Good afternoon, ladies and gentlemen, and welcome to AeroVironment’s Third Quarter Fiscal Year 2020 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. Before we begin, 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. 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 Safe Harbor statement contained therein. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation to our website at avinc.com, in the Events & Presentations section. The content of this conference call contains time-sensitive information that is accurate only as of today, March 3, 2020. 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. Joining me today from AeroVironment are President and Chief Executive Officer, Mr. Wahid Nawabi; and Senior Vice President and Chief Financial Officer, Mr. Kevin McDonnell. We will now begin with remarks from Wahid Nawabi. Wahid?

Thank you, Steve, and welcome to our third quarter fiscal year 2020 earnings conference call. Today, I will refer to the supplemental investor presentation we filed with our earnings release and posted to our website. On today’s call, I will discuss three key topics that are outlined on Slide #3 of our earnings presentation. First, we’re on track to achieve our fiscal year 2020 objectives and deliver our third consecutive year of profitable double-digit growth, and today, we increased our EPS guidance to reflect our strong momentum. Second, we are well-positioned to maintain our growth trajectory beyond fiscal year 2020, based on our assessment of demand drivers. And third, we’re executing effectively against our strategy for long-term value creation and delivering significant value to our stockholders. I’ll start by summarizing our third quarter fiscal year 2020 performance, while highlighting our key financial and operational achievements during the quarter. Next, Kevin McDonnell, our new Chief Financial Officer, will provide a more detailed summary of financial performance in the quarter. I will then discuss our goals and increased guidance for fiscal year 2020 before Kevin, Steve and I take your questions. As I stated last quarter, we expected about one-third of our second-half revenue in the third quarter, which is consistent with the $61.9 million we delivered and described on Slide #4. Third quarter revenue produced loss per diluted share of $0.04 and non-GAAP loss per diluted share of $0.01, which reflects expenses related to our Pulse Aerospace acquisition in June 2019 and amortization of intangible assets. Third quarter revenue also resulted in lower overhead absorption, which impacted quarterly earnings. Higher revenue plan for the fourth quarter will result in improved absorption. For the fiscal year-to-date, revenue of $232 million increased 3% compared to the prior year. This was a modest improvement…

Thank you, Wahid. Before sharing our third quarter financial results, I’d like to take a moment to thank AeroVironment’s Board of Directors, Wahid, the leadership – and the leadership team for the opportunity to serve our stakeholders as Chief Financial Officer. This is a unique and exciting company with tremendous growth potential. I look forward to working with our team to achieve our value creation objectives. I also look forward to meeting our stockholders and research analysts in the near future. Now let’s turn to the Q3 results as highlighted on Page 4 of the posted presentation. Revenue for the third quarter of fiscal 2020 was $61.9 million, a decrease of $13.4 million, or 18% from the third quarter of fiscal 2019 revenue of $75.3 million. The decrease was due to a decrease in product deliveries of $13.6 million. Third quarter fiscal 2020 revenue by major product line and program is as follows: Small UAS was $37 million, or 60% of total revenue; HAPS was $11.8 million, or 19%; TMS was $7.9 million, or 13%; and other was $5.3 million, or 8%. Let me take a moment to outline the current status of the HAPS program. Inception-to-date, revenue under contracts from the HAPS program is $115 million. The total value of all contracts with HAPSMobile is $148.6 million, which consists of $140.3 million for design and development and $8.3 million for preliminary design and other-related efforts. There is $33.6 million remaining on these contracts, which includes a portion that is currently unfunded. Turning back to the financial performance for the quarter. Gross margin for the third quarter of fiscal 2020 was $23.5 million, or 38% of revenue, compared to $30.4 million, or 40% of revenue for the third quarter of fiscal 2019. The decrease in gross margin was primarily due…

