AeroVironment, Inc. (NASDAQ:AVAV) Q3 2024 Earnings Call Transcript

AeroVironment, Inc. (NASDAQ:AVAV) Q3 2024 Earnings Call Transcript March 4, 2024

AeroVironment, Inc. beats earnings expectations. Reported EPS is $0.63, expectations were $0.32.
AVAV isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the AeroVironment Fiscal Year 2024 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jonah Teeter-Balin. Please go ahead.

Jonah Teeter-Balin: Thanks and good afternoon, ladies and gentlemen. Welcome to AeroVironment’s fiscal year 2024 third quarter earnings call. This is Jonah Teeter-Balin, Senior Director of Corporate Development and Investor Relations. 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. These statements involve many risks and uncertainties that could cause actual results to differ materially from our expectations. For further information on these risks and uncertainties is contained in the company’s 10-K and other filings with the SEC, in particular in the Risk Factors and Forward-Looking Statement portions of such filings.

Copies are available from the SEC, on the AeroVironment website at www.avinc.com or from our investor relations team. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation to the Investor section of our website under Events and Presentations. The content of this conference call contains time-sensitive information that is accurate only as of today, March 4, 2024. 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?

Wahid Nawabi: Thank you, Jonah. Welcome, everyone, to our fiscal year 2024 third quarter earnings conference call. I will start by summarizing our performance and recent achievements, after which Kevin will review our financial results in detail. Next, I will provide information about our outlook for the remainder of fiscal year 2024. Kevin, Jonah, and I will then take your questions. I am pleased to report that our third quarter results were exceptional and we once again hit key milestones toward achieving our best year ever. Our key messages, which are also included on slide number three of our earnings presentation, are as follows: first, third quarter revenue rose to $187 million, setting a new third quarter record and significantly outperforming last year’s same quarter results by nearly 40%; second, revenue for our Loitering Munition segment more than doubled year-over-year and achieved its highest quarterly revenue to date; third, this quarter’s exceptional performance and high visibility gives us confidence to raise and tighten our fiscal year 2024 guidance ranges; and fourth, AeroVironment continues to be a leader in the defense tech space and remains well positioned for double-digit revenue growth in fiscal year 2025.

Our strong top line growth in profitability created meaningful value for our shareholders, and we’re very pleased with our performance to date. Our results were driven by increasing demand for our unmatched solutions and strong operational execution. Our backlog is up 12% from the same quarter last year, and we have leveraged this stable backlog to deliver more consistent quarterly performance. By level loading our factory’s production throughout the year, we have achieved greater operational efficiencies, while expanding throughput. AeroVironment has demonstrated market leading manufacturing capacity for Unmanned Systems, and we continue to invest in facilities, people, and processes to prepare for even greater demand in the future. With both our customers and shareholders in mind, we continue to reinvest in innovative customer-driven solutions.

We’re targeting multiple $1 billion programs of record, as well as emerging unmanned solutions markets. We’re also investing in upgrades to our current platforms so they remain well suited to evolving battlefield conditions. While our focus is primarily on internal development, we also remain active in seeking inorganic opportunities which would benefit our current product portfolio and further our success. We’re proud to partner with our country and our allies by delivering the solutions they need to successfully carry out their vital missions, and we’re confident that we will continue to deliver strong value to our stakeholders for the remainder of fiscal year 2024 and beyond. Now, let me provide an update on current developments across our three segments.

I will begin with our Loitering Munition segment, or LMS, in which revenue for the third quarter more than doubled year-over-year to $58 million. Higher demand across the globe and emerging programs of record are driving historic top line growth. This was our best quarter ever for LMS, with a significant rise sequentially and year-over-year. Yet, we believe we’re only getting started. As I mentioned last quarter, we’re in active negotiations with the U.S. government on a large multiyear sole source IDIQ contract for Switchblade to meet increased demand for the U.S. and our allies. We’re also engaged with more than 20 countries who have demonstrated a strong interest in Switchblade and of those, about a third continue to seek export authorization from the U.S. DoD.

