Steven Gitlin - IR Tim Conver - Chairman and CEO Jikun Kim - SVP and CFO.

Andrea James - Dougherty & Co. Peter Arment - Sterne Agee Michael Ciarmoli - KeyBanc Capital Markets Josephine Millward - The Benchmark Company Howard Rubel – Jefferies Brian Ruttenbur - CRT Capital Prab Gowrisankaran – Canaccord Genuity Inc..

Good day, ladies and gentlemen and welcome to AeroVironment Incorporated’s Second Quarter Fiscal 2015 Earnings Call. 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.

With us today from the company is the Chairman and Chief Executive Officer, Mr. Tim Conver, Chief Financial Officer, Mr. Jikun Kim, and Vice President of Investor Relations Mr. Steven Gitlin. And now, at this time, I would like to turn the conference over to Mr. Gitlin. Please go ahead, sir..

Thank you, Karen and welcome to our second quarter call. 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 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 a list and description of such risks and uncertainties, see the reports we file with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date on which they are made.

We do not intend and undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The content of this conference call contains time-sensitive information that is accurate only as of today, November 25, 2014.

The company undertakes no obligation to make any revision to the statements contained in our remarks or to update them to reflect the events or circumstances occurring after this conference call. We will now begin with remarks from Tim Conver.

Tim?.

Thank you, Steve and welcome to our second quarter fiscal 2015 earnings call. This year we have two priorities. First, expanding our core business with a focus on revenue and gross margin objectives and second, positioning AV for three large emerging growth opportunities with managed investments.

I'm pleased to report that across the board our fiscal 2015 plan is on track. On today's call I'll summarize Q2 performance and then review progress in our core business and our growth opportunities as we are focused this year.

Following Jikun Kim will provide a detailed financial summary of the quarter and the fiscal year today and I'll discuss our outlook for the year. Then after the outlook discussion we'll take your questions. Second quarter revenue of $52.7 million nears Q1 revenue as we anticipated on our Q1 call. Gross margin of 34% improved over Q1.

We had strong bookings again in Q2. Funded backlog increased to $125 million up 50% over Q1 and up 90% for the year. With this backlog our visibility entering Q3 is 97% of the midpoint of our revenue guidance range.

Our business model comprises two elements, first the set of established business areas and our core business that lead their respective markets and generate operating income, and second a portfolio of growth opportunities representing potentially large new businesses requiring investment to secure market adoption and to position us for market leadership.

I'll address our core businesses first where both UAS and EES segments were executing as expected for the year. Our key message in describing our business is that our small UAS business area continues to perform well. We have built a strong backlog based on broad customer demand. During Q1 the U.S.

Army and Marines both announced the requirements for their next generation family of Small Unmanned Aircraft Systems and both adopted AV solutions. During Q2 we received an initial $22 million order for WASP AE systems against that new Marine Corp requirement.

Both the Army and the Marines are upgrading their capabilities of their large Raven fleets with our Mantis Gimbaled payload contributing to order flow and revenue during the first half. Genuine AeroVironment's spare parts ensure high levels of operational readiness and reliability for our troops when the systems we make are properly maintained.

This is important as the Army begins to refit its extensive small UAS fleet to ensure that after years of heavy use this critical capability will be fully operational when needed. This recapitalization contributed to high sustainment order flow for small UAS spare parts in Q2.

We also received international contracts from two new customers and five established customers in the second quarter, rounding out our robust small UAS order flow from multiple sources. Small UAS now have the potential to be deployed beyond their traditional mission of supporting ground troops.

The Navy is advancing their evaluation of small UAS adoption. Sailors operating our systems in multiple FC trials of different applications on different classes of ships have all demonstrated positive results.

We are optimistic about the Navy finding high-value to the future adoption of our all environment small UAS that are uniquely capable of saltwater landing. Our team won a significant down select competition this quarter for a $19 million Phase II development contract for DARPA's current program.

