Ladies and gentlemen, thank you for standing by and welcome to the AeroVironment Fiscal Year 2022 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. . Please be advised that today's conference is being recorded for replay purposes. If you require any further assistance, . I will now like to hand the conference over to Jonah Teeter-Balin, thank you. Please go ahead, sir.

Great. Thank you and good afternoon, ladies and gentlemen. Welcome to AeroVironment's fiscal year 2022, third quarter earnings call. This is Jonah Teeter-Balin, Senior Director of Corporate Development and Investor Relations for AeroVironment. Before we begin, please note that certain information presented on this call 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 which 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 other filings with the SEC, along with the associated earnings release and safe harbour statement contained therein. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation on our website at avinc.com in the Events and Presentations section. The content of this conference call contains time-sensitive information that is accurate only as of today, March 3rd, 2022. 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 Chairman, 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, Jonah. Welcome to our fiscal year 2022, Third Quarter Earnings Conference Call. I will start by summarizing last quarter's performance and discuss recent achievements. Next, Kevin will provide a more detailed summary of our financial results, after which I will follow up with a discussion of goals for the remainder of fiscal year 2022 before Kevin, Jonah, and I take your questions. Let me emphasize a few key messages which are included on slide number three of our earnings presentation. First, AeroVironment's, like many other businesses in our industry, face continued headwinds last quarter as anticipated, notably with regards to supply chain constraints, the federal government's continuing resolution, and entire labour market. Second, that said, third quarter results were largely in line with our expectations, and we are maintaining our previously stated guidance for fiscal year 2022. Historically, our fourth fiscal quarter has been our strongest and we expect that trend to continue this year. Third, we continue to make strides and reducing costs, managing working capital, and increasing operational efficiency during this challenging period. And fourth, with a solid backlog and multiple expense reduction actions, we are positioned to deliver a strong fiscal year 2022 performance and even better performance in fiscal year 2023. Before going through these themes in more detail, let me summarize our financial results for the third quarter. We delivered revenue of $90.1 million compared to $78.8 million last year, a 14% increase year-over-year. The revenue growth was primarily due to increased sales in our Medium Unmanned Aircraft Systems and Unmanned Ground Vehicles segment. This along with other organic and acquisition-led increases offset the negative impact from lower Small Unmanned Aircraft Systems product line shipments, which we had already anticipated. We ended the quarter with a backlog of $226 million compared to $252…

Thank you, Wahid. Today, I will be reviewing the highlights of our third quarter performance during which I will occasionally refer to both our press release and earnings presentation available on our website. Revenue for the third quarter of fiscal 2022 was $90.1 million, up 14% increase from the prior year's comparable period. Slide 5 of the earnings presentation provides a breakdown of revenue by segment for the quarter. Our largest segment during the quarter was small UAS with $24.4 million of revenue, down from last year's $50.5 million dollars in revenue. Reiterating what Wahid said, the small UAS business was primarily driven by reduced U.S. DoD spending, while international demand continues to be consistent with historical patterns. We expect the demand for Small UAS from the DoD to continue below historical levels in the near term. Our acquired Medium UAS segment had another solid quarter with revenue of $21.2 million, a small increase over the second quarter. Most of our Medium UAS revenue is classified as service revenue as we anticipate growth from this segment to be in the form of product sales. As Wahid indicated, we are well-positioned for the Army's FTUAS Program and our international pipeline for the JUMP 20 continues to build. Our Tactical Missile Systems business or TMS segment contributed $18.6 million of revenue during the quarter. TMS continued to be impacted by ongoing supply chain issues in Q3 and we expect these issues to continue at least for the remainder of the fiscal year. But to repeat what Wahid said, we are seeing an increased opportunity for international sales of our TMS products. Revenue from the other segment which includes HAPS and our acquired Telerob and Progeny ISG businesses, increased year-over-year to $26 million versus $8.6 million in fiscal 2021 third quarter. The increase…