Thanks, Kevin. We’re executing on our plan and are on track to achieve and exceed our fiscal year 2020 objectives and deliver a third consecutive year of profitable double-digit top line growth. With 98% full-year visibility to the midpoint of our revenue guidance range, as described on Slide #8, and a number of contract negotiations underway, we reiterate our guidance of $350 million to $370 million in revenue. As a result of anticipated favorable revenue mix and operational improvements, we are raising our earnings guidance, as described on Slide #9. Our previous earnings guidance was between $1.35 and $1.55 in diluted EPS and between $1.47 and $1.67 in non-GAAP diluted EPS. Our new earnings guidance is between $1.55 and $1.75 in diluted EPS and between $1.67 and $1.87 in non-GAAP diluted EPS. This represents an increase of $0.20 per share of earnings at the midpoint of the ranges. As I noted earlier, our investments are producing strong results and delivering favorable bottom line results for our customers and our stockholders. The midpoint of our fiscal year 2020 revenue guidance range implies fourth quarter revenue of $128 million. While this is higher than each of our last three quarters, it is lower than we have delivered in the past. We are confident in our ability to achieve our targets and extend our track record of value creation. We continue to expect full-year internal R&D spending to be about 11% of revenue. Consistent with our plans, we are on track to invest 5% to 6% of revenue in capital expenditures this fiscal year to support our strong and consistent growth. We have summarized our full fiscal year 2020 financial expectations on Slide #9 of our supplemental presentation. Importantly, we are monitoring the coronavirus situation closely. Our business is not experiencing any adverse effects due to the virus at this time. Our supply chain is almost entirely U.S.-based. Safety remains a top priority for AeroVironment and out of abundance of caution we’re limiting some international travel by our people. Before we take your questions, I would like to reiterate our key takeaways from AeroVironment’s third fiscal quarter. First, we are on track to achieve our fiscal year 2020 objectives and deliver a third consecutive year of profitable double-digit growth, and today, we increased our EPS guidance to reflect our strong momentum. Second, we’re well-positioned to maintain our growth trajectory beyond fiscal year 2020, based on our assessment of demand drivers. And third, we’re executing effectively against our strategy for long-term value creation and delivering significant value to our stockholders. I would like to take this opportunity to thank our employees for their focus and dedication, our customers for continuously challenging us to deliver the most effective solutions to support their mission success, and you our stockholders for your confidence in our team and our plans. We are dedicated to helping you proceed with certainty. Kevin, Steve and I will now take your questions.

Thank you, Wahid. We will now begin the question-and-answer session. [Operator Instructions] We respectfully request that you limit your questions to two and please reenter the queue to ask any further questions. [Operator Instructions] Our first question comes from Pete Skibitski at Alembic Global. Pete?

Hi, good afternoon, guys.

Good afternoon, Pete.

Wahid, can you tell us, are you leaning maybe towards the low-end of your revenue guidance range at this point, or the high-end of the range? And maybe you could talk about what sort of the moving pieces are within that range with one quarter left?

Sure, Peter. So as I mentioned on my remarks, we delivered for the third quarter, very closely to what we actually said during the second quarter earnings call, which I commented on. About a third of our second-half revenue will be in the – and the first third quarter of the year. Secondly, we have looked at a number of opportunities that we have and we’re negotiating multiple contracts, both with domestic as well as international customers. As a result of that, based on the information that we have now, we believe that the guidance range on our revenue should remain a $350 million to $370 million, and we’re confident about our ability to achieve that outcome. In terms of the EPS – GAAP EPS, we believe that based on improvements in our operations, as well as the favorable revenue mix that we see in this year, that we increased our guidance by $0.20 both on the GAAP as well as the non-GAAP. So this will be, again, the third consecutive year of double-digit top line profitable growth. We’re confident about our ability to achieve those targets. Should any change, we’ll keep you updated throughout the quarter and – or otherwise, but next quarter call.

Okay. My follow-up on gross margins, in terms of your expectations for the fourth quarter, your gross margins are obviously very strong in the first-half of the year. They came down in the third quarter, I think, sort of, as expected. How will we think about the fourth quarter? Should that be a sequential increase from the third quarter? Would it compare to the first-half? Just any color there would be appreciated? Thanks.