Our innovative Tern solution is consistent with the DARPA and the Navy vision of an entirely new reconnaissance and strike capability for naval forces. This is also one important step in our initiative to development larger UAS with the potential to broaden our defense market access and increase revenue opportunities.

Switchblade Systems have been very successfully deployed with American troops. This successful operational experience continues to attract switchblade procurement interests from new customers both domestic and international, which supports our expectation for continued success in our tactical missile systems business area.

In our Efficient Energy Systems segment we continue to see strengthened demand for our charging systems for both passenger and industrial electric vehicles. Electric vehicle test systems still reflect soft demand in that market.

We have now deployed more than 21,000 level 2 charging systems in North America and TurboCord demand continues to increase allowing us to maintain our leadership position in this area.

The plug-in EV adoption accelerates as projected over the next three to four years a correlated increase in demand for charging systems represents a large growth opportunity for our EES segment. I'll now move on to discuss our portfolio of growth opportunities.

Potential lead customers for tactical missile systems Global Observer and Commercial UAS continue to express interest and behave in a manner consistent with emerging demand and probable adoption of these solutions.

This year we are closely managing increased investments to optimize our position to support and grow with these three market opportunities when customers adopt. In tactical missile systems our increased investments in fiscal 2015 are focused on two main areas.

First we initiated investment to optimize our position for an anticipated Army LMAMS program of record. The LMAMS program of record progresses through a key Pentagon review during the quarter and we believe it could materialize in government fiscal year 2017.

Our second areas of tactical missile systems investment this year is in the development of new systems for multiple customers. Each offer different capabilities in the existing Switchblade and the Army LMAMS program of record. Well I won't discuss these new systems in any detail.

They are all driven by customers seeking the unique capability set introduced with Switchblade, but for different applications. It is important to note that each development will be co-funded by a customer and each represents an incremental and material market opportunity with strong customer support for near-term demonstration.

Recall that the Army and the Air Force budgets for missile systems in government fiscal '14 totaled more than $6 billion, so the market opportunity is significant. The second growth opportunity that we're investing in this year is commercial applications of Unmanned Airplane Systems.

Much news coverage continues to address these potential market opportunities that are expected to be large and global and that coverage often is associated with increasingly ubiquitous consumer club copters.

Our primary focus is professional system solutions for large global industries which we believe represent the most attractive segments of this emerging market. It is also more complex than it may seem.

Adoption and market success with these customers will require capabilities such as the ability to operate safely and reliably in all environments, regulatory compliance, legal access to airspace, processing enormous amounts of data to deliver the actionable information to generate strong economic return on investment and seamless integration into their existing business processes.

We believe the more complex requirements for success in these high-end segments of the market that's emerging are ideally matched to the kinds of robust systems and business solutions we provide. One essential element of any successful commercial UAS solution is meeting their rigorous requirements for legal access to airspace.

We remain the only UAS manufacturer to have met the demanding qualifications for FAA restricted type certification for commercial service over American soil. This gives us the ability to secure our own FAA certificates of authorization for commercial operations.

Our demonstrated ability to achieve FAA type certification, regulatory compliance and legal access to airspace is a significant differentiation in this essential aspect of market success. During Q2 we continue to invest in commercial UAS solution development and market positioning both in the oil and gas industry and in other vertical markets.

Our first of a kind solution for BP in Alaska has contributed to important business relationships and validated industry requirements and solutions. We are now developing opportunities for our solutions in and outside of Alaska with BP and with other companies in the oil and gas industry.

Our intent is to ensure that our lead position can translate into strong business growth and return on investment when adoption accelerates.

This year we also increased investment in a second key element for commercial UAS market success, that is the innovative technology developments that will further optimized platform and payload solutions across multiple new commercial applications. We're pleased with our prototype results.

However, for competitive and intellectual-property reasons we do not intend to discuss the specific new capabilities until we bring them to market. Our third growth area driving increased investment in fiscal 2015 is global observer.

Our joint venture in Turkey remains active and we're expanding our relationships in Turkey to address growing opportunities for Global Observer. Lockheed Martin and AeroVironment also remain actively engaged through our memorandum of understanding to pursue Global Observer opportunities.