Thanks, Kevin. Before turning the call over for questions, let me just reiterate a few key points from earlier today. With 95% visibility to the mid-point of our previously stated guidance, we are reaffirming our guidance for fiscal year 2022 as follows: full year revenue between $440 million and $460 million, net loss from continuing operations between $12 million and $8 million, adjusted EBITDA between $59 million and $65 million, diluted Loss per share between $0.47 and $0.33, and non-GAAP diluted earnings per share is forecasted to be between $1.23 and $1.37. While facing the ongoing challenges caused by our supply chain constraints, the continuing resolution in Washington, and a tight labour market, we have and we'll continue to aggressively reduce costs, manage working capital, and improve AeroVironment's long-term growth profile. While I am of our -- while I'm proud of our team and the progress shown in tackling the various macro challenges, I'm also excited by the many opportunities which lie ahead. Given the potential FTUAS Program when the solid performance of our recently acquired businesses and expanding demands from overseas customers, I believe AeroVironment is on the right path for growth, which will yield improved financial and operational results. That means better margins and higher cash flow, as well as an even larger international presence. We believe in the future of AeroVironment, and we're investing in leading edge technologies that will accelerate the top line and provide for years of solid performance. So as we approach, the end of fiscal year 2022, I speak for the entire team here at AeroVironment and our resolve to serve our customers to the best of our abilities, capitalize on new market opportunities, and ensure the returns that our investors have come to expect. And with that Kevin, Jonah, and I will now take your questions.

Thank you sir. . Due to the essence of time, we ask that you please limit yourselves to one question and one follow-up. Please stand-by while we compile the Q&A roster. I see our first question comes from the line of Ken Herbert from RBC Capital Markets. Please go ahead.

Hey, good afternoon, Wahid, and Kevin, and Jonah, how are you?

Wonderful, Ken. Good to see -- good to hear from you. How are you?

Thank you. Very good. Hey, Wahid, just a first question, can you provide any more colour on the expected timing of the FTUAS contract announcements and what -- assuming you're successful with the Increment 1, what that could contribute to this year, if anything, but I guess more importantly to fiscal '23?

Sure, Ken. The U.S. Army has basically told us that they are planning on awarding that contract and making announcement sometimes in our fourth fiscal quarter right now. We are hopeful that by the end of this quarter we will have that outcome basically announced and communicated. That's for Increment 1. Fairly soon after that, the Army also plans to award Increment 2. Whoever wins Increment 1, the probability of being successful winning Increment 2, obviously increases, which is good for us. And then that also increases the probability of success for the longer-term program of record acquisitions if it were to become a program of record. So in terms of the actual award, we expect that to happen sometimes in this quarter. And in terms of contributions, we may recognize a small amount of revenue for that in fiscal year '22 this fourth quarter, but majority of that most likely will be in the next quarter. And that's primarily predicated by how fast our customer can move and being able to assume deliveries or accept deliveries and deploy the systems out there. It is a very large strategic opportunity that we're very focused on. And we're so far engaged with the U.S. Army very actively on a regular basis, and we hope to provide you with more updates in the near future.

That's hopeful. But there's a follow-up with the situation currently in Eastern Europe, there is some speculation about reinstatement of maybe OCO accounts. How, if anything, have you seen that situation in Europe impacting your business today or how should we think about that to potentially impact the business in fiscal '23?

Sure. Again, the recent events in Ukraine and Europe obviously is very hard breaking and our hearts, and minds, and prayers go to the Ukrainian citizens and others. At the same time, the solutions that we have developed, such as Switchblade 300 and 600, JUMP 20 and our Small UAS is perfectly designed and suited for those types of conflicts. We truly believe that our Switchblade family of loitering missiles could be literally a game changer for the Ukrainian military. The ability to shoot these things very easily and identify target and designate them automatically and take them out, and disable them or destroy them with no collateral damage is absolutely phenomenally well-situated for that type of a conflict. In terms of a OCO budget in account, historically we have benefited from that during the conflicts in the Middle East and Afghanistan. We historically received significant amount of funding for both our Small UAS and TMS as a result of that. It is not clear to me now whether that is going to happen again in the case of Ukraine, if it does, I believe that would be a positive contributor to our business. And even besides that, I do believe that all the activity that's going on right now is sort of becoming a wakeup call for a lot of our allies in Europe, as well as the U.S. military that systems like Switchblade and JUMP 20 could be extremely effective and vital to these types of complex in the future.

Great, thanks, Wahid.

Welcome, Ken.

Thank you. Your next question comes from the line of Austin Moeller from Canaccord. Please go ahead.

Good afternoon, Wahid. Just my first question here. The last time that we spoke, I was wondering if there was any timing around when you think the supply chain component common issues might be resolved. Do you guys have any better visibility into that now relative to last quarter?

Good afternoon, Austin. Great to hear from you. The short answer is that we have some visibility to the best of our abilities and we're taking a lot of actions related to the supply chain constraints. And I mentioned a few of them on my remarks, but it is an ongoing effort and challenge on a daily basis. In some areas we have seen improvements, and in some areas we have seen lack of improvements. I tend to believe that those challenges will continue into next fiscal year of ours and I don't see how all those issues are going to go away within the next three to six months. I tend to believe that while some areas have shown some improvement overall, the situation is still existing. We've taken enormous amount of effort to address many of those. And I think we've done an incredible job of addressing the issues that are out there, working with our suppliers and how that could be mitigated. But we do this on an ongoing basis. We evaluate the impact due to this. And also there may be some issues related to the Ukraine situation that could cause this in some ways to improve by putting a priority for defense acquisitions and supply chain, but also may negatively impact it because of the global supply chain constraints in general. So it's an ongoing challenge that I see it continuing into next fiscal year for us.

