Steven Gitlin - VP of Investor Relations Tim Conver - Chairman and Chief Executive Officer Raymond Cook - SVP and Chief Financial Officer.

Andrea James - Dougherty & Company LLC. Troy Jensen - Piper Jaffray Howard Rubel - Jefferies LLC Peter Arment - Sterne, Agee & Leach, Inc. Joseph DeNardi - Stifel, Nicolaus & Company, Inc. Josephine Millward - The Benchmark Company LLC Michael Ciarmoli - KeyBanc Capital Markets Inc..

Good day, ladies and gentlemen and welcome to the AeroVironment Inc Second 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, [Sheri] (Ph) and welcome to our second 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, December 08, 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 second quarter fiscal year 2016 conference call. Our fiscal 2016 plan was on track. Second quarter revenue of $64.7 million brought first half revenue to 41% of our fiscal 2016 guidance midpoint as expected and second quarter gross margin was strong.

Adoption and new orders for Switchblade variants continue to attract new customer funding in Q2 and customer interest in our large UAS and commercial UAS growth opportunities was active.

On today’s call, I’ll review Q2 performance, provide an update for our core business which includes small UAS and efficient energy systems and then review progress in our growth portfolio. Raymond Cook will discuss our financial performance. I’ll update our view of the second half of the fiscal 2016 and then Raymond and I will take your questions.

Second quarter revenue of $64.7 million and gross profit of $31.5 million increased significantly over last quarter and over the second quarter of last year. Our performance also drove first half revenue up by 7% and gross profit up by 49%. Q2 gross profit was robust even before positive impact of a one-time $3.5 million reversal of a reserve.

Q2 funded backlog of $97.2 million was up 50% from the prior fiscal year-end and has been augmented by additional bookings of 21.3 million thus far in Q3.

In the EES portion of our core business, Hyundai selected us as the preferred electric vehicle charging provider for its dealerships in Q2, and we will begin supplying its nationwide dealer network of chargers in the second half. Hyundai is the seventh global automotive OEM to select AeroVironment as its charging supplier.

Automotive dealership represent a portion of our North American EVSE charge dock deployment footprint, which also includes residences and other businesses and totaled more than 29,000 units at the end of Q2.

In other EES news, our TurboCord dual voltage cord set was selected as a finalist for the Automotive News 2016 PACE Awards, an important auto industry recognition of this innovative charging solution. These accomplishments help to illustrate our leadership in the electric vehicle charging business.

In emerging markets, a key component of maintaining our leadership while maximizing return on investment is evaluating shifts and trends as the market develops and appropriately optimizing our business model.

We recently concluded the deemphasizing fast charge and public charging infrastructure solutions while sharpening our focus on consumer and business charging solution will drive more profitable long-term growth for our on-road electric vehicle charging business. Our TurboCord and TurboDock both represent components of this strategy.

The resultant decrease in fast charging sales was the largest contributor to the 26% year-over-year decline in first half EES revenue. With this strategy refinement, we believe we are well positioned to benefit from an increase in EV adoption. Let’s move from our EES to our UAS portion of our core business.

We continue to develop and support the solutions that will help our small UAS customers quickly gather the clear actionable information they need in the dangerous world in which they operate. Our UAS business continue to perform well producing $56.6 million in second quarter revenue, an increase of 31% year-over-year.

Presented with an ever increasing number of competing UAS choices, customers continue to choose AeroVironment’s small UAS when it comes to equipping their force for uncertain situations. For example, in Q2, the U.S.

Marine Corp purchased its first group of Puma AE systems against its new requirement for a family of small UAS with a $13 million contract. And beyond domestic demand, the large pipeline of international small UAS procurement activities produced foreign military sale contracts of $18.5 million for Raven systems in Q2.

So far in Q3, we have already received an additional $13.5 million contract for Puma AE systems from another international customer. We expect continued order flow from initial adoption of our DoD proven small UAS both by new customers and allied countries in addition to growing requirements from our more than 35 current global customers.

Expanding the utility of our small UAS, beyond ground applications remains one of our key objectives. To this end, pre-adoption trials of our all environment Puma system in maritime applications continue to produce successful results during the quarter. Of note, the U.S. Navy purchased a number of Puma systems for operational deployment.

