Timothy E. Conver - Chairman, President & CEO Raymond Cook - Senior Vice President and Chief Financial Officer Steven A. Gitlin - VP of Investor Relations.

Robert J. Burleson - Canaccord Genuity Inc. Joseph De Nardi - Stifel Andrea James - Dougherty & Company Josephine Millward - The Benchmark Company.

Good day, ladies and gentlemen, and welcome to the AeroVironment Inc. First Quarter Fiscal 2016 Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after managements’ 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; Senior Vice President and Chief Financial Officer, Mr. Raymond Cook 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, Abigail and welcome to our first quarter fiscal 2016 earnings 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 filed 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, September 01, 2015.

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 first quarter 2016 conference call. Our main message today is this; we're on track for our fiscal 2016 plan. In our core business, we maintain our market leadership and we are pursuing growth potential in both our UAS and our EES business segments.

We are also making good progress in our growth portfolio as we engage with customers showing active adoption interest in our multiple growth opportunities. During the quarter we fortified our strong board and leadership team with the addition of Catharine Merigold, who is our newest Director and Raymond Cook as our new Chief Financial Officer.

Both Catharine and Raymond bring valuable experience and expertise to help us to continue to grow our business and create long-term stockholder value. On today's call I'll comment on our first quarter financial performance, review year-to-date highlights in our core EES and UAS segments and discuss our new market initiatives.

Raymond will then review our financial performance in more detail and I will discuss our view of the balance of the fiscal year and then Raymond and I will take your questions. Our Q1 operating financial performance was consistent with our annual plan. We expect the Q1 revenue to be similar to Q1 last year.

At $47.1 million Q1 revenue was slightly lower than FY 2015 primarily due to unexpected delays in two shipments that we now expect to be completed in Q2. Our Q1 operating loss of $9.1 million is consistent with the expected low first quarter revenue and the high incremental investment in R&D and SG&A.

That said, we're pleased to report an increase in our gross margin to 34% up seven percentage points over Q1 last year, representing consistent strong performance despite revenue levels in the quarter.

We're also encouraged by strong Tier-1 bookings of $71 million that drove backlog to an $89 million level an increase of 38% over last quarter and 9% relative to Q1 FY 2015. And now I'll discuss the Q1 highlights in our core business.

In our EES segment, we began delivering the in trunk TurboCord for Volvo and the charging infrastructure rollout at Volvo dealerships to support their FY 2016 North American plug-in hybrid electric vehicle introduction. We also expanded distribution of our new TurboDock workplace charger.

In our core small UAS business, our Raven, Wasp and Puma systems remain the dominant solutions for tactical situational awareness and their installed base continued to grow around the world. Sustainment of that growing installed base will maintain high levels of effectiveness and operational availability contributing to customer success.

During Q1 we received contracts worth $35.2 million from the U.S. Army for sustainment of their large fleet of Raven and Puma systems. Additionally, we have a robust pipeline of active proposals in response to a growing international demand for small UAS. We expect most of our international business continue to be based on direct commercial contracts.

However, our recent $3.4 million dollar Raven order for the Spanish armed forces illustrates the potential for growing government to government foreign military sales. We continued to be encouraged by the potential adoption of all environment small UAS for maritime applications, which could materially expand the small UAS defense market opportunity.

For example, in Q1 we successfully demonstrated our autonomous precision recovery of Puma AE on a Navy patrol craft. In addition to working with the Navy, in July we supported the U.S.

Coast Guard and the National Oceanographic and Atmospheric Administration in the Arctic as they successfully demonstrated their first integrated manned helicopter and unmanned Puma search and rescue operation. The success of this operation led to the first procurement contract from the U.S. Coast Guard for Puma.

Our team also provided emergency information services with Puma in response to a high profile offshore oil spill further illustrating the nondefense maritime applications for all environment small UAS.

Turning to our growth portfolio, customer adoption interest in tactical missile systems, large unmanned aircraft systems and commercial UAS continues to pull significant engagement and investment. In tactical missile systems we are now delivering hardware under the contracts for a variant of Switchblade that we developed last year.