During Q2 we increased investments in business development and application engineering for international opportunities. In total, we have invested a little less than $6 million in these three growth opportunities during the first half of the year in addition to our core business investments.

We expect to increase investments in tactical missile systems, commercial UAS and Global Observer in the second half. In summary, this is a year of investing in new growth opportunities while continuing to execute in our core business.

We are carefully managing and meeting these new investments to position the company for sustained growth with high returns. We remain market leaders in our core business in both our unmanned airplane systems and our efficient energy system segments.

We have seen strong performance in our small UAS business where order flow has been high and driven from diverse factors.

Small UAS demand is supported by the Army and Marines next generation requirements for our solutions, the Navy's evaluation of small UAS adoption, ongoing sustainment requirements for an installed base of thousands of our systems and a strong requirements pipeline.

Now I’ll turn the call over to Jikun Kim for a detailed financial overview of Q2 and the fiscal year to-date. .

Thank you Tim and good afternoon everyone. H AeroVironment FY15 Q2 results are as follows. Revenue for Q2 was $52.7 million a decrease of $12.2 million were 19% as compared to $64.9 million a year ago. Looking at revenue by segment UAS revenue was $43 million a decline of $13 million or 23% compared to the last year.

This decline was primarily due to lower product deliveries of $10 million and decreased in service revenues of $3.1 million. The decrease in product deliveries was primarily due to lower SUAS deliveries and decrease in service revenue was due to reduced repair activities for SUAS as well as a decline in Switchblade related quad activities.

EES revenues increased $0.8 million or 9% to $9.6 million in the second quarter. This increase was primarily due to increased product deliveries over passenger electric vehicle charging systems. Turning to gross margin, gross margin in the second quarter was $17.9 million a decrease of $6 million or 25% as compared to $23.9 million in the prior year.

Gross margin was impacted by a government contract accounting reserve we setup in the quarter for prior year incurred cost audit findings. These reserves impacted gross profits by $2.6 million in the quarter. Now by segment, UAS gross margin decreased $5.3 million to 26% to $15.5 million in the quarter.

The decrease is primarily driven by lower sales volumes. As a percent of revenue gross margin for UAS decreased from 37% to 36%. EES gross margin decreased $5.7 million or 22% to $2.4 million in the quarter primarily due to unfavorable product mix. As a percent of revenues EES gross margin decreased from 35% to 25 %.

SG&A expense for the quarter was $13.5 million or 26% of revenue compared to an SG&A expense of $13.1 million or 20% of revenue in the prior year. R&D investments for the second quarter was $8.5 million or 16% of revenue compared to R&D investments of $6.9 million or 11% of revenue in the prior year.

R&D investments increased by $1.6 million year-over-year. Operating loss for the second quarter was $4.1 million were negative 8% of revenue compared to the prior year profits of $3.9 million were 6% of revenue. Operating income was lower primarily due to lower sales volumes generating lower gross profits and higher R&D investments.

Interest income and other expenses for the quarter was a net loss of $0.4 million primarily driven by the convergent and the second CybAero convertible notes. The effective tax benefit rates for the quarter was 36% an increase from the prior year period of 9%.

Net loss for the quarter was, $2.9 million or $0.13 loss per share compared to $1.7 million profit or $0.7 per fully diluted share in the same quarter last year. On an adjusted basis which excluded the impact to the CybAero convertible notes and equity related transactions FY15 Q2 EPS would have been a $0.12 loss per share.

We have provided an EPS reconciliation table in the press releases. And now moving quickly through our first half FY15 results, revenue for the first six months was $104.5 million a decrease of $4.5 million or 4% as compared to $109 million a year ago.

UAS revenues decreased by $7.1 million or 8% to $84.2 million primarily due to decreases in customer funded R&D work of $7 million and service revenues of $3.6 million. These reductions were offset by higher product deliveries of $3.5 million.