Okay. That's very helpful. And just a follow-up there. You said that some countries in Europe wanted to procure some Switchblades, could you potentially prioritize using components for TMS relative to some other product lines just to get them shipped out faster?

Yes, we could. There's multiple ways that we can address that potential new increased demand. First and foremost, we have some inventory within our U.S. defense government or defense customers themselves. So U.S. military can provide some of those directly to those customers and wait for us to backfill their needs and their supply from AeroVironment in the next few months, number one. Number two, we're already are working all of our supply chain avenues and relationships and suppliers to see if we can get more of those components that are in high demand, that could be useful for those needs. And third, another key item in here is the U.S. Department of Defense can always activate a higher priority for military or act of war type of situations that could put us and many others defense contractors on the higher priority with be suppliers. Fundamentally, our volumes in some of these areas are not that big relative to the global demands and volumes for these microprocessors and chips. However, if the U.S. enacted such a priority on it, it will give us priority within the suppliers and the whole global supply chain in general. So there are at least three ways that I can think of that were actually working, all three. If there was to be stronger demand that we can address that.

Excellent. Fantastic colour, Wahid.

You're welcome, Austin.

Thank. Your next question comes from the line of Brian Ruttenbur from Imperial Capital. Please go ahead.

Yes. Thank you very much. First question is just helping us understand your revenue visibility going in the quarter. You cited supply chain issues, continuing resolution delays like that, what is your visibility? I know you have great backlogs and things like that. Do you have the supplies in place right now? Do you have the orders in hand to ship in this fourth quarter?

Brian, thank you for the question. And the short answer is, overall, as I said on the comments, that we feel confident about our ability to achieve the reaffirmed guidance that we provided based on the variables and the facts and the conditions that we see today. There are several reasons as to why. Number 1, we have a visibility, which we refer to as our visibility for achieving the midpoint of our guidance. We're about 95% visibility to the midpoint of our current guidance on revenue. Compared to our historical levels, that's pretty much in line with it and maybe to some extent, a little slightly better. Number 2, we have a strong backlog that contributes to that backlog -- to that visibility. And 3 is, we have already started this process internally with suppliers. Are there still some risks? Absolutely. There always has been and there will continue to be as the quarter goes on. But overall, based on all the indicators that we have and based on all the factors that we see, we believe that we should be able to achieve our guidance that we confirmed today for the full fiscal year and for our fourth quarter.

Great. Just as a follow-up on a slightly different subject, if I can. In terms of -- you sell to 50 countries roughly, have you sold to Ukraine in the past or sold to Turkey that sells to Ukraine? I didn't know if there is any direct exposure with your systems right now.

So Brian, I'm not able to comment on any specific country for its sensitivity reasons what I can tell you is that absolutely positively majority, if not most of the European countries, Western European, Eastern European, the Baltic's, the Scandinavian, Middle Eastern, Northern African countries are our existing customers in that less continues to grow. So that's number one. Number two, given the fact that we already do business with 50 plus countries around the world and have a very large installed base, helps us execute our strategy and provide more of our products and portfolio to various countries around the world. So we generally feel fairly good about that because our install base and customer base is very robust, very broad, totally unmatched in the industry in many aspects of it internationally. And it's actually one of the strong suit of AeroVironment. We're very fortunate to have a diversified product portfolio, diversified customer base geographically, as well as different types of customers and those in services of the military, army, marines, navy, air force, etc.

Thank you.

You're welcome, Brian.

Thank you. . Our next question comes from the line of Christopher Riger from Baron Burke, please go ahead.

Good afternoon, Wahid, Kevin, and Jonah. Thanks for the time.

Good afternoon.

Good afternoon.

Good afternoon.

Just piggybacking on Austin's first question, I'd like to double-click on a comment you made regarding the supply chain difficulties you're experiencing. You mentioned some areas are better and some are worse. Could you speak to the specifics as best you can as to how the situation has changed from last quarter?