Strong customer interest continues for two additional variants we also demonstrated last year and we anticipate RFPs for additional development later this year. These significant opportunities are the direct result of development, successful demonstrations and investments that we made in fiscal 2015.

We continue to be encouraged by customer interest in Switchblade which remains high and we are focused on delivering the high level of unique value to customers to drive significant growth and stockholder value.

Moving forward, you should anticipate continued constraints in our disclosure of some of the specific information in our tactical missile systems business due to customer preferences. Our large UAS team is focused on executing phase 2 of the DARPA TERN program.

The TERN system offers a next-generation medium altitude, long endurance or MALE UAS solution with a compelling value proposition for the integrated Navy Marine Corps Mission. We expect a procurement decision for the planned phase 3 program in the second half of our fiscal year.

We continue to engage with customers and team members on potential opportunities for Global Observer a high-altitude, long endurance or HALE UAS.

To put up the large UAS opportunity in perspective for AeroVironment, the price of a typical MALE UAS can be two orders of magnitude greater than for our small UAS and yet another order of magnitude greater for HALE system.

Successfully entering the market for either or both, MAL UAS like TERN or a HALE UAS like Global Observer will represent huge growth opportunities for AeroVironment with high returns on invested capital.

Moving now to our emerging commercial UAS business, more customers are soliciting demonstrations and working with us as we continue to develop our new commercial UAS solutions. We are developing these new solutions to deliver high-value actionable information that can move the dial for enterprise customers.

We are investing in extended engagements with a number of customers and we are actively evaluating the adoption of small UAS solutions in industries such as transportation, agriculture, energy and public safety.

For example, we recently worked with Duke Energy in North Carolina to evaluate inspecting solar panels and transmission lines as well as monitoring large co-piles [ph] with our advanced UAS-based information service.

Working closely with early adopter customers by applying our leading UAS capabilities in the real world applications enlightens and validates our development of the optimized solution for new markets.

Our objective is to provide commercial customers essential, reliable and timely information allowing them to proceed with confidence in their otherwise uncertain operating environments. Not coincidentally that is the same value proposition that we deliver with great success across the Department of Defense and to over 30 other countries.

In summary, we're on track for our annual plan. Our core business is strong and we are making meaningful progress across our growth polio designed to drive significant stock holder value. And now Raymond Cook will review our Q1 financials..

Thank you, Tim and good afternoon everyone. Before we look at the results for the quarter, let me just say that I'm honored to have joined the highly dedicated team at AeroVironment. The culture of innovation and focus on the end customer's needs is pervasive throughout the organization.

I look forward to working with our analysts, investors, customers, suppliers and the AB [ph] team in the years to come. Moving now to AeroVironment's fiscal 2016 first quarter results are as follows. Revenue for Q1 was $47.1 million a decrease of $4.8 million or 9% as compared to $51.9 million a year ago.

The decrease in revenue was due to a decrease in product deliveries of $16.2 million offset by an increase in service revenue of $11.4 million. Looking at revenue by segment, UAS revenue was $40.2 million a decrease of $1 million or 2% compared to last year.

The decrease was primarily due to a decrease in product deliveries of $12.8 million, a decrease in service revenue of $0.5 million offset with an increase in customer funded R&D work of $12.2 million. EES revenue decreased $3.8 million or 36% to $6.9 million in the first quarter.

This decrease was primarily due to a decrease in product deliveries of our industrial, fast charge symptoms. Turning to gross margin, gross margin for the first quarter was $16 million or 34% an increase of $2 million as compared to the $14.1 million or 27% in the prior year.

By segment, our UAS gross margin increased $3.5 million or 35% to $13.7 million in the quarter. The increase was primarily due to favorable product mix. As a percentage of revenue gross margin for UAS increased from 25% to 34%.

EES gross margin decreased $1.6 million or 40% to $2.3 million in the quarter primarily due to as decrease in sales volumes and an unfavorable product mix. As a percentage of revenue EES gross margin decreased from 36% to 34%.

