $4.4 million s on…

Thanks Teresa. We have now delivered double-digit top-line growth for two years in a row. The large majority of government fiscal year 2019 appropriations totaling nearly $200 million for our solutions is not reflected in our fiscal year and funded backlog. These expected orders support our continued growth in fiscal year 2020. Government fiscal year 2020 appropriations for our solutions are slightly lower than they put in the previous year, but still very high compared to our historical trends. We expect tactical missile systems and small UAS to drive growth in fiscal year 2020. We expect a shift in revenue mix in our fiscal year 2020 that will result in lower gross margins than in fiscal year 2019. Additionally, we do not anticipate another one-time gain similar to the litigation settlement we benefited from last year. We do, however, expect continued double-digit growth in revenue reflecting the large market adoption potential for our business to between $350 million and $370 million. This would mark the third consecutive year of double-digit strong revenue growth. Our 55% visibility into the midpoint of our revenue guidance range is almost equal to last year's visibility at this time in the fiscal year. And is much higher than visibility at this point in prior years. With lower gross margin and no expectation of litigation settlement gain, we expect GAAP diluted earnings per share for fiscal year 2020 of $1.35 to $1.55. This compares to our fiscal year 2019 GAAP diluted earnings per share of $1.74 which included $0.26 diluted earnings per share for the litigation settlement gain. Adding the acquisition related expenses and amortization of intangibles associated with the Pulse Aerospace acquisition, adjusted non-GAAP diluted earnings per share equals $1.47 to $1.67. As a reminder, we expect the Pulse Aerospace acquisition to be accretive to…

Thank You, Wahid. We will now begin the question-and-answer session. But before we do just a couple of things. Number one, we realize that we've just given you a lot of information and we've done that on purpose because at the end of the year we want to make sure we have the opportunity to share as much as possible with you. We also realized that many of you do many of these calls on a multi-day basis and we really realize how hard that can be. And many of you are probably multitasking while you do this. So, we ask one thing before we get into Q&A, let's everybody just take a breath; let's be present and let's have a conversation.

[Operator Instructions] And we will start with Ken Herbert from Canaccord. Ken, welcome.

Hi, Steven. Good afternoon, Wahid and Teresa. Hi, I just wanted to first ask about HAPS and it sounds like from your commentary, Wahid, that the revenues you might recognize from HAPS in fiscal 2020 could be may be flat to down slightly if we look at what you did this year just considering some of the mixed comments around strength in small UAS and TMS. And I'm just wondering if you could provide a little more granularity on expectations perhaps in particular, and then within that what we should be watching out for in terms of some of the important milestones and where you are with the flight test aircraft and anything else you can detail around progress on that program?

Sure. So, your general conclusions are roughly accurate based on what we provided the comments. We expect the majority of growth for the year-over-year growth to come from our small UAS and TMS business. As you know, our HAPS business has an exciting large opportunity for the long run. We are on the design, development, and demonstration phase of this which we generated so far about $126 million worth of backlog of orders. And the revenue between fiscal year 2019 and fiscal year 2020 will be roughly the same. Obviously, this is a customer funded development work, which is primarily doing work to design and develop and demonstrate the aircraft Beyond that, as you know, we have publicly said that we rolled out the first aircraft, and obviously there's a lot more of ground testing and flight testing to come later as part of this exercise. And then of course, we are planning on eventually certifying the airplane and then getting into what I've referred to as a business launch and production which means producing these in [ph] volumes and scaling the business in the commercial market. We still believe this is a very large, significant large global opportunity for us. Our partners at SoftBank and we are very excited about this. That's why we have continued to increase the value of the contract and keep growing our business in this area and progressing our strategy. And of-course, there are lots of other value creation opportunities that I outlined in my remarks on the call earlier and very exciting for us to pursue this in the long run.

Great. And if I could just one follow-up on that. I think you mentioned in your prepared remarks that a portion of the give or take $56 million remaining was not yet funded or was partially unfunded. Can you talk about, maybe what percentage of that is and is there any risk around timing of that getting funded obviously through the partnership?

Sure. So, I just provided that to make sure that we're very clear on specifics. Generally speaking, I -- we're not expecting any surprises or issues there in my view and our view. It's just natural -- nature of such a contract when you're working on a large complex program and long-term development effort that you have certain milestone as you complete that you release the next phase and next phase and the next step in the milestone of the contract. So, majority of that is really funded but there's some portion that it's always that may be or may not be unfunded in that regard. Other than that, we are very pleased with our progress so far. This is historic in my view that we've been able to deliver the first airplane in less than two years from the start of this effort. We and both our strategic partner are very convinced and committed about the performance characteristics of the airplane and its ability to compete in the marketplace for a multibillion-dollar global market, and we look forward to updating you in the future.