Sure. So as I stated in the remarks, we only guide on the top line revenue and on our bottom line GAAP and non-GAAP EPS. And we, based on the revenue mix, you’re absolutely correct that Q3, we expected this primarily because of the timing of the contracts, lower volume, as well as the revenue mix of products versus services and which type of contract that we had for the third quarter. That’s only optically for the third quarter. For the full-year, we’re confident with the EPS guidance at both on the GAAP and non-GAAP, and we believe that that’s the reason why we raised it. Obviously, if you look at the full-year number, that would most likely indicate slightly higher gross margin percentages for the fourth quarter to achieve the full-year results, based on our R&D spending and as well as our revenue and EPS guidance.

Thank you, Pete. And our next question comes from Ken Herbert of Canaccord Genuity. Hi, Ken.

Hi, good morning, or good afternoon, Wahid and Steve and I welcome, Kevin.

Thank you.

Hello there, Ken.

Hey, Wahid, I just wanted to first ask on the LMAMS and the contract. It sounds like there’s still some – maybe some uncertainty around timing. Can you just maybe provide a little bit more color or handicap the potential to see that in that contract finalized in fiscal 2020? Or if it slips into fiscal 2021, when you’d expect it? Maybe just some of the moving pieces between what you’re seeing now and wrapping that up?

Sure. So, Ken, as I mentioned on the remark, and as you stated, yes, we’re very much in the thick of the negotiations on that contract. Obviously, this is the largest contract, a multi-year contract in the history of our TMS business. So it’s a significant contract for us. We’re making significantly good progress. And although the process of negotiating and definitizing such a contract does take quite a long time. We expect this contract to either close towards the end of this fiscal year or the beginning of next. So really, it’s a optics timing situation if you ask me. Regardless of that, we believe that based on a portfolio of opportunities that we have, that we are confident with our ability to achieve our revenue guidance for the full-year, as well as the increased EPS guidance range that we provide for the full-year. So we look at a number of different factors and contracts and opportunities to determine the range of outcomes that we believe is most likely for the quarter at this time.

Okay. Thank you. And if I could just to follow-up on your larger Switchblade variant you’ve talked about this call, you’ve indicated, I think that you view this as a larger addressable market. Can you provide anymore detail, Wahid, on maybe when you’d expect to be getting some of these under contract, maybe your target market or any other detail on this opportunity for a larger Switchblade, which sounds fairly interesting? Thank you.

Sure. No problem, Ken. So, yes, of course, we – as we introduced the initial Switchblade that we’ve been now providing to the U.S. military on open competitions for over a decade successfully and essentially won almost every single competition and contract that has been competitive open contract competition in our entire history. I wanted to make sure that I’d clarify that to our investors and our shareholders and our analysts. Number two, we are in the midst of the development of a larger variant of our original Switchblade. This larger variant, obviously, fly further and longer and carries a much bigger mission effects or mission impact. And so what that does, it actually increases the addressable size of the market for Switchblade and tactical missile systems significantly. We have conducted already successfully a series of flight tests, which is part of the development effort. And we’re looking forward to introducing this product to the market in the near future. And as we make more progress and we’re ready to introduce it, we’ll obviously update you at that time. But it’s a very exciting capability, which we’re co-funding with alongside our customer to deliver – and develop and deliver the next-generation of capabilities for the Warfighter that they need and it’s very exciting for us.

Thank you, Ken. Our next question comes from Troy Jensen at Piper Jaffray. Hi, Troy.

Hello, gentlemen. Congratulations on the nice results and better profitability.

Thank you.

Thank you, Troy.

Hey, so first of all, clarification. Did you say that the HAPS segment was $7.9 million?

Hey, HAPS segment, I believe that Kevin mentioned on his remarks, I mean, the HAPS revenue – revenue that you say was $11.8 million.

$11.8 million. So TMS was $7.9 million?