We’re also optimistic about key programs of record in the pipeline. These include the U.S. Marine Corps solicitation for its Organic Precision Fires, or OPF program; the U.S. Army’s Low Altitude Stalking and Strike Ordnance, or LASSO program; and the U.S. Defense Innovation Unit’s Replicator initiative. We believe we’re well positioned for these significant long-term opportunities. We look forward to sharing further updates on these programs later this calendar year. In addition to these standalone applications, we continue to see opportunities to integrate Switchblade into other platforms, such as helicopters through the U.S. Army’s Long-Range Precision Munition, or LRPM program, and ground vehicles with the U.S. Army’s Optionally Manned Fighting Vehicle, or OMFV program.

We believe platform integrations will be a significant component of LMS revenues in future years. We expect Switchblade production to increase further in the fourth quarter, setting LMS up for another record fiscal year and even greater success in the future. Since we foresee additional large orders for Switchblade on the horizon, we’re investing to further increase our manufacturing capacity. While we have sufficient capacity for the next couple of years of increased demand, our team is also evaluating future expansion of facilities, geographies, and supply chain partners. In summary, we remain very optimistic about the growth potential in this business segment. Moving to our Unmanned Systems segment, revenue for the quarter rose 23% year-over-year to approximately $113 million.

Top line growth is broadly spread across our Puma and JUMP 20 systems, reflecting a good mix of domestic and international customers. While AeroVironment remains the defense tech leader in unmanned aircraft systems, the Puma, now in its third generation, is undeniably the industry gold standard for small UAS. In the last 12 months alone, we have shipped more than $400 million of this product to domestic and international customers. It is also important to mention that the third-generation Puma we’re shipping today has significant technological upgrades compared to the original one. These enhancements include higher resolution cameras, greater autonomous navigation, resiliency in contested environments, longer endurance, and vertical takeoff and landing, or VTOL operations, to name a few.

We plan to continue these investments to keep the Puma system best-in-class. As an example, we’re upgrading our software stack to include new machine learning enabled autonomy and computer vision image recognition features for this amazing product. In a similar manner, we’re leveraging our most recent acquisition, Tomahawk Robotics, to bring open architecture common control systems to our full UAS portfolio. This business has now successfully transitioned into our Unmanned Systems segment, and we expect to integrate the Kinesis software platform with our UAS platforms later this year. I also want to address the U.S. Army’s recent announcement that it plans to sunset the RQ-11 Raven, their workhorse small UAS, after more than 20 years of service.

With approximately 20,000 units delivered, Raven is the most widely adopted military UAS in the world. We are extremely proud of the support Raven has provided to the U.S. Army and our soldiers. At the same time, we stand ready to compete for the next-generation small UAS on the U.S. Army’s Medium-Range Reconnaissance, or MRR program, and the Long-Range Reconnaissance, or LRR program. Our Unmanned Systems segments continue to offer a strong, steady, and profitable revenue stream, and we remain optimistic about additional domestic and international orders in our pipeline. We also believe that our recent and future product enhancements for Puma 3 AE, JUMP 20, and Vapor 55 will drive enduring customer demand for the remainder of fiscal year 2024 and beyond.

Moving to our MacCready Works segment. As expected, revenue was down slightly from third quarter fiscal year 2023. As we discussed last quarter, we’re now realizing some program delays related to the continuing resolution in an associated reduction in customer funded R&D. As Kevin will discuss, we now expect to increase R&D spend in the fourth quarter in order to progress these programs, while we await funding approvals. That said, we continue to focus on many new and exciting opportunities which will rapidly shape this business’s growth. We are maintaining our investments in [HAPS] (ph), contested logistics, maritime UAS and other exciting platforms and technologies. Many of these solutions require very advanced capabilities which AeroVironment is uniquely capable of providing.

In fact, we recently won a $16 million US Navy contract for the advancement of video analytics and computer vision research to support multidomain robotics. This award leverages our development of shared software ecosystems that provide enhanced situational awareness on the battlefield. Under this multi-year effort, we will explore and implement new technology that optimizes how intelligence, surveillance, reconnaissance and targeting are performed throughout the US DoD. Finally, I would like to note that our Ingenuity Mars Helicopter just wound down its mission after making its 72nd flight. Ingenuity’s performance was nothing short of outstanding, exceeding all mission objectives and expectations. We’re very proud of our work on this program and look forward to supporting future planetary exploration initiatives.

In summary, MacCready Works is achieving its mission to incubate new product lines and develop vital capabilities, and we look forward to sharing exciting developments in future quarters. With that, I will now turn the call over to Kevin McDonald for a review of the quarterly financials. Kevin?