We believe the adoption of small UAS by the U.S. Navy and in other maritime applications can drive significant demand for Puma over the next few years. In addition to new system procurements, we continue to sustain and upgrade the large fleet of our small UAS deployed across the Department of Defense and many allied countries.

Fiscal 2016 sustained the contracts through July totaling $35 million from the U.S. Army demonstrated the ongoing value of our large installed base continues to generate.

Customers have consistently chosen to retrofit many of the thousands of existing systems they own when new upgrades have been made available that deliver needed system capabilities, generating incremental revenue.

As AV continues to enhance the capability of our family of small UAS in anticipation of customer needs, we expect to offer new upgrades to those customers over the next few years. Shifting now to our growth portfolio, demand for Switchblade tactical missile systems and their support remains strong and demand for new variants grew in Q2.

The Army awarded Switchblade contract extension of one year for options totaling $29.3 million. In addition to the army announcing their intent to solicit and award additional scope for Switchblade services and support for joint operational needs through December 2016.

All three of the Switchblade variants that we successfully demonstrated last year have generated growing customer support and funding this year. I told you last quarter that one variant of Switchblade demonstrated last year had transitioned to procurement. In Q2, we received additional contracts for that successful variant.

This quarter we received additional funding for engineering manufacturing development of a second variant. A third variant completed additional successful user demonstrations during the quarter and is now it appears likely to transition to a production program.

To put further color on the opportunity we are now working with five different customers and other new tactical missile system proposals are under consideration.

In terms of how our investment yields results consider that the incremental R&D investments we made in fiscal 2015 have already driven three customer funded programs forward and created active interest in others.

Our tactical missile systems continue to demonstrate success in their operational deployment with seven successful demonstration in Q2 and new system developments currently funded by customers we consider our new family of tactical missile systems to be well into the early stage of adoption with significant growth potential.

In the large UAS area, within our growth portfolio, during our second quarter, we completed phase II of the DARPA TERN development contract and we’re informed we would not receive a phase III contract.

We may yet find customers for this innovative capability in the future, but for now the R&D team that was working on TERN has redeployed to other programs with immediate return potential. Our largest UAS platforms are intended to operate as cost effective satellites in the stratosphere.

Our business investments in this area are currently focused on bid in proposal activities sometimes involving teaming agreements in response to customer interest, in international applications for these unique long endurance stratosphere UAS. Generating more organic growth requires carefully managed investment.

This year we expect our typical internal research and development investment range of 8% to 10% of revenue to be sufficient to support not only our leading market positions in our core small UAS and EES businesses, but also the ongoing adoption of tactical missile systems and our large UAS.

For our emerging commercial UAS opportunity for growth, we are making significant incremental R&D investments above that typical range this year, as well as higher investments in business development to built out and validate our solution for this new and potentially large opportunity.

Our R&D investments in commercial UAS supported the continued development of optimized platforms, payloads and software solutions in Q2. Our business development investments in this area, included working closely with a few select early customers.

These engagements are essential to our understanding the customer needs, how best to integrate UAS into their operations and a relative value of new actionable information to their enterprises and by extension to other customers in their industry.

In the interest of providing some metrics to help you understand our progress, in the last six months, we have engaged with 10 such businesses on two continents, in energy, transportation, power and agriculture industries.

During the first half, we collected and analyzed terabytes of data from multiple types of sensors in nearly 20 different applications using our small UAS based information solution.

We delivered actionable information through more than dozen types of data products to customer decision makers, in one pilot project, we flew over an analyzed 9000 acres of crops.

These customer engagement help validate our business models, inform the design optimization of our commercial UAS solutions and build relationships for ongoing collaboration and adoption.

We are confirming that large customers in multiple industries can gain significant benefit from small UAS based solutions that deliver timely actionable information to provide increase certainty for their decisions and actions.

Our experience in these enterprise customer interactions suggests that the right solution requires a reliable integrated system that effectively and simply delivers this value. With that summary of recent performance in opportunities, Raymond Cook will now review our financial performance in more detail. Raymond..

Thank you Tim and good afternoon everyone. AeroVironment’s fiscal 2016 second quarter results are as follows. Revenue for Q2 was $64.7 million an increase of $12.1 million or 23% as compared to $52.7 million a year ago. The increase in revenue was due an increase in product deliveries of $6.6 million and an increase in service revenue of $5.4 million.