And our next question will come from Pete Skibitski at Alembic Global. Pete?

Yes, good afternoon, guys. Thanks. Let me start with on the fiscal 2020 guidance. Can you share with us how much Pulse is going to contribute to revenue in fiscal 2020? And then you mentioned that small UAS and TMS would be the growth drivers in 2020. Is TMS going to grow the most because it came in a little lighter than I thought for fiscal 2019? So, it seems like maybe there's still a lot of inappropriate funds out there for TMS.

Sure. So first, we're very pleased with the results that we delivered for fiscal year 2019 with the double-digit second consecutive year of growth on the top-line and very solid performance in the bottom. Second, we're fortunate to have such a diversified portfolio of business and opportunities that allows us to lever different parts of our business depending on the markets and the customer situation and the timing of those orders. As I mentioned on my remarks, the Pulse Aerospace acquisition really is a technology and product acquisition. It's really less about a revenue multiple or our existing profitability, multiple acquisition in terms of valuation. We are -- it has basically are acquiring a whole family of vertical takeoff and landing systems that complements our small UAS very, very well. We have already secured an IDIQ contract to approximately over $13 million in the Pulse business, and since that acquisition we have secured two of the task orders for that. The revenue for this business is going to be not significant for fiscal year. We do not break our revenue down to that level of product lines. Teresa outlined, we break them down to by different product families, small UAS being one and the Pulse revenue will be reported under the small UAS category for us starting in fiscal 2020 and beyond. So essentially you can think of the Pulse product line as part of our small UAS Tactics systems and features.

Okay, sounds great. And then on the TMS, again is TMS going to be your growth leader in fiscal 2020?

Sure. As I said, absolutely both TMS and CIS are both areas that are going to generate growth to increase our growth top-line growth for the third consecutive year with double-digit numbers. We're very pleased with these guidance expectations that we have out of our business. We feel very strongly about the position that we have in the market and the amount of demand that there is exist in our products both domestically internationally. It's very exciting to see that across our portfolio there seems to be very strong demands across the globe for our types of solutions and products. And I'm very pleased with the results of our teams and execution in the last fiscal year. And we're looking forward to update you in fiscal 2020 as we go forward.

And our next question comes from Joe De Nardi at Stifel Nicolaus. Joe?

Hey, good afternoon. Steve, thanks for setting the tone for the call. Just another one HAPS, it seems like you guys have decent visibility now kind of over the next few years in terms of maybe the revenue profile as you transition from production to certification and flight testing. So can you just talk about -- should our expectation be that HAPS revenue is roughly flat for the next few years before larger scale production or are you expecting the kind of the ramp up in production to occur sooner than that?

Sure, Joe. So, as I said, we are in a multi phase of pursue of this very large multi-billion dollar global market opportunity. This is a very exciting capability that is uniquely compelling to us and both our strategic partner. We are really focus on this phase of the activity or effort and the business plan which is make two airplanes, designed these airplanes and demonstrate the capability, which we intend to complete that within this phase of this project. Our partner SoftBank and we both feel very confident and pleased with our progress so far. And obviously, this is not an easy task and an easy achievement. It's never been done before type of effort as you see. And beyond this step, we expect to obviously ramp up as I mentioned on my remarks that producing a few more airplanes because you need more airplanes for the testing and certification phase. During that time, we will be obviously assessing the business and assessing the prospects of the future with our partner and will inform you of the updates that we provide. As far as fiscal year 2020 is concerned, we expect this business again to execute the strategy that we have and very pleased with the top-line growth that we're going to be delivering hopefully this year as well.

Okay and then just on the acquired business. I mean you guys have had plenty of cash for a while. I'm sure a number of opportunities to engage in a decent-sized M&A like this and you haven't pulled the trigger really until now. The deal being earnings accretive by year three isn't super compelling from where we stand. So can you talk about what's so attractive about it from your point of view? Thank you.

Sure, of course. Joe, that's a great question. So I'm very excited and so is our team about the acquisition of Pulse product line and the assets. I really consider this a strategic product and technology acquisition, not necessarily an immediate or current revenue or profitability multiple acquisition. So that's number one. Number two, we are essentially getting a whole family of systems, Pulse Aerospace has multiple, different products in the Vapor family of VTOL helicopters. If a Vapor 15, 35, 55 and 65 with the whole integrated solution set. We believe that this is a naturally perfect tuck-in and expansion in addition towards existing world meeting small UAS family of systems obviously mostly fixed-wing. So our customers will benefit from this in terms of more mission critical objectives being accomplished with the teaming of these two solutions and products. We can use our distribution channels globally with 45 plus countries around the world to sell a lot more of this. And as you all know, developing a product internally will easily take at least a couple years if not more than that to come to fruition. So in our view this is a long-term strategic acquisition that strengthens our portfolio, delivers more value to our customers and certainly delivers a lot of value long term in terms of our shareholders interests as well. We're very excited about that and we're also expanding our talent based, engineering talent base in the Midwest with opening that Innovation Center and Lawrence, Kansas. So, all-in-all, we're very pleased with this acquisition and we believe that this is going to deliver a lot of value long term for our shareholders.