Kevin McDonnell: 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. Overall, we had another outstanding financial quarter as the third quarter finished strong in terms of revenue, adjusted gross margins, and adjusted EBITDA. We are on track to meet all our full-year objectives. As Wahid mentioned in his remarks, revenue for the third quarter of fiscal 2024 was $186.6 million, an increase of 39% as compared to the $134.4 million for the third quarter of fiscal 2023. Slide 5 of the earnings presentation provides a breakdown of revenue by segment for the quarter. Our largest segment during the quarter was unmanned systems, UMS, which is a combination of our small UAS, medium UAS, UGV, and recently acquired Tomahawk businesses.

UMS had revenue of $113.3 million in the quarter, which is up 23% from last year’s $92.3 million. Puma demand remained strong, accounting for about half the UMS revenue, but we also saw meaningful contributions from our JUMP 20 product, Tomahawk products, and ground vehicles during the quarter. Loitering Munitions or LMS, recorded revenue of $57.7 million, a 140% increase as compared to the $24 million last year during Q3. A little more than half of the LMS revenues came from the Switchblade 600 products and services, while the remainder is primarily from the Switchblade 300 products. Revenue from our MacCready Works segment came in at $15.6 million, a decrease of 13% as compared to the $18.1 million from the third quarter of last fiscal year.

However, we had over 20% increase in non-HAPS revenue year-over-year, as we continue to see strong demand for our machine learning and autonomy capabilities. The MacCready Works segment’s growth has been muted because of the delays in establishing a government year 2024 budget. In Slide 5 of the earnings presentation, there is a breakdown between product and service revenue. Specifically, during the third quarter, product revenue accounted for 84% of total revenues, an increase from 68% in the corresponding quarter of the previous year, primarily due to strong product revenue from both our small UAS and Loitering Munition Systems businesses. We expect product revenues as a percentage of revenue to remain above 80% for the foreseeable future.

Moving to gross margins. Slide 6 of the earnings presentation shows the trend of adjusted product and service gross margins. While Slide 12 reconciles the GAAP gross margins to adjusted gross margins, which excludes intangible amortization expense and other non-cash purchase accounting items. In the third quarter, consolidated GAAP gross margins finished at 36%, up from 34% in the previous year. The improvement in GAAP gross margins was a result of improved product service mix and higher service gross margins, following the scaling down of our medium UAS COCO business in the comparable period last year. Third quarter adjusted gross margins reached 38%, marking an increase from the 36% recorded in the same period last year. The improvement was driven by the same factors as for GAAP gross margins.

Adjusted product gross margins for the quarter were 38% versus 41% in the third quarter of last fiscal year, reflecting the increase of the Loitering Munition Systems product revenue in the overall mix this year. In terms of adjusted service gross margins, the third quarter was at 40% versus 27% during the same quarter last year. The high level of service margins was primarily a result of one-time — a one-time favorable contract closeout and the impact of our new Tomahawk acquisition. We expect full-year fiscal 2024 adjusted gross margins to end up right around 40% following the continued proportional increase in Loitering Munitions Systems revenue and a decrease in small UAS revenue. In terms of adjusted EBITDA, Slide 13 of the earnings presentation shows a reconciliation of GAAP net income to adjusted EBITDA.

In the third quarter of fiscal 2024, adjusted EBITDA was $29 million, representing an increase of $5 million, or 21% from the third quarter of last fiscal year. The main factors contributing to this increase were stronger revenue and gross margin, which was partially offset by increased investments in R&D and incremental SG&A expenses. SG&A expense excluding intangible amortization and acquisition-related expense for the third quarter was $26 million, or 14% of revenue, compared to $21 million, or 15% of revenue in the prior year. The increase of SG&A expense is primarily — partially result of the Tomahawk acquisition and continued expansion of our domestic and international sales teams. R&D expense for the third quarter was $25 million, or 13% of revenue, compared to $16 million, or 12% of revenue in the prior year.

The increase of R&D expense in both terms, in dollar terms and percentage of revenue is a result of investments in the next generation Group 1 UAV, the maritime version of the JUMP 20, investment in our HAPS solar aircraft and investment in new products. We are continuing to spend AV R&D dollars on some of our U.S. DOD programs for which funding has been delayed due to the pending finalization of the U.S. federal budget for government fiscal year 2024. We now expect R&D to run in the high teens as a percentage of revenue in the fourth quarter as a result of continued investment in our long-term growth initiatives and the DOD budget delays. Now turning to GAAP earnings. In the third quarter, the company generated a net income of $13.9 million versus a net loss of $0.7 million recorded in the same period last year.