Looking at revenue by segment, UAS revenue was $56.6 million an increase of $13.5 million or 31% compared to last year.

The increase is primarily due to an increase in product deliveries of $8 million principally from an increase in product deliveries of small UAS, an increase in service revenue of $0.9 million and an increase in customer funded R&D work of $4.6 million principally due to an increase in development programs related to tactical missile systems and large UAS.

EES revenue decreased $1.5 million or 15% to $8.1 million in the second quarter, this decrease was primarily due to a decrease in product deliveries of our industrial fast charge systems and our passenger electric vehicle charging systems.

Turning to gross margin, gross margin for the second quarter was $31.5 million or 49% an increase of $13.7 million as compared to $17.9 million or 34% in the prior year.

The increase in gross margin was due to an increase in product margins, increase in service revenue margins and a $3.5 million increase related to a reserve reversal on the settlement incurred cost claims with the DCMA for fiscal year 2007 through 2009. By segment, UAS gross margin increased $12.8 million or 83% to $28.3 million in the quarter.

The increase is primarily due to an increase in margins on product sales and service related contracts and the reserve reversal on settlement of incurred cost claims. As a percentage of revenue, gross margin for UAS increased from 36% to 50%.

EES gross margin increased $0.9 million or 36% to $3.3 million in the quarter primarily due to favorable product mix and the reserve reversal on settlement of incurred cost claims. As a percentage of revenue, EES gross margin increased from 25% to 40%.

SG&A expense for the second quarter was $14.7 million or 23% of revenue compared to SG&A expense of $13.5 million or 26% of revenue in the prior year. SG&A expense increased $1.3 million primarily due to higher professional services and bid and proposal cost.

R&D expense for the second quarter was $9.9 million or 15% of revenue compared to R&D expense of $8.5 million or 16% of revenue in the prior year. The increase in R&D expense was primarily due to increased development activities for certain strategic initiatives.

The operating income for the second quarter was $6.9 million or 11% of revenue compared to prior year operating loss of $4.1 million or 8% of revenue. The operating income increase was primarily due to higher gross margin and the reserve reversal on settlement of incurred cost claims.

Net other income for the quarter was $0.1 million compared to the prior year net other expense of $0.4 million. Other income increased due to the prior year change in fair value of our CybAero convertible investment not present in the current year.

The provision for income taxes for the quarter was $2.6 million or an effective tax rate of 36.7% compared to the benefit for the income taxes of $1.6 million or an effective tax rate of 35.8% in the prior year.

Net income for the quarter was $4.4 million or $0.19 earnings per diluted share compared to a net loss of $2.9 million or $0.13 loss per share in the same quarter last year. The loss per share for the second quarter last year increased by $0.01 due to the decrease in fair value of our CybAero convertible bond investment.

There was no impact to EPS for the second quarter of fiscal year 2016 for the convertible bonds investment. The earnings per diluted share for the second quarter of fiscal 2016 increased by $0.09 due to the reserve reversal on settlement of incurred cost claims with the DCMA. Now moving through our first half fiscal 2016 results.

Revenue for the first half of fiscal 2016 $111.8 million an increase of $7.3 million or 7% as compared to a $104.5 million a year ago. The increase in revenue was due to an increase in service revenue of $16.8 million and a decrease in product deliveries of $9.6 million.

UAS revenue was $96.8 million an increase of $12.5 million or 15% compared to last year. The increase was primarily due to an increase in customer funded R&D work of $16.8 million an increase in service revenue of $0.5 million offset by a decrease in product deliveries of $4.8 million.

EES revenues decreased $5.3 million or 26% to $15 million in the first half. This decrease was primarily due to a decrease in product deliveries of our industrial fast charge systems and our passenger electric vehicle charging systems.

Gross margin for the first half was $47.6 million or 43% an increase of $15.6 million as compared to $31.9 million or 31% in the prior year. The increase in gross margin was due to an increase in product margins, increase in service revenue margin and the reserve reversal on settlement of incurred cost claims.

UAS gross margin increased $16.3 million or 64% to $42 million in the quarter. The increase was primarily due to an increase in margins on product sales and service related contracts and the reserve reversal on settlement of incurred cost claims. As a percentage of revenue, gross margin for UAS increased from 30% to 43%.