SG&A expense for the first quarter was $15.3 million or 32% of revenue compared to SG&A expense of $13.4 million or 26% of revenue in the prior year. SG&A expense increased $1.9 million primarily due to higher professional services and bid and proposal costs.

R&D investments for the first quarter were $9.8 million or 21% of revenues compared to R&D investment of $7.1 million or 14% of revenue in the prior year. The increase in R&D investments was primarily due to increased development activities for certain strategic initiatives.

The operating loss for the first quarter was $9.1 million or 19% of revenue compared to prior year operating loss of $6.5 million or 12% of revenue. The operating loss increase was primarily due to higher SG&A and R&D spending. Net other expense for the quarter was $2.4 million compared to the prior year net other income of $0.6 million.

Other income decreased due to the recording of an other than temporary impairment loss of $2.2 million related to available-for-sale equity shares of CybAero AB stock. During the month of August we sold all of our remaining shares of CybAero stock and netted proceeds of $0.8 million. Our investment in CybAero has proven to be successful.

Our initial investment of $3 million in CybAero convertible bond in fiscal year 2013 has resulted in cumulative cash proceeds of $7.8 million over fiscal years 2014 to 2016 with the conversion and sales of the shares. The net gain from the transaction was $4.8 million or 160% total return.

The benefit for income taxes for the quarter was $4.2 million or an effective tax rate of 37.8% compared to the benefit for income taxes of $2.1 million or an effective tax rate of 36.3% in the prior year.

The net loss for the quarter was $7 million or $0.30 loss per share compared to a net loss of $3.6 million or $0.16 loss per share in the same quarter last year.

On an adjusted basis which excludes the impact of the convertible bond and related equity investment in CybAero AB, the first quarter EPS loss would have been a $0.24 loss per share compared to an $0.18 loss per share in the same quarter last year. We have provided an EPS reconciliation table in the press release.

Looking at backlog, funded backlog at the end of the first quarter was $89 million an increase of $7 million or 9% from the first quarter of the prior year and an increase of $24.3 million or 38% from the prior quarter.

Turning to our balance sheet, cash, cash equivalents and investments at the end of the first quarter totaled $262.2 million, a decrease of $13.4 million from the prior quarter. The decrease in cash, cash equivalents and investments was driven by higher working capital needs and the first quarter loss.

Turning to receivables, at the end of the first quarter our accounts receivable including unbilled receivables totaled $42.2 million a decrease of $8.8 million from the prior quarter. Total days outstanding was approximate 81 days compared to 53 days at the end of the prior quarter.

This increase in DSO was primarily attributable to the reduced revenue in Q1 versus the prior quarter combined with the timing of unbilled accounts receivable. Taking a look at inventory, inventories were $43.9 million at the end of the quarter compared to $39.4 million at the end of the prior quarter.

Days in inventory were approximately 127 days compared to 86 days at the end of the prior quarter. This increase in days in inventory was primarily attributable to a decrease in revenue levels and delays in Q1 shipments due to timing of export licenses. Turning to capital expenditures.

In the first quarter we invested approximately $0.9 million or 2% of revenue in property improvements in capital equipment. AV recognized $1.4 million of depreciation during the quarter. Now an update to our FY 2016 visibility. As of today, we had year-to-date revenues for Q1 of $47 million.

Q1 ending backlog that we could execute in FY 2016 of an additional $85 million.

Q2 quarter to date bookings that we can execute in FY 2016 of an additional $12 million, unfunded backlog from incrementally funded contracts that we expect to recognize revenue during the balance of the year of $5 million and revenues needed to hold EES revenues flat relative to last year of $23 million.

This adds up to $173 million or 64% at the midpoint of our revenue guidance. Now I'd like to turn things back to Tim to discuss AV's expectations for the remainder of fiscal year 2016..