Our next question comes from Troy Jensen from Piper Jaffray. Troy?

Hey, thanks, Steve. And congrats on a nice result, team. Hey, so, Wahid, how about for you furnish and you touched on this a little bit in your prepared remarks, but it looks like US defense spending on UAV is going to have a down year. I guess do you really think that's true for AeroVironment? I know you guys have always talked about coming up with new variants, new products to sell a different US defense agency. So just some more detailed thoughts on US defense strategy.

Sure, of course. First of all, so first of all the year-to-year comparison certainly is slightly down not up, not a significant amount down but slightly down compared to fiscal 2019. But we got to keep in mind that fiscal year 2019 and 2020 in comparison to our historical averages is far greater than several years before that or as far as I've been to the company. So that's an important point to point out and I mentioned that in my remarks. Secondly, the demand drivers for business across the board overall at a macro level is very strong. More and more the feature is unmanned systems and robotics. We are very uniquely positioned at the technology solution provider at the intersection of these four features of finding technologies. Obviously, robotics and UAVs being one of them. Sensors, software analytics and connectivity. So this is all very positive and encouraging for our small UAS. And needless to say this is just one of our portfolios of diversified growth initiatives. We have small UAS that's contributing to our financials. We have our TMS business. We have our HAPS business. So we're very fortunate to have a pretty diverse portfolio of products, revenue and customer base globally that complements our business. And overall, I don't consider the UAV budget slight decline from 2019 to 2020, a negative at all. I consider that it's still a very positive relative to historical levels.

Right, perfect. How about a couple here for Teresa quick. Just on the guidance here to the EPS. I think you said the tax guidance was 11% to 12% and I just want to make sure it's non-GAAP. And then what you reassume for other income?

So, Troy, yes the tax rates that we have in is 11% to 12% for fiscal 2020 and your other question was what about other range of --

Yes. Other income what does your EPS guidance assumes in your model or what should we be modeling?

We didn't provide guidance per se on the other income. In fiscal 2019, we had the one time litigation settlement. We also had the transition services from the buyer of our EES business, were the two drivers along with our interest income.

And our next question will come from Louie DiPalma with William Blair. Hello, Louie?

Good afternoon, Wahid, Teresa and Steve. What is your degree of confidence that you will win short range reconnaissance orders in the context of how there seems to be an incredibly large number of contenders and AeroVironment at least prior to the Pulse Aerospace acquisition historically is not specialized in VTOL systems?

Sure. So, Louie, first and foremost, we're fortunate to have a diversified portfolio of businesses and growth opportunities that allows us to deliver strong results year after year, and have strong demand drivers across our businesses. Number two, in relates -- in relationship to SRR, as I mentioned in my remarks, there was a very small down select small award by DIU which we would not select it on that. That does not mean that we're not engaged with that customer. We're actually very engaged with that customer. We've tracked that opportunity and engage with the customer quite closely. And we stand ready to compete in the future and we'll obviously keep you updated on that. And the same token, let's keep in mind that the overall DoD requirements and budget dollars for all types of solution and specifically in most cases calling out our product specifications or names even is quite robust for fiscal year 2020. And so we are very pleased with those demand drivers. We are very pleased with our fiscal 2019 results and fiscal 2020 of course will be the third consecutive year of double-digit top-line growth and very healthy profitability in bottom line. The fact that there are more competitors in the space is really not new news to us at all. We've been competing in the space for a very long time very successfully. We have a very high win rate. We, obviously, do not have a 100% market share but that doesn't mean that we're not going to continue to compete and stand ready to win opportunities in the future.

Okay and I miss this but what was the year-over-year growth rate for the International small UAS for the quarter?

So, Louie, you're asking a small UAS, international small UAS quarter-to-quarter, so in the fourth quarter we had $35.9 million of revenue versus $46.5 million in fiscal 2018. On a full-year basis though we were at $107.7 million of small UAS international revenue versus $96.7 million in 2018. So it grew 11.5%.

Okay and you guys have commented regarding this international small UAS that it still seems to be in the very early innings. And I think last year you signed your largest order ever for the Puma in the Middle East. Are there any other data points that you could provide to give us some sense of the penetration for like international small UAS and how your Puma and Raven stack up relative to the competitors internationally?