EES revenues increased $2.6 million or 15% to $20.3 million primarily due to increased product deliveries of our industrial fast charged systems partially offset by lower product deliveries of our passenger electric vehicle charging system as the CEC program came to an end earlier this year.

Gross margin for the first six months was $31.9 million as compared to $36.4 million from the prior year. This represents a decrease of $4.5 million or 8%. Again gross margin was impacted by the government contract account reserve we setup in the second quarter for prior year incurred cost audit findings.

UAS gross margins decreased $5.8 million or 18% to $25.6 million. The decrease is primarily due to termination settlement for our Global Observer joint capability technology demonstration contract which occurred during the first six months of the prior year. As a percent of revenue gross margin for UAS decreased from 34% to 30%.

EES gross margin increased $1.3 million or 25% to $6.3 million primarily due to higher sales volumes and favorable product mix. As a percent of revenue EES gross margin increased from 28% to 31%. SG&A expense for the first six months was $26.9 million or 26% of revenue compared to SG&A expense of $25.5 million or 23% of revenue in the prior year.

R&D investments for the first six months was $15.7 million or 15% of revenue compared to R&D investments of $14.1 million or 13% of revenue in the prior year. Operating loss for the first six months was $10.6 million or negative 10% of revenue compared to an operating loss of $3.2 million or negative 3% of revenue last year.

Interest income and other expenses for the first six months was $0.4 million. The effective tax benefit rate for the first six months was 36% compared to the effective tax benefit rate for the prior year of 34%. Net loss for the first six months was $6.5 million or 29% loss per share compared to a net loss of $5.6 million or 25% per share last year.

On an adjusted basis which excludes the impact of the CybAero convertible notes and equity transactions FY15 Q2 year-to-date EPS would have been a $0.30 loss per share. Now backlog, looking at backlog funded backlog at the end of the second quarter was $125.2 million up $59.3 million or 90% from April 30, 2014.

Turning to our balance sheet, cash equivalents and investments at the end of the second quarter totaled $257.2 million down $7 million from the prior quarter. The decline in cash equivalents and investments were driven by higher working capital needs.

Turning to receivables, at the end of the second quarter our accounts receivables including unbilled receivables totaled $38 million up $7 million from the prior quarter. Total days sales outstanding were approximately 55 days compared to 54 days at the end of the prior quarter.

Taking a look at inventory, inventories were $51.8 million at the end of the quarter compared to $46.4 million at the end of the prior quarter. Days in inventory were approximately 134 days compared to 111 days at the end of the prior quarter.

Turning to capital expenditures, in the second quarter we invested approximately $1 million or 2% of revenue in property improvements and capital equipment. AV recognized $2.1 million of depreciation in the quarter. Now an update to our FY15 visibility, as of today we have year-to-date Q2 actual revenues of $105 million.

Q2 ending backlog that we can execute in FY15 of an additional $123 million, Q3 quarter to date bookings that we can execute in FY15 of an additional $6 million, unfunded backlog from incrementally funded contracts that we expect to recognize revenue from the balance of this year of $3 million and revenue needed to hold EES revenues flat relative to last year of $14 million.

This puts the total FY15 revenue visibility at $251 million or 97% at midpoint of revenue guidance. Now I’d like to turn things back to Tim to discuss AV's expectations for the balance of our FY15..

Thank you, Jikun. You will recall from our fourth quarter call that our primary focus for year-over-year comparisons in fiscal 2015 is on revenue and gross profit margin. We limited our guidance to these two metrics because our investments in growth opportunities during FY15 will offset operating profits from our core business.

We are solidly on track for achieving these fiscal 2015 metrics. With 60% of our revenue to go for the year, we are comfortable with our revenue guidance of $250 million to $270 million, because our backlog gives us good visibility for revenue at the midpoint of that range.

Our tactical focus in the second half will be on efficiently converting current backlog to revenue and building future backlog in business opportunities for fiscal 2016. We’re also comfortable with our gross margin guidance for fiscal 2015 of 34.5% to 37.5% at the respective revenue levels.

The expected volume increase in the second half should favorably impact our gross margin keeping us on track to achieve that guidance range as well.