EES gross margin decreased $0.7 million or 11% to $5.6 million in the quarter primarily due to lower sales volume. As a percentage of revenue, EES gross margin increased from 31% to 37%. SG&A expense for the first half was $30 million or 27% of revenue compared to SG&A expense of $26.9 million or 26% of revenue in the prior year.

SG&A expense increased $3.1 million primarily due to higher professional services and bid and proposal cost. R&D expense for the first half were $19.7 million or 18% of revenue compared to R&D expense of $15.7 million or 15% of revenue in the prior year.

The increase in R&D expense was primarily due to increased development activities for certain strategic initiative. The operating loss for the first half was $2.2 million or 2% of revenue compared to prior year loss of $10.6 million or 10% of revenue.

The operating loss decreased was primarily due to higher gross margins of $15.6 million offset by an increase in R&D of $4.1 million and an SG&A expense of $3.1 million. Net other expense for the first half was $2.1 million compared to the prior year net other income of $0.4 million.

Other income decreased primarily due to the other than temporary impairment loss on our CybAero equity securities. The effective tax benefit rate for the six months was 39.7% compared to the effective tax benefit rate from prior year of 36.1%.

The net loss for the first half of fiscal 2016 was $2.6 million or $0.11 loss per share compared to a net loss of $6.5 million or $0.29 loss per share in the first half of last year.

The loss per share for the first half of fiscal 2016 increased by $0.06 due to losses on the impairments and sale of CybAero equity securities and decreased by $0.09 due to the reserve reversal on settlement of incurred cost claims.

Loss per share for the first six months last of year decreased by $0.01 due to the increase in fair value of the CybAero convertible bond investments.

Looking at backlog, funded backlog at the end of the second quarter was $97 million a decrease of $28 million or 22% from the second quarter of the prior year and an increase of $8 million or 9% from the prior quarter.

Turning to our balance sheet, cash, cash equivalents in investments that the end of the second quarter totaled $243.7 million, a decrease of $18.5 million from the prior quarter, the decrease in cash, cash equivalents in investments was driven by higher working capital requirements of the business, $3.8 million used in the quarter for share repurchases.

Turning to receivables, at the end of the second quarter, our account receivables including unbilled and retention receivables totaled $54.5 million, an increase of $12.3 million from the prior quarter. Total day sales outstanding was approximately 76 days compared to 81 days at the end of the prior quarter.

Taking a look at inventory, inventories were $48.3 million at the end of the quarter compared to $43.9 million at the end of the prior quarter, days and inventory were approximately 131 days compared to a 127 days at the end of the prior quarter.

This increase in days and inventory was primarily attributable to an increase in inventory for anticipated second half shipments and lower cost of goods sold as a percentage of revenue driven by the reserve reversal for settlements to incurred cost claims for the DCMA.

Turning to capital expenditures, in the second quarter we invested approximately $1.9 million or 3% of revenue in property improvements in capital equipment. EV recognized $1.4 million of depreciation and amortization in the quarter. Now an update to our FY 2016 visibility.

As of today, we have year-to-date Q2 revenues of $112 million, Q2 ending backlog that we expect to execute in FY 2016 of an additional $89 million. Q3 quarter-to-date bookings that we anticipate to execute in FY 2016 of an additional $21 million.

Unfunded backlog from incrementally funded contracts that we anticipate to recognize revenue during the balance of the year of $2 million and revenues needed the whole EES revenues flat relative to last year of $16 million. This adds up to $240 million or 89% at the midpoint of our revenue guidance.

Now I would like to turn things back to Tim to discuss AV’s expectations for the remainder of FY 2016..

Thank you, Raymond. We are focused on two strategic objectives. First, growing our leading core businesses in small UAS and efficient energy systems and second plan to win large innovative growth opportunities that can deliver compelling value to new and existing customers and significantly accelerate our growth.

The AeroVironment team is as usual executing at a high level on both fronts, we support customers and maintain market leadership in our core businesses, by anticipating and satisfying our customers’ important needs with unique solutions to meet those needs exceptionally well. We see growth potential in both EES and small UAS.