So, Louie, that's a great question. As I said on my remarks, we continue to grow our international footprint and small UAS very successfully and very well throughout the last several years. Our international business in terms of top-line growth as you've seen has grown significantly. But so has the number of customers and the geographies that we're expanding into. Secondly is that I believe that our international markets are still five plus years, maybe 5 to 40 years in many cases behind the adoption cycle of the US first generation systems. And in majority of those countries, we have the ability and the opportunity to expand our portfolio and increase our share of that customers overall spend and the DoD budgets. How large that is and how big could it be? Time will tell number one. Number two, overall the demand drivers are very healthy. Also due to customer sensitivity and competitive reasons, I'm not in a position to be able to disclose specifics of our engagements with each customer. But as you saw from my remarks, our portfolio customers, our diversification geographically as well as our solutions, their penetrations within those customers are pretty strong. And it speaks volumes to these -- the value proposition and the compelling capabilities of our solution that's helping our customers to proceed with certainty.

Next we have a follow-up question from Pete Skibitski at Alembic Global. Go ahead, Pete.

Yes, thanks guys. Wahid, can you talk a little bit about whether the US Army is doing UAVs with this air launch effects kind of I guess it's kind of an SMT effort and your potential role there? And then how much are you guys spending on things like autonomy in AI? It seems like that's becoming more important at least domestically? I just want to get your thoughts on those two areas.

Sure, Pete. In terms of the US Army and the whole DoD's overall approach to UAS, as I've said in several quarters and two-plus years now, I believe that the overall macro trends in that space is very positive. More and more systems are going to become unmanned and robotic systems and solutions integrated with ground systems are also going to increase. And we're fortunate to be that intersection of those four future deployment technologies as I said number one. Number two, we also have the ability to expand our market, addressable market with new announcements and [teaming] of existing platforms as I mentioned. So general dynamics land systems and Kratos are two examples that are specific that you refer to is essentially a program that we're working with a potential program that Kratos Corporation where our solution is going to be essentially included as part of a larger unmanned, supersonic or hypersonic s unmanned UAV that carries Switchblade and other capabilities deep into the contested environments of enemy and then it actually launches and delivers mission effects that really in the past have never been done before. These types of solutions and partnerships speak to the potential opportunities in the space and the ability for solutions to really deliver a lot more value to our customers' missions. And that's just one aspect of our macro demands and opportunities in our market. The other thing is also US Army and many other customers are coming up with new requirements for new type of systems and solutions such as SBS and SRR and LR and all that. And we're tracking all of those and will engage with them and we'll keep you updated.

Okay. Now last question will come from Joe De Nardi, a follow up question from Joe De Nardi of Stifel. Go ahead, Joe.

Yes, thanks. Wahid, can you just talk about what the customer is saying around Switchblade in terms of wanting to possibly deploy it more broadly across the force? Is that still a conversation? What are you hearing in terms of a competition, a formal competition for that program? What's the latest there?

Sure. So we're very pleased with the progress we've been making on our tactical missile systems business as you know in terms of revenue growth and demand and value proposition to our customers. We continue to engage with our customer on the Switchblade, the original Switchblade I referred to. Adoption and potential larger penetration and deployment within the Army and larger forces. That remains to be a discussion point and an interest of our US Army customer and our customer in general. The timing of which is really unpredictable. I won't be able to give you any more visibility to that in that specific relationship. However, I did mention in my remarks, a new variance, very exciting new variance which is being co-funded by us and one of our customers that essentially is the larger version of our Switchblade that goes further, has a longer endurance, covers more geography and carries a significant larger warhead. This variant which we worked actively in the development phase right now is significantly going to increase the mission effects and the types of solutions -- problems that our customers are trying to solve with our solution. We believe that our small UAS was a pioneering capability in a small UAS and we believe the same thing in our tactical missile systems business in a similar way. So we're making really good progress on that development and we'll keep you updated as we have more updates on that front. Overall, you could see in the DoD budgets for government fiscal year 2019 and 2020 there's significant dollars for original Switchblade and majority of which is not reflected in our backlog and visibility number so far. I'd like to also point out, I'm sorry Joe, Pete's earlier question I did not get a chance to answer his second part of his question. Peter which was about AI. What are we doing in that area? As I mentioned in my remarks, that's a really important point. We have been and we continue to invest heavily in the AI category. As I've I said previously we are at the intersection of this four future deployment technologies, very exciting and connectivity software analytics. AI, artificial intelligence is a very critical component of all solutions even today, as well as in the future. We've got a lot of investments in that area which we believe is going to further differentiate us from competition and enable our customers to do a lot more missions and deliver more value to them. And as we make progress we'll keep you updated. End of Q&A

So with that as we have no further questions. We thank you all for spending a good chunk of your afternoon or evening with us as the case may be. We appreciate your interest. An archived version of this call, all SEC filings and relevant company and industry news can be found our website avink.com. And of course, we look forward to speaking with you again following next quarter's results. Good day.