Thank you, Raymond. We're on track for fiscal 2016 and we reiterate our original FY 2016 guidance. We expect revenue between $260 million and $280 million in fiscal 2016 with gross profit margin between 36% and 37.5%.

we expect additional planned R&D and SG&A investments in our fiscal 2016 for commercial UAS market opportunities could consume up to all of the operating profit we would otherwise have generated from the revenue and gross margin we anticipate this year.

Beyond revenue and gross margin, we consistently monitor progress against our operating planned objectives throughout the year. Key milestones that we will be looking for as we move through fiscal 2016 include the following.

In our EES segment we will be looking for growing TurboCord and TurboDock adoption and market expansion opportunities for our industrial electric vehicle charging product line. In our small UAS business we will look for additional U.S.

Marine Corp procurement against their new family of systems requirements, indications of maritime adoption of small UAS, international order flow and the next opportunity to provide system upgrades for the large fleet of Raven, Wasp and Puma systems owned and operated by our government customers.

In tactical missile systems we will be looking for additional customer funding that confirms growing demand for Switchblade variance which we perceive as the basis of a family of systems driving a growing tactical missile systems business.

Primary indicators for large unmanned airplane systems will include a turn tree procurement decision in the second half of fiscal 2016 and increasingly specific indicators of procurement activities for global Observer Atmospheric Satellite Solutions in the second half of our fiscal 2016 or the first half of fiscal 2017.

In commercial UAS we will be looking for an increase in successful pilot demonstrations of multiple industries. We will also be closely monitoring internal product development milestones for the integrated solution that we believe will provide the most compelling customer value in large global markets.

Much of our commercial UAS development will be subject to constrained disclosure for competitive reasons, but we will update you on our progress in these areas as we are able to.

We continue to manage your investments to create solutions that deliver significant value to customers in large markets, match projected market adoption timing and achieve high returns on invested capital.

We are closely monitoring the progress and the performance of our developments integrating invaluable customer perspectives from pilot projects and gating all investments to manage risk and achieve the optimal profitable growth that will enhance stockholder value.

Thank you to AeroVironment's outstanding employee team that continues to work hard, smart and courageously. Our team does what is necessary to earn and maintain the trust of our customers and they consistently go above and beyond in their efforts to do so. And thank you on this call for your interest in AeroVironment.

Raymond and I will now look forward to taking your questions..

Thank you. [Operator Instructions] Our first question comes from the line of Bobby Burleson with Canaccord. Your line is open..

Hi, thanks for taking my questions. .

Thanks Bobby..

Hi, thanks for taking my question.

So, just a quick one I guess for Tim, if we think about the strategic R&D and SG&A investments for commercial UAS, obviously there is a plan here for fiscal 2016, I’m wondering, how much discretion is in that plan, is it a wide amount of discretion and then if there is some discussion or latitude and how much she spent there, is it because of your specific customer programs that may or may not be impacted by the macro environment?.

I think the answer is, there is some discretion in that amount Bobby. If you recall multiple times I’ve described our investment management process where we are closely monitoring and guiding those investment decisions.

Those gained decisions are based on performance against the plan internally and insights that we gain from our customer engagements and changes to the extent they happen in our perception of adoption timing with customers.

So I think if everything went well as we planned we could very well consume all of the operating profit we would otherwise generate in the year. On the other hand if market adoption timing slowed, if we ran into delays in programs that we could theoretically spend somewhat less or somewhat more than we currently planned..

Okay, great and then just a follow up, when you look at TERN, I’m wondering what the requirements are there in terms of technical requirements or things that your AeroVironment is good at that if you put unit a strong position and as we get to some of that, second half of fiscal 2016 selection process given that were talking in some cases about a different form factor versus where you guys have very high share right now?.

Well, let me just restate your question to make sure I’ve got it so it’s around the TERN program that we’re currently working on with DARPA and specifically your question refers to I think the planned Phase III that we expect an award decision from DARPA on in our second half, but could you clarify for me I think….

Yes, I think that, to simplify the question I’m just wondering how confident you guys are in a strong position there, any developments, there that increased confidence or is always pretty much where we were last quarter when we talked about this..