Strategically we will continue to focus on delivering unique value to our existing customers, the pursuit of larger UAS platforms like Tern and the three growth opportunities that we are investing in this year; tactical missile systems, Global Observer and commercial UAS.

We are actively engaged with lead customers and partners in these three growth areas. This ongoing engagement supports our view of a growing probability of adoption over the next couple of years as well as the potential for compelling return on investment as that adoption subsequently drives market growth.

We are carefully managing the growth portfolio investments we’re making this year. We continue to believe that these investments will increase in the second half and could offset all operating profit for 2015 if fully deployed.

Thank you for your time and attention and thanks to the AeroVironment team for the ongoing commitment of your unique human power that drives success for our customers and as a result our growth. And now Jikun and I will take your questions..

Thank you, sir. [Operator instructions] Our first question comes from Andrea James from Dougherty & Co..

Thanks you so much for taking my question. I’ll speak with first to the commercial drones. You said you’re, Tim you said you are processing large amounts of data to generate a return on investment and this is one of your ventures, I guess presumably with BP and this still seems to be change from how I have historically understood your core business.

So I guess my question is on, is information service is something that you’re going to continue to invest in internally? Are you partnering and can you just elaborate on that piece of the advantage for you?.

Yes, thanks for the question Andrea.

First what I intended to say there was that one of the elements of success in these large industrial applications of commercial UAS that we think represent extremely high value will be delivering actionable information and in order to do that we need to process large amounts of data to get to that actionable information.

And it's in fact that information that will drive return on investment or those customers and we see that in our initial applications with BP in Alaska as we've operated these solutions over the course of the summer.

You’ll recall, I think over the last couple of calls as I’ve described some of the solutions we're delivering up there, they in some cases include looking at the unique network of roadways and operating pads and resource extraction that goes on up there in building very accurate 3D maps of the geography and those areas of interest and then integrating those with high definition photogrammetry.

So those 3D maps are generated by creating very large amounts of data in the form of point clouds and processing those point clouds to in a back office operation to produce those 3D maps and integrate the high definition video.

From that we are able to help the customer extract the critical information that they need to make real time actionable decisions. So, sorry for the long answer. Particularly, we move that data through the cloud. We process it in conjunction with partners that are very proficient at specific applications of that high volume big data processing.

So I don’t mean to say that we are internally generating all of that work..

I appreciate that.

And then the other thing, because you only get only two questions, I guess you’ve talked about your three main growth areas, you know, Commercial UAS, Global Observer, Switchblade, but then we got this turndowns like and so this one is from a $2 million program to a $20 million program within a year and so I guess my question is can that continue to grow and a sort of expansion with the Navy another thing that we should be looking at?.

Well yeah, again you'll recall I've been talking for some time now about our initiative to expand our unmanned airplane systems solutions beyond the small UAS where we have a very large market share now and continue to have a strong relationship with customers in that area, but to move into in addition to larger sized platforms where some of our innovative solutions have the potential to bring some compelling value to customers and expand the size of the market opportunity that we pursue.

So this is a good example. There were half a dozen organizations that had Phase I contracts for Tern, that down select for Phase II reduced the competitors to two. I believe that DARPA expects to further down select in a year or so probably to one supplier and move that on to which would probably become a significant program beyond that..

Thank you. And our next question comes from the line of Peter Arment from Sterne Agee..

Yes, good afternoon Tim, Jikun. Tim, you've talked a lot about these small US performing really well and that you're seeing a lot of upgrades with the Gimbaled systems.

You know, maybe can you just give us based on now kind of what inning are we in that kind of the rechap or the upgrades there?.

This is Jikun. I think from a Gimbaled standpoint we are probably halfway through. We've got some life to go on that..

Okay, thanks. And then unrelated I have a second question Tim, you mentioned two new international customers in five established.

Maybe you could just give us an overview how big is the international, you know sales mix right now in the UAS and where do you think this could be three years from now?.