All right, perfect. All right. So then the question is, I would just love to know more about just the next – the timing of these next test flights perhaps and the milestones would be – should be looking for? And then a follow-up to that would be, if you look at the HAPS Alliance, it seems like there’s a few international carriers listed there, Deutsche Telekom, China Teleco and I think Telefonica, but just curious on the U.S. service provider interest in HAPS partnerships?

Sure. So in terms of the flight testing, perhaps as you know, we’re under the, what we refer to the design, development and demonstration agreement, which essentially means that we have to develop the airplane, design it, provide or make and produce two airplanes and deliver those two to our customer being HAPSMobile joint venture. And as part of that, we also have to achieve a certain milestones of flights, et cetera, et cetera. We’re coming towards the near end of that phase of this multiphase business plan, Troy. And we currently are preparing for multiple, a series of light test, which essentially what it does, it increases the flight envelope, both in terms of duration of flight, as well as altitude of war, we’re going to be flying this airplane higher and higher. And our goal obviously is to achieve all of those successfully. And then it’s not a binary sort of a situation. We’re going to transition essentially from design and development to testing and certification of the aircraft – airplane, which is another phase of this development effort. That is where we are with the flight and we’re very pleased with our results so far and we’re making significant progress in this area. And we believe that this represents a very significant long-term opportunity. In terms of your second question the HAPS Alliance, yes, the HAPS Alliance is a very major, what I call, step towards the adoption and opening of the stratosphere for 5G connectivity. The HAPS Alliance, the – essentially, the initial three partners that formed it was AeroVironment, SoftBank Telecom of Japan, as well as Alphabet’s Loon. And essentially now, since we launched this already, we have multiple global companies, both from telecom, as well as technology, and other industries have joined this movement. And the intent here is to essentially bring to – bring forward this topic of how do we harness the stratosphere and how do we make global 5G connectivity able and realistically capable with the HAPS platform. That is main intent of that HAPS Alliance. We’re very pleased that multiple parties from around the world actually is joining us in this endeavor and has already become members of this alliance, and we look forward to progressing our efforts and bringing this vision to reality one day.

Thank you, Troy. [Operator Instructions] Our next question comes from Louie DiPalma at William Blair. Hello, Louie.

Wahid, Kevin and Steve, hello. Good afternoon.

Good afternoon. Hello, Louie.

First one for Kevin. Is the difference between the bottom and the top range of the 2020 revenue guidance related to the $160 million LMAMS contract? And are those shipments expected to start before the end of April?

Yes. I think, Wahid had addressed that earlier. Basically, we have a range of opportunities and different possibilities. So we’ve obviously taken that into account as we look either to sign that this year or early next year.

Yes. So we – Louie, we expect to achieve our range by a number of different opportunities, neither one of one specific one is the make or break situation for us. And we look at all the different variables and different factors and we determine what’s the most likely range of outcomes that we believe at this time. And since our expectation on that contract is, it could happen at the end of this fiscal year or may not in terms of its definitizing. We believe it’s going to happen either close to the end of this quarter or the beginning of the next quarter. But either case, we are still confident about our ability to achieve our guidance range. And that’s why we confirm the top line and we increased the bottom line by 20%, which essentially makes the third consecutive year of us delivering double-digit top line profitable growth as part of our process here.

Sounds good. And, Wahid, you noted that you have successfully competed against many large contractors for LMAMS over the past eight or so years. Do you feel that the budget request, which may not actually come to fruition, but the budget request that seeks a second source for LMAMS? Do you think the reason that they put that in there was to achieve the benefits of diversity, or do you think that the customer just wants to keep you on your toes?