The initial adoption of our tactical missile systems has devoted compelling results for our customers and continues to generate revenue in operational system deliveries, support and customer funded R&D.

Current and new customer engagements suggest significant growth potential for this new business that addresses an estimated $1 billion per year market with a unique performance solution. We have yet to translate our large UAS developments to adoption and deployment of production businesses.

However, we are engaged with customers that have an interest and the potential to adopt these solutions to exploit the potential of atmospheric satellites. As I mentioned earlier, we expect internal R&D of 8% to 10% of revenue to support all of these initiatives except commercial UAS.

It’s important to note that our planned incremental research and development and SG&A investments in commercial UAS this year could offset the operating profit that we would otherwise generate from the revenue and the gross profit we expect to produce this year.

For that reason, our profit focus is on gross profit margin rather than earnings per share this year. That said, the objective of our investments is to get the right solution to market to deliver the compelling value to multiple very large global industries that can create a large growing business and thereby drive high sustained stockholder value.

As we look to the balance of the fiscal year, we still need to book and ship an additional 11% or $30 million this year as Raymond discussed in his fiscal 2016 visibility walk down. We continue to expect fiscal 2016 revenue of $260 million to $280 million and gross profit margin of 36% to 37.5% net of the reserve effect.

We are optimistic about the opportunities we've cultivated by serving our customers extremely well and above accelerating our growth with the adoption of multiple new solutions in our growth portfolio, all designed to deliver much more certainty to customers operating in inherently uncertain environments Thank you to the outstanding AeroVironment team of innovators and doers that are committed to the success of our customers and to each other.

Thank you on the call for your interest in AV. And now Raymond and I will take your questions..

Thank you, sir. The question-and-answer session will be conducted electronically. We ask all callers to limit enquiries to two questions. If you have additional questions, you are welcome to return to the queue [Operator Instructions] Our first question comes from Andrea James of Dougherty & Company..

Hi, thanks for taking my questions. It sounds like you are really on track. You said you had 84% visibility into your full year guidance, how does that compare to historically? I think last year you had 97% visibility at this point, but I think last year might have been an anomaly..

Yes, actually we had 89% visibility into the midpoint of our guidance Andrea and last year we were at 96% at the same point last year.

When you look at the lumpiness of the revenue trend, it’s one of those where we are always going out and looking for the additional orders for book and ship and this is our historic run rate that maybe a little bit lower this year, but historically we've always been within this 85% to 95% range at the end of the second quarter..

Okay that’s helpful.

And then also, how do you see the seasonality playing out for the rest of the year?.

Back to history again Andrea, we are typically back end loaded in the second half. I expect we will probably see that again this year, maybe crudely 40/60 third quarter, fourth quarter..

Okay. That’s very helpful. I will get back in the queue. Thanks..

Thank you. Our next question comes from Troy Jensen of Piper Jaffray..

Hey congrats on the nice quarter gentlemen..

Thanks Troy..

Thank you..

So two questions. First one out for Tim.

Could you point us to like milestones that we will be able to see, that’s going to give us evidence that you are getting traction with the commercial drone market?.

Well as you saw in the prior comments Troy, I was trying to give you what I could in terms of just some status of what we are doing with our pilot programs and our engagement with a few lead adopters. And I can keep you updated in some of those metrics, just so you know generally what we are out doing.

What we are also working quite aggressively in the development area to put the complete solution together as I indicated previously and that’s platforms, payloads, and software.

We don’t expect to be generating material revenues this fiscal year, because we are still developing and finalizing the solution and working with early adopters to refine the value proposition. So I would expect that’s about what I can anticipate to give you over the next couple of quarters..

All right that’s fair. And then just a follow-up for Tim.

There is a program of record, you talked about at the iRobot Analyst Day and I think they called it [Christie and Clark] [ph] that maybe incorrect, but it looks like it was a large program of record and it was looking for maybe a common ground controller that would work with both ground Recon and UAV.

So I’m just curious if this is a program of record you guys are working on and if I’m thinking about the pieces of this correctly..

Well, the idea of a common ground controller for small UAS and UGS, unmanned ground systems, has been a desirable get for many of our customers for a long time. And there have been multiple developments sponsored by different customers, within DoD to pursue that objective, I think that's probably an ongoing desire.