The pipeline for international requirements is very large and if anything it continues to grow. We now have over 30 international customers and I would, my expectation from everything we can see in our pipeline is that the three years from now our international small UAS business will be significantly larger than it is now.

We do experience what I think is relatively common and that is if anything our international contract releases tend to slide more often than US Government contract releases. But that doesn't seem to have reduced the probability of those contracts ultimately being awarded..

Okay, thank you..

Thank you. Our next question comes from the line of Michael Ciarmoli from KeyBanc..

Hey, good afternoon guys, thanks for taking my questions.

Maybe Tim how are you thinking about on your commercial UAS growth opportunities, is that market becoming more challenging and more complicated? I mean the FAA just I think they're requiring pilot licenses now basically, I mean how are you dealing with some of the red tape that's just not sort of clearing up right now in that market? Do you see that I guess creating some headwinds on your revenue growth opportunities or have you kind of anticipated those?.

I think Mike, that I was trying to address some of that in my previous comments. The specific FAA requirements that you noted are all present with our current commercial operations that are FAA approved in Alaska. We understand those.

We operate in compliance with those and in fact we're still the only manufacturer to have achieved type certification for commercial operation over the land from the FAA. That's been so successful in this initial summer of operation with BP that this year the FAA expanded that area of operation significantly.

We're now I think approved to operate in an area of something like 14,000 square miles which is a little larger than the State of Maryland. So I think in summary we have a good understanding of what those rigorous requirements are.

We have been uniquely successful in operating with them and we are looking forward to moving ahead with being able to extend those operations more broadly..

Oh, I guess I was referring to the Wall Street Journal article yesterday, where I guess the proposed rule would require operators to have pilot licenses?.

Yeah, operators are required to have pilot licenses in Alaska now..

Okay, okay, got it..

So we're, to my knowledge I saw nothing in that article yesterday Mike that was surprising or different than what we've been used to operating with to date..

Got it, perfect, that's helpful. And then just how should we be thinking about the payback period here for these investments? And you know, I guess you've got an upcoming LMAMS competition.

But I mean, is it reasonable to think that that some of these, we should see revenues start to hit the P&L in fiscal '16 or can you give us any color around timing of any awards or when these growth programs start to have more of a pronounced impact on the income statement?.

Well, we have the chart that we put in our corporate communication deck last year that lays out the notional adoption timing and potential investment level. So of a half dozen growth opportunities that we have been focused on and included in those are the three that we are increasing investments in this year.

And again we're increasing those investments because we're getting market signals and customer feedback that is consistent with their accelerated consideration of adoption in those areas. So we want to be optimally positioned to support that adoption and growth with them when they move.

And so the timing, if looking, referring back to that chart, the timing for each of those three areas is different, we're currently generating revenue and good returns from Switchblade as the initial product in our tactical missile systems business and so I would suspect that the likelihood of earlier meaningful adoption of new applications there is relatively good for that business area.

If we moved out to the other end of the timeframe, even if we got very short term initial adoption of Global Observer, the ultimate delivery of those systems would be a few years out just because of the lead time of that large complex system.

Obviously, the impact on the business could be huge with that adoption and probably commercial I would say is, if anything is probably pulling in a little bit from the timeline that we'd indicated on that chart which would be looking at 1 to 3 years on our chart and if anything that's probably moving in a bit..

Thank you. Our next question comes from the line of Josephine Millward from The Benchmark Company..

Hi Tim, hi Jikun..

Hi Josephine..

Congratulations on the quarter, nice bookings..

We like the visibility..

Me too.

Tim can you comment on the President's request for additional OCO funding to support the campaign against ISIS? Do you see any potential there for AV? I know their request has about $55 million for small tactical UAS?.

I think there is the engagement with in these kinds of conflicts have historically provided a venue for products like ours to deliver large very significant value to organic teams on the ground. How that rolls out with between U.S. engagement and U.S.

ally engagement and what ultimately happens in the real situation I think I'm reluctant to try to guess that, but as you know our systems are typically built to provide incremental and often times significant incremental value to those organic teams that that do get engaged in these unfortunate situations..