Sure. Generally speaking, because our systems are extremely innovative in terms of cutting-edge technology, we use some of the highest performing GPUs, that's graphic processor processing units, and CPUs and other varies types of semiconductor that addresses and they're -- and in terms of performance there on the most extreme of what's referred to a SWaP, size, weight, and power performance. So these are the types of things that are highly, highly in demand in many other industries besides ours. And so it is the cutting-edge and the leading edge. And based on that, the supply in general for those systems are very, very high globally beside just in the United States. Historically we've done a really good job of working with our suppliers to not only give them long-term forecasts, but we've also provided them with requirements that they have to actually carry inventory based on our forecast. And that really helped us over the last two-and-a-half, three years considerably. What's changed from last quarter to this quarter, in some areas we see some improvements. And those improvements are such that a supplier might've quoted us an X amount of weeks of lead time and as time have gone by they've been able to improve that lead time, and in some cases that is actually eroded. So net I would say that there has been pockets of positives, but there's also some pockets of negatives or setbacks in that regard. Overall, we've been able to manage that and it's a daily effort, daily activity to address the issues that come up and to go away. It's a dynamic environment. Overall given our forecast today and how we've executed so far, we believe we're well-positioned to achieve our full-year results that we -- what we've discussed earlier. So again, I'm very proud of our teams being able to execute on the third quarter and deliver the results that we expected. And we believe that we're positioned well for not only this fiscal year, but even for fiscal year 2023 and beyond.

All right. Very helpful. Thanks for that. And just switching gears here, on the labour front, has your utilization of outsourced engineering services had a material impact on your margins? And if so, could you quantify the impact?

Brian, I'm sorry, Chris, the outsourced labour effort has had some effect. Not very material in general, but has had some effect. We don't typically break them down by specific drivers or contributors. Overall, there's certain areas that we could use outside labourers, or engineering resources for some of the work. But some of it is very, very high-tech work, which requires a lot of training and knowledge transfer, which we are very hesitant to do, and it's not practically to do that easily. So overall, we've made progress on both fronts, bringing some outsource labour in, but also actually increasing our headcount and hiring. And so we've made some progress as of last quarter, but it's still remains a challenging environment. Overall, the demand for the type of resources that we're looking for, primarily in autonomy, AI, guidance navigation, and control, air mechanical design, robotics engineering. These are the areas that we look for and we have needs and the demand for those still remain to be very, very high and competitive overall.

Alright, great, thanks. I appreciate the caller.

You're welcome, Chris.

Thank you. I see our next question comes from the line of Louie DiPalma from William Blair. Please go ahead.

Wahid, Kevin, and Jonah good afternoon.

Hi, there.

Hi, can -- Wahid can you discuss opportunities and the developmental progress with the Switchblade 600. You previously have discussed how there is some strategic overlap with the 600 and javelin missiles, amongst other types of missiles. And specifically, the javelin missiles have been in the news a lot as it relates to Ukraine. So I was just wondering if you could discuss that high level. The different types of end markets and applications you see for the 600.

Sure. So Louie, so far, it's a strong belief of ours that a loitering missile such as Switchblade 300 or 600. And particularly Switchblade 600 is an ideal capability that today, the Ukrainian military and the other allies and neighbours and Eastern Europe and Western Europe could absolutely benefit from and use. As you know they carry some of the warheads and then, and they have similar amounts of warhead capacity and payload capacity. But in terms of its other performance characteristics, Switchblade 600 is extremely superior. Being able to travel 50 plus kilometres, not have to have the target on your visual site and then designated and then take it out. These are all the competitive, compelling, unique value proposition in differentiators of Switchblade 600 which l believe makes it a superior weapon and missile system for the type of conflict that we see today and Ukraine, and possibly in other areas all over the world eventually. So we feel very good. This is something that we've been talking about and we believe then for years and years. That's why we invested in it. I think our domestic customers see that as well, and we're hopeful that with our latest engagements with the U.S. State Department and the Pentagon, we will get more of the support to be able to export these to our allies. And that's really the key for us to be able to do that. Again, one of the other things I want to mention Louie is that, we have received authorization as you know, to export that to one country, the Switchblade 300. We had some very favourable and positive engagements with the U.S. State Department and officials from the U.S. Department of Defense in the last quarter, where they are quite supportive of helping us equip our allies with more of our Switchblade 300 and 600 in the next few months to come. Obviously, this is going to take some time because the processes doesn't go -- don't happen overnight. But we believe that those engagements are very positive in terms of encouraging us and giving us optimism that the U.S. military and state department is very much supportive of enabling our allies with this capability.

Awesome. Thanks, Wahid, that's it for me.

You're welcome, Louie.

Thank you. As a reminder, to ask a question, . I'm showing no further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you again for participating and we look forward to speaking with you again next quarter. You may now disconnect.

Thank you.

Thank you.