We are very focused on doing a good job of executing Phase II on TERN which we continue to work on as we speak.

The design that we have put forward, we believe, meets the objective requirements of the customer we think it is highly innovative and practical and has the potential to deliver a compelling next generation solution for the integrated Navy and Marine core mission.

We also are very much aware that we're competing against one of the largest and most well capitalized defense companies on the planet. So we’re taking nothing for granted, but that competition, the nature of that competition is inherent in our strategic intent of delivering compelling innovative solutions for large markets.

So we continue to focus on meeting our customers’ expectations and we’ll see what happens..

Okay. I appreciate the thoroughness of the answer and I’ll jump back into the queue..

Thank you. Our next question comes from the line of Joe DeNardi with Stifel. Your line is open..

Hey, thank you.

Tim, I'm just wondering on the commercial markets, what your expectations are for the economics there in terms of has that ramps up and assuming some of these investments pay off is that market ramp up profitably for you or is it more of a revenue story and then the profitability takes couple of years to mature, just any color on what your expectations are for that ramping up?.

Joe, we think the commercial market for enterprise solutions using small unmanned aircraft can be very, very large.

There is and I think the approach that we’re taking which I described as delivering actionable information that can significantly improve revenue, reduce cost or increase safety in large global enterprises has the potential to significantly move the dial in important operations of those enterprises.

So that if you extrapolate that across industries like oil and gas, energy, agriculture, even transportation and public safety it’s clearly a huge potential.

The level of the rate and the timing of that adoption as you know is very difficult to predict and the nature of the adoption of that solution as well as the rate will end up driving the initial revenues and the associated profitability or the period of time of initial investment during that adoption.

So I’m hesitant to give you a straight answer to your question because I can’t predict the rate of adoption accurately. We do believe that the revenue potential is very large and that there are very strong value propositions that can be delivered and delivering those value propositions can generate significant profitability.

The timing of the growth in the revenue and the period of point in time when investment translate or kicks over into profitable returns, we’ll have to wait and see..

Okay, thanks Tim.

And then just on the commentary around FY 2016 operating income being offset by SG&A and R&D in commercial, I think previously there were some other buckets that you guys were investing in, has that changed at all in terms of Tactical Missiles or Global Observer and now the focus is more on commercial or is it really just as it was six months ago?.

Last year Joe, we were incrementally investing in all three of those large growth opportunities and we described specific areas we’re investing in and Tactical Missile Systems, large UAS and commercial UAS. I think we accomplished our immediate objectives in Tactical Missile System investments and in large UAS investments last year.

However, as we went into fiscal 2016 this year we see the compelling need to continue to make incremental investments to position ourselves for commercial UAS solutions.

I think we see the our ongoing typical investment in IR&D, internal research and development that has ranged between 8% and 10% of revenue to be adequate for now to support the growth in our core businesses and the work we need to continue to do in Tactical Missile Systems and large UAS.

The incremental investment this year over and above that 8% to 10% of revenue for IR&D is focused on commercial UAS development..

Thank you. Our next question comes from the line of Andrea James with Dougherty & Company. Your line is open..

Hi, thanks so much for taking my questions.

I just wanted to ask about the CybAero partnership, I remember when you guys took the stake in late 2012, you were talking about expanding your offerings with Tier 2 UAS and at the time I think you were looking at U.S., NATO and Allied Forces, I just had a question is that kind of just obviously you haven’t mentioned it in a while, is that something we shouldn’t really think about anymore or are you still kind of keeping relationship with them somehow?.

Well, I think your memory is correct Andrea, when we made that initial investment in CybAero and developed our strategic relationship with them, we were primarily focused on responding to a very large Department of State requirement for UAS services that required both small UAS and Tier 2 vertical take-off and landing or helicopter solutions.

So we worked closely with CybAero to develop that integrative solution for the Department of State which at the time had a $1 billion five year IDIQ RFP out that we were addressing.