The increase in net income of $14.6 million can be attributed to several factors, namely, a $22.5 million increase in adjusted gross margin, a $3 million increase in other income, a $2.7 million decrease in interest expense, a $1.9 million decrease in intangible amortization and other acquisition-related expenses. These were partially offset by a $9 million increase in R&D spending, a $5.7 million increase in SG&A expenses excluding intangible amortization, and a $1.8 million increase in taxes. Slide 10 shows a reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per share of $0.63 for the third quarter of fiscal 2024 versus $0.33 per diluted share for the third quarter of fiscal 2023. Turning to the balance sheet, at the close of the third quarter, our total cash and investments amounted to $129 million compared to $121.5 million at the end of the second quarter.

We had a very strong cash quarter which enabled us to pay down $40 million in our term loan facility. Working capital decreased $29 million during the quarter, primarily due to the reduction in accounts receivable and inventories. However, we anticipate working capital usage to fluctuate quarter-to-quarter as we move forward. We continue to have a strong balance sheet with over $100 million of cash and investments and approximately $100 million available under our working capital facility. I’d like to conclude with some highlights of our backlog metrics. Slide 8 of the earnings presentation provides a summary of our current fiscal 2024 visibility. As Wahid mentioned, our funded backlog at the end of the third quarter of fiscal 2024 finished at $463 million, lower sequentially due to headwinds from the continuing resolution and the elongated foreign military sales process.

Despite these challenges, we have over 100% order visibility to the midpoint of our revised revenue guidance range. Now I’d like to turn the things back to Wahid.

Wahid Nawabi: Thanks, Kevin. With a strong third-quarter performance behind us, we’re increasing and narrowing our guidance range for fiscal year 2024 as follows. We now anticipate revenue of $700 million to $710 million. Full-year net income of $51 million to $55 million or $1.86 to $2 per diluted share. Non-GAAP adjusted EBITDA of $122 million to $127 million. Non-GAAP earnings of $2.69 to $2.83 per diluted share. And R&D spend totaling 13% to 14% of revenue. We remain confident in our growth trajectory for the fourth quarter and fiscal year 2025. Our backlog remains strong, our visibility is nearly 100%, and our pipeline continues to expand. While we await approvals on the continuing resolution in supplemental assistance package in Congress, we remain hopeful that a bipartisan agreement will be reached soon.

We stand ready with our cutting-edge battle-tested solutions and unmatched manufacturing capacity to meet our customers needs. Given our strong performance, we remain on a trajectory of our best year ever again. As stated in the past, our expectations for this year and beyond are not driven by a single product or customer, but by the overall expanding global demand and our autonomous AI-enabled unmanned solutions. We are ideally suited to continue this growth trajectory given our global installed base, battle-tested solution offering, successful track record, proven best-in-class technology, agile product development cycle, and unmatched manufacturing capacity. As our addressable markets expand, we remain well-positioned to benefit from budget priorities in the U.S. and abroad as an industry leader and the original defense technology innovator.

Before I turn the call over for Q&A, let me summarize the key points from today’s call. First, we delivered outstanding third-quarter results with record-breaking revenue and strong profitability. Second, our Loitering Munition segment delivered impressive year-over-year growth and achieved its highest quarterly revenue to date. Third, we’re raising and tightening our fiscal year 2024 guidance range. And fourth, with a solid momentum, we anticipate double-digit top-line growth in fiscal year 2025. Thanks again to our investors for their support of our mission and company, and thank you to our customers for putting their faith in AeroVironment. Finally, thank you to our highly capable employees who strive to meet our customers’ urgent needs and ensure our products deliver when it really counts.

We are honored to support our country and allies at this critical time. As we close out fiscal year 2024, we look forward to further success in the years to come. And with that, Kevin, Jonah, and I will now take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Peter Arment with Baird. Please proceed with your question.

Peter Arment: Hey, thanks. Good afternoon, Wahid, Kevin, and Jonah. Nice results.

Wahid Nawabi: Hi, Peter. Thank you.

Kevin McDonnell: Thank you.

