In addition to that, Peter, I also want to mention that we’re actively negotiating with the U.S. DoD on a very large multiyear IDIQ sole source Switchblade contract that allows the U.S. DoD to purchase large quantities of Switchblade for multiple years from AeroVironment and then actually fulfill the needs for Ukraine, for the U.S. DoD stockpiles and programs as well as for our allies and FMS cases. That actively is in process, but it will take some time, but it’s very encouraging.
Peter Arment: That’s all great color. I appreciate that Wahid. And Kevin, maybe just a quick one for you on, you made some comments about that, you kind of expected the gross margin — adjusted gross margin for the year to end up in the low 40s to high-30s. Maybe you could just — that implies, I guess in the second half of the year, if you’re going to be in the high-30s that you’d see that gross margin come down. I guess maybe the mid-’30s or so, is that primarily tied to the LMS revenue ramp or can you maybe highlight, maybe some of the puts and takes there? Thanks.
Kevin McDonnell: Right. So you kind of have a combination of a little bit lower small UAS revenue and that’s kind of replaced by the lower margin LMS coming in the second half.
Peter Arment: Okay. Great. Thanks again. Nice results.
Kevin McDonnell: Thank you, Peter.
Wahid Nawabi: Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Ken Herbert from RBC Capital Markets. Your question, please.
Ken Herbert: Yeah. Hi. Good afternoon, everybody.
Wahid Nawabi: Hey. Good afternoon, Ken.
Ken Herbert: Hey, Wahid. Maybe if I could just to sort of put a finer point on the mix impact in the second half of the fiscal year, what’s your outlook for growth, specifically within LMS of — within the LMS segment for the second half of the year? I mean, second quarter growth there, I mean, consistent with your expectations, but flattish down slightly. How much of the second half growth is going to come from that segment relative to UMS or MacCready Works?
Wahid Nawabi: So Ken, I’m glad you asked that question. First of all, this fiscal year Loitering Munitions as a whole, we expect it to be the strongest driver of our growth overall, it’s going to be very, very robust growth for the whole year. That’s our expectation. As we expected and as I said in my comments, the first half of the year is very much in line to our expectations and how we thought it’s going to play out, primarily because the contracts for Switchblade are very large lumpy contracts. We had a very strong fourth quarter. If you remember last fiscal year which we had a record shipments and record bookings that has allowed us to ship on the first quarter and second quarter, according to our plans. Second half is going to be very dominant in terms of growth and revenue driver for our Switchblade 300 and 600.
We have a robust pipeline for Switchblade that is not only going to fuel our second-half performance in terms of revenue and bookings, but it’s also going to fuel our fiscal ’25 and beyond. I mean the pipeline for Switchblade 300 and 600 looks extremely promising. It just takes a little while, primarily because of the nature of the product, the government contracting process and the FMS approval process that we have to go through for all these exports. But overall, I think second half is going to be dominant by our Loitering Munitions business both in terms of bookings as well as in terms of revenue performance for the year.
Ken Herbert: Okay. That’s helpful. Thank you. And maybe, Wahid or Kevin, what’s your outlook for full year free cash flow? I mean you sort of used 36 or so through the first half of the year, your significant investments in working capital. Do we expect much relief in positive free cash in the second half of the year or how do we think about the full year from a cash basis?
Kevin McDonnell: I mean, I’m not banking too much on a lot of relief. I think the working capital levels will stay around this mark here in the third and fourth quarter, maybe even up a little in the third quarter and then come down a little bit in the fourth quarter. And then I think you’ll start to see some improvement at least as a percentage of overall sales in FY ’25.
Ken Herbert: Okay. Great. Thank you very much.
Wahid Nawabi: You’re welcome, Ken.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Pete Skibitski from Alembic Global. Your question, please.
Pete Skibitski: Yeah. Good afternoon, guys.
Wahid Nawabi: Hi, Pete.
Pete Skibitski: I guess one for me, how do you guys — what’s the right way to think about the kind of the timeframe or the path to improve LMS gross margins and what are the major factors that impact that through the mid-term?
Wahid Nawabi: Well, Pete, we actually have seen fairly strong improvement on the gross margin of our Switchblade product line as a whole relative to the last several years and we continue to make even more progress. Having said that, our small UAS especially international contracts and orders are by far the most profitable products because we’ve invested for many, many years in that product line and we’re able to sell those as a commercial item to a lot of our international customers. So while — our small UAS has set up very, very high bar in the industry, if not only just for AeroVironment. Switchblade gross margins and profitability is fairly strong and it’s improving. How well that it’s going to be — usually our hardware’s are in the upper 40 — mid ’40s or low ’40s, and Switchblade are on a mid to high ’30s.