Right, right.

A follow-up question, have you delivered all the Switchblade in your backlog? And do you still anticipate a follow-on for the Switchblade this coming, I guess for this fiscal year?.

We've delivered a significant portion of the prior backlog for operational hardware. We have ongoing contracts that we are currently engaged with for Switchblade and I would expect that we will continue to see good demand for that the product from current and from new customers..

Thank you. Our next question comes from the line of Howard Rubel from Jefferies..

Thank you very much. Jikun, just a point here.

You talked about the gross margin adjustment, which reflected a booking rate change from prior periods, so how should we think about this item going forward? Does that have a, is there a modest reset in how you think about profitability?.

Yeah so, a little or a background information on this one, the incurred costs were you know we're talking six or seven years ago. So it's been a while, so this is the government is catching up with our incurred cost audits and this is from 2007 and 2008.

So we don’t think it will impact us going forward, but it is something that we have to deal with this quarter..

No, I get it and I mean I didn’t realized it was that far ago, far long ago. I thought it would have been near, but I get what happens.

And then just second thing, just to talk a little bit about profitability, and I want to make sure that Tim to clarify your statement, so that if I understand, you are saying that, given the incremental R&D and the other initiatives to grow the business and given where sort of where you are in the midpoint guidance, you are saying that operating income would essentially be break-even.

Is that a fair interpretation?.

I think it's fair if we are able to complete all of the investments that we currently think would drive he kind of ROI that we're pursuing Howard. There is obviously we have still got six months left to go on the operating side if the business and we are closely managing and gating those investments.

So, both in terms of, against internal performance progress as well as externally as in the regards to the response that customers have to our ongoing engagement and market developments.

But I think an additional internal area of consideration is the fact that many of the resources that we apply to these incremental investments that we’re making compete with requirements for investment in our core business as well as growing customer funded research and development.

So we are bringing on additional staff to address these requirements. We are increasing the amount of work share that we allocate to partners and trusted outsource suppliers which allows us to flex that capacity more rapidly, but it does all of those factors will come to bear to determine how much we actually invest during the year.

So we’ll have a better view of this by the end of next quarter. But I don’t know if that helps you at least gets a better feeling for what the, what’s going into the decision making process..

Thank you. And our next question comes from the line of Brian Ruttenbur from CRT Capital..

Yes, thank you very much.

Just a question along these same lines that others have been asking, R&D and SG&A expense understand where it was this quarter and it sounds like at least from your answers is that there’s going to be a ramp throughout this year, this fiscal year and will that ramp continue into fiscal 2016? Should we is it going to be flatten out or decrease, increase can you give me a directional?.

I think our visibility at this point Brian is that we’re primarily focused on executing these investments in fiscal 2015. No doubt there will be some areas that will not be concluded and will roll into next year, but I think the primary focus and the primarily impact at this point looks like fiscal 2015..

Is that on the R&D side or on the SG&A side?.

Well these qualities of investments probably will be mostly in R&D. They are certainly significant elements that are in business development bidding proposal and in some cases some of them will even show up in overhead accounts..

Okay, thank you very much..

Thank you. Our next question is a follow up from the line of Andrea James from Dougherty..

Hi thanks for taking my follow ups.

Is it the Switchblade that you’re looking for a program of record in GFY17? I think at one point way back in the day we were looking for GFY14, so I guess my question is what if the Pentagon still needs to decide to get it there? And I guess in the past, maybe in the context of like in the past they had to decide whether it was a UAS or a missile.

Right? And then there was like the whole direct trigger pull, indirect trigger pull debate, kind of where is it in the processes? Have they fully characterized it yet and who’s advocating for it?.

Well, I’m not sure that I recall GFY14 beats my limited memory clearly goes back one time we were thinking it might be 16.

But nevertheless, it’s the process of getting to confirming and enduring requirement and getting to a program of record and funding that program of record has always been a relatively torturous process and certainly more so with sequestration and recent constraints in the DoD budget.