Peter Arment: Hey, Wahid, you mentioned about capacity kind of expansion plans. I wonder if you could give a little more color on Switchblade capacity. I think we’ve all seen the numerous reports of kind of the opportunities that are in front of you for that product. And I know that there was thoughts that you guys already had existing capacity of a couple thousand units. Maybe you could just give us your thoughts on what — where you think you’re taking capacity to?

Wahid Nawabi: Thank you, Peter. So, as I mentioned on the remarks, we have significantly increased our Switchblade production capacity in the past several quarters with the expectation of our customers and the demand that we see across the globe, number one. Number two, we have sufficient capacity right now to meet the increased demand that we’re forecasting for the next two years. We believe that we’re the only company out there in the entire world that can produce Loitering Munitions such as Switchblades by the thousands today. And we’ve delivered thousands of them in the last year and two years alone, as you know. And so beyond the next two years, we’re already engaged in looking at new sites and new facilities and new expansion plans to go above and beyond that.

And especially with programs such as Replicator, which were very heavily engaged with the U.S. Department of Defense and DIU, we expect that companies like AeroVironment, who has a very unique capability to be able to produce them in volume at proven record level of rigor and reliability, and safety, will benefit from this heightened demand and customer need. So we remain ready, we have been delivering products very, very effectively in the last several quarters and in couple of years, and we look forward to the additional demands that are coming our way, which is all very positive for us.

Peter Arment: Yeah. Yeah. And just as my second question, just — could you give a little more color around timing of LASSO, just — is that being held up by the funding delays? And if that — if we do get a resolution in March, when would you expect to kind of begin to ship units? Thanks again, Wahid.

Wahid Nawabi: So the U.S. Army has publicly stated that they’re going to go through multiple tranches. And I believe that they’ve said that the first tranche AeroVironment is the sole source provider of the systems for the U.S. Army on their own public statements. We are working with them directly. If the budget approval happens through Congress, we’re expecting that to turn into another contract sometimes, probably this summer or right thereafter. We’re actively engaged with the U.S. Army, we know that that’s a very key need by the U.S. Army as it’s a directed requirement by General Rainey from the Army Futures Command. We’re engaged with their office as well as the acquisitions executives within Pentagon, and we’re prepared to support them.

In fact, one of the reasons why we’ve increased our capacity is because we’re expecting them to work through the budget process and eventually award contracts for us to deliver more. It is one of the key program records that we’re pursuing, as I mentioned on my remarks, and there were many others besides that as well, that we’re pursuing, Peter.

Peter Arment: Thanks so much. I’ll leave it at two.

Wahid Nawabi: You’re welcome.

Operator: One moment for our next question. Our next question comes from Greg Konrad with Jefferies. Please proceed with your question.

Greg Konrad: Good evening.

Wahid Nawabi: Hi, Greg.

Greg Konrad: Hey. Maybe just to start, you know your comments about phasing out Raven. How meaningful is Raven today? And just thinking about OE and some of the service volume tied to that, and how do you think about the phasing of any replacement in terms of that bridge whenever Raven does phase out?

Wahid Nawabi: So, Greg, I’m glad you asked that question, because Raven, as you know, has been the workhorse of the U.S. military’s small UAS for the last two decades. We’re very proud of that. We’ve got over 20,000 of those units shipped around the world, and U.S. Army is one of the largest customers of Raven. In the last several years, Raven has not been the primary driver of our revenue or shipments at all. In fact, it’s been in a sustainment mode for the most part. And so sunsetting that program by the U.S. Army, A. will take several years, most likely, it won’t happen overnight, and B. it’s not going to be a material financial impact to our environment. In fact, we’re very bullish and we’re very excited that the army did that, so they can expedite the next generation of systems, which we’re pursuing those requirements with our next generation systems.

The primary driver of our small UAS revenue, as I mentioned on the remarks, has been and continues to be the Puma system. And Puma is really by far the most prominent driver of the revenue for small UAS. Raven is almost insignificant and has been for the last several, two years to three years at least. So we don’t expect that to have any negative impacts. And in fact, we consider that as an instigator of potentially expediting the next program of record, which is referred to as MRR, Medium Range Reconnaissance, and LRR, which is the Long Range Reconnaissance. We have solutions for those requirements. We’re working with the customers and we look forward to that. And I think that is going to be another tranche of demand over the next several years for AeroVironment’s small UAS systems in the future.