The Department of State subsequently and at the same time, we had been working with other customers that had requirements for similar Tier 2 helicopter unmanned helicopter requirements.

When the Department of State decided to not go forward with their RFP and their subsequent procurement for the UAS services, we ultimately decided to not make the incremental investments in the development of the Tier 2 helicopter that would be necessary to meet the specific requirements of other customers in that area.

Had we pursued the delivery against the State Department, we would have completed significant incremental development of that helicopter and in very close to the requirement solution for the other customers. But we weren’t prepared to make that incremental investment in anticipation of the new requirements without the State Department contract..

That’s super helpful, thank you.

And then I was intrigued by the commentary about the oil spill using the Puma to kind of – looking what’s going on, who is the customer there and if you don’t want to identify that I would love if you did but is it a pipeline company or is it a government entity or some other entity who pictures the Puma?.

Yes, I will defer defining the specific or identifying the specific customer until they make their own public announcements, but this was government customers addressing the spill..

Thank you. Our next question comes from the line of Troy Jensen with Piper Jaffray. Your line is open..

Thank you. This is actually Austin Bohlig on the behalf of Troy Jensen.

My first question is for Tim, on the commercial side again, you guys brought up and you guys started to do some business with Duke Energy going over some solar panels, I was curious [is] that did you start using that business with Exemption 333 process or were you able to do that because your Puma had been certified before that statute was put in place?.

Austin, I’m going to hedge a little bit, I’m not positive but I believe in that particular instance, we used the 333 exemption to deploy the Puma system and do that demonstration for Duke..

Okay and then just a follow up.

Last time on the call, I know you guys talked about possibly may be considering entering the prosumer market may be the lower end consumer drones, is there any other or have there been any developments inside the company to further pursue those opportunities?.

We’re primarily focused on the enterprise solution development that I’ve been describing Austin. I think we were well aware of course of the significant consumer demand for the quadcopters that are currently available at that level.

There is no doubt that if we were to conclude that we could bring a compelling product to the market that people were fascinated with and wanted to own and fly that we would do that..

Okay, alright that’s all. Thank you, gentlemen..

Thank you. [Operator Instructions] Our next question comes from the line of Josephine Millward with Benchmark. Your line is open..

Hi, Tim..

Hello Josephine..

Tim in your prepared remarks you said AV is now delivering the new Switchblade variant that you developed last year, now is this is the production orders that you expected and can you tell us the size of this order?.

This is a contract for one of the variants that we developed and demonstrated last year. I think, I previously said we thought that was a possibility and in fact that’s turned into a reality during Q1. I think the contracts and the revenue there are a little over $5 million..

Congratulations, do you think that has potential to grow to expand?.

I do..

Great.

Now maritime small UAS adoption, when do you think you will have more clarity on timing and is any of this in your guidance, that sounds like very exciting markets?.

We have a lot of customer engagement, we have a lot of focus on meeting the unique requirements for maritime applications we are very focused on finding a cost effective and compelling solution that can address the Navy’s mission. And as I described in my comments there are other maritime applications that go to the Coast Guard and many others.

I think at this point for this fiscal year we think we’re still in the early adoption phase and our primary focus is working with customers, refining solutions that are compelling for them and looking for indication that they are moving towards initial adoption.

The potential as I commented before we think is quite large, but that probably doesn’t generate significant revenue growth yet this year but will keep plugging away..

Thank you. We have a follow up question from the line of Andrea James with Dougherty. Your line is open..

Hi, thanks for taking my follow up, can you give us the funded R&D number for the quarter?.

Funded R&D revenue number?.

Yes..

Yes, our customer funded R&D for the quarter was $16.5 million..

Okay, thank you. That’s good. Thank you..

Thank you. I’m showing no further questions at this time. I would like to turn the call back to management for closing remarks..

Thank you, very much Abigail and thank you all for your attention on this call and for your interest in AeroVironment. A recording of this call, all SEC filings and relevant company and industry news can be found on our website www.avinc.com. We look forward to speaking with you again following next quarter's results..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day..