So I think it’s at least for me it’s not at all surprising that it might have slid out a year over the last two years, but it appears to clearly be moving along the established process. I mentioned it cleared a very significant Pentagon review just this last quarter.

So I think it’s perceived by certainly up to that level it’s been perceived as an enduring requirement and approved as for the next step along the way to a program of record..

I appreciate that. And then you said in Q1, I think you said you had received $60 million in new UAS orders.

Have you given that number for Q2 yet?.

Our bookings for Q2 for those….

Yeah, yeah..

Yeah sure, hold on a second. So booking in Q1 were $68 million and bookings in Q2 were $95.8 million..

Okay.

And then your visibility, the buckets that give you the visibility into guidance, can you give us those buckets, please?.

Sure. So we have actual revenues of $105 million year-to-date. Of the $125 million of backlog we can execute on $123 million of it, so that's an additional $123 million.

We have an additional $6 million of Q3 quarter to date bookings that we can execute in FY15 and then one additional item that we added this quarter was, we had some unfunded incrementally funded contracts that will be getting incremental booking for that we can execute in this year of an additional $3 million.

And then holding EES revenues flat relative to last year, generates an additional 14 million. This adds up to $251 million or 97% of midpoint of guidance..

Thank you our next question comes from the line of Prab Gowrisankaran from Canaccord..

Hi thanks for taking my question I’m calling in for Bobby.

One quick question on the EES segment you’ve seen year-on-year growth for the first couple of quarters, if you can provide some color would you expect I know you’re kind of funded backlog of 97% assumes flat EES growth, but if you can add any color to that?.

Well, I did mentioned in the previous comments that we see continued demand strength in both the industrial and the on-road charging infrastructure businesses. We’re seeing continued quarter-over-quarter growth in the revenue from our new TurboCord product. The third product line in that segment is in electric vehicle test equipment.

Now that market has been soft last year and it still looked soft this year, both domestically and internationally. So I think we expect the bulk of our revenue for the balance of the year to come from the charging applications in both industrial and on-road vehicles..

Okay, and this is a follow-up question I had was in terms of the dip in gross margins you saw in the EES segment attributed to unfavorable product mix.

Does that AV test or do you see the margins bouncing back to the previous Q1 levels?.

Yes, so couple things to keep in mind. Remember the $2.6 million hit we took at the corporate level. Now that does get shoved down into the business segment, so EES picked up its share as well as UAS picked up its share, so that does impact the segment growth profits.

So if you adjust that out it will look a little more favorable, but in general we did have a mixed shift where some of our more profitable products had less revenue relative to last year..

Okay, thank a lot..

Thank you. Our next question is a follow-up from the line of Howard Rubel from Jefferies..

Thank you, I wanted to make sure I understood this also Tim.

Have you gotten incremental orders as a consequence of the activity in Iraq?.

Well Howard, I don’t want to, I don’t have a good answer for you on that. So we barely have talked about which where our customers are taking our solutions and I try to leave that to them to talk about if they want to. We have we did have obviously very strong bookings in the quarter.

The bulk of those bookings were new orders were attributed to the applications I did talk about, which were generally the Marine last quarter and a lot sustainment contracts and the Tern order, but we did end up with what was $95 million Jikun? So there are elements of that booking portfolio that didn’t get broken out and I don’t think my customers want to get me, want me to be getting any more explicit about what they are doing with our solutions..

Maybe just, I understand, and I appreciate that. The demand, I mean your receivables, DSOs, stretched a bit. And, so, my sense is there were probably some accelerated orders with pretty quick deliveries.

Is that a fair way to think about how the quarter shaped up?.

I think you might want to think about it as just a timing of the revenues within the quarter, month one, month two, month three that’s probably a more bigger driver of that DSO than anything else..

Thank you very much..

Thank you and that concludes our question-and-answer session for today. I would like to turn the conference back to Steve Gitlin for any closing comments..

Thank you for your attention and 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 happy holiday season and we look forward to speaking with you again following next quarter’s results. Good afternoon..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day..