So let me answer the question very clearly, based on where we see it, Louie, I’m glad you asked this question. First and foremost, historically, every single competition and award that we have received for the LMAMS and other UAS products of ours with U.S. DoD, we have competed on those. Open competitions with not just one, but multiple parties competing, both small and large companies. DoD – defense contract as a whole of non-defense startup companies from the technology world. And you could see from our track record over the last decade plus that we’ve had a significantly strong track record almost, I’m not familiar aware of any losses that we’ve had in this space at all, to my knowledge to our knowledge, number one. Number two, when the budget documents are formed, they usually are formed and developed way in advance of today, probably months and months in advance. Usually, the Pentagon has to include specific dollars for different allocations of purposes or items. And there is a $5.5 million or $5 million, which I mentioned on the call earlier my remark, I look at it for – essentially, I think, it says to qualify a second competitor or a contractor..We’re very familiar with that. We also are very familiar with the fact that this has happened in the past and we have competed very successfully. And last but not least, I mentioned that the contract that we’re under negotiation right now extends our ability to deliver solutions to our customer for at least another three years. So that’s a three-year contract. So one could argue that this has really tried to position for beyond that and we are used to that and we look forward to that competition. And we absolutely are focused on making sure that we win as we won in the past. And again, this to us is a very positive, because this is a growth opportunity for us. We have developed this capability. We have patented technologies that are within our Switchblade and tactical missile systems, such as our wave off capability, which is very unique to this loitering munition systems. And we believe that we hold a compelling differentiation in our solution against all competitors globally in the space and we welcome the competition.

Thank you, Louie. Our next question comes from, once again, Pete Skibitski at Alembic Global. Pete? Peter, are you with us?

Yes, I’m sorry. Can you hear me?

Yes, we can. Hi, Pete.

Sorry about that. A couple of follow-ups. First one is just a housekeeping question. Do you guys have what the international revenue was for the quarter?

We’re going to look that up for you right now, Peter, just a second.

Okay, great. Well, maybe I’ll ask the second one while you guys look that up. Second one was on the larger Switchblade variant. I’m trying to figure out, I guess, get a better sense of the funding for that, because kind of looking through the Army’s budget, you see the LMAMS funding. I don’t know see anything in there right now for sort of a larger Switchblade variant in terms of production. So, maybe I’m missing it. But do you guys sense that, this larger Switchblade variant that it’s production run is funded? or are you hopeful that it will be added to the budget, maybe in fiscal 2022 and beyond?

Sure. So we have a co-funding customer that is funding this with us together. And our customer and us believe that we’ve always believed that there was a family of loitering munition and the future strategy of our tactical missile systems business and product line. We’ve always believed that from the inception of when we launched the first product to the market. So what is exciting about this one is that, because it flies further and carries a bigger mission effect, obviously, a larger payload and it also has a longer endurance in terms of its flight duration. It opens up the envelope of missions far beyond our current original Switchblade capability. If you look at the DoD spend and other category of systems that are in that space, it’s much, much larger spend dollars in that addressable market. So we have been co-investing in this with our customer. And while I’m very pleased that the progress we made so far is incredibly great, we’ve had a series of flight tests and we’ve successfully achieved those. We continue to do that obviously with a mission-critical lethal loitering munition, safety and reliability is of utmost importance for the Warfighter and our customer and we take nothing for granted. And so we’re doing – we’re going through a series of testing, and we hope that we could introduce this product to the market in the near future. And when we’re ready, obviously, we’ll tell you that. In terms of funding, this is a new capability, just like our Switchblade, as you remember. When we first introduced that product, there was nothing like it in the market. And we believe that this is the case with this as well. And so, obviously, we have to work with our customer to educate them and inform them about this capability. So they can essentially switch their acquisition dollars, or generally new acquisition dollars for the consumption of this in the long-term. And obviously, that’s one of the reasons why we invested in this alongside our customer for the long-term growth and value creation strategy.

To answer your first question, the international revenue in the third quarter was $34.3 million.

Okay. Very helpful, guys. Thank you very much.

You’re welcome, Peter.

Thank you, Pete. At this time, we have no further questions. We thank you 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 www.avinc.com. We wish you a good day, and we look forward to speaking with you again following next quarter’s results. Thank you.

And thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.