You may know that the army has developed a common system for larger platforms, larger unmanned Arial platforms. So I suspect ultimately the benefit of minimizing the demand on operators that use these systems will continue to be beneficial and will be involved wherever we can be helpful..

Tim, do you guys have to partner then for the UAGs?.

Well, most of the customer initiatives around common systems, ground control systems that run across both aerial platforms and ground platforms have to interface with the airplane and the ground robot, but they are often independent of both.

So I think it’s not determined yet, when and if that common system gets to a program of record and if it does, whether it’s an independent system that plugs in to interfaces on both the aerial and the ground side, or whether it’s more deeply embedded in one vehicle or the other..

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

Thank you very much.

First on UAS, can you provide a little bit of indication of how much share you have Tim with respect to Switchblade as a percentage of the business now?.

It is hard to give you a meaningful answer on that Howard, because the primary program of record that's been discussed that would encompass the capabilities that Switchblades delivering has been LMAMS and as of now the army has not announced the LMAMS program of record in their palm.

So when we look at the kinds of existing solutions that are similar to what Switchblade and its variants are providing we add that up to approximately $1 billion a year of current procurement and clearly Switchblade is not at a 1% level of that market share.

On the other hand, if you look at the capabilities that Switchblade delivers and the requirements of an LMAMS program as it’s been define to-date, I’m not aware of any other deployed system that meets those requirements.

So if we define the market narrowly around the capabilities that we’re addressing which some people have said is changing the definition of the smart munitions then we’re a very high share of very small market and it’s vice versa if you look at the procurements of existing similar systems that have been developed over the last two or three decades..

I get that. Sort of. The other thing is that on EES, what’s pretty remarkable is even though you had the decline in volumes, you held gross margins, gross margins were pretty good.

Could you talk about was it mixed change or was it the way in which you are distributing product or I mean you talked a little bit about strategies and could you elaborate a little bit on that please?.

Well, yes, thank you. Two parts I think the mix usually has is a contribute significantly to the variants we see in gross margin and that was the case in this quarter, but to the specific point of your question.

I believe the change in our business model approach that I described earlier where we are deemphasizing fast charging and public infrastructure and putting a greater emphasis on consumer and business solutions.

Not only contributed largest piece of that revenue reduction but it also would have contributed a significant part of the gross margin performance. So not surprisingly, we would be deemphasizing low margin solutions and emphasizing products that deliver greater value to customers with greater growth potential in the future..

Thank you. Our next question comes from Peter Arment of Sterne Agee..

Hi guys good afternoon Tim and Ray. Tim maybe just a quick one, you mentioned you are seeking a lot of kind of retrofit spending.

Can you give us kind of an idea of where that is on a percentage against the installed base or at least from maybe a one of those - a baseball analogy what inning we are in just when you compare it?.

Well we have gone through a number of different retrofit adoptions across our small UAS installed base Peter. The latest one was the payload, the pan, tilt, zoom payload retrofit available for Raven and I believe that most of that retrofit for the Army and the Marine Corp has now been completed.

So the point of my comment was that we have an ongoing revenue stream of sustainment for that fleet and we have a pattern, a historic pattern of customer adoption of major retrofits when they are available and compelling.

And I expect that we will continue to develop that retrofit capability and make them available to our customers with an eye to delivering compelling value to them over the next few years..

Okay that’s helpful.

And if I could just ask one follow-up on thinking about operational tempo of going back several years, we are tied to all the activity now overseas and what is kind of recent step up in some of the activity we have see in the Middle East? Are you guys seeing any pickup in terms of conversations regarding either urgent need request or change in requirements versus over the last months or so?.

The small UAS have proven themselves now I think beyond any doubt in terms of their value to troops on the ground and particularly they are used by small teams on the ground to provide situational awareness and the actionable intelligence that they need as I commented before to bring a lot more certainty to the very dangerous situation they operate in.

And the tactical missile systems like Switchblade are similarly designed to be utilized metaphorically maybe as a rucksack packable air support for small teams and teams on the ground. So I would expect that these systems go where boots go and they have been a compelling value.

I have heard more use of the term urgent needs in the last years than I did probably in the prior couple of years to specifically answer question..

Thank you. Our next question comes from Joseph DeNardi of Stifel..

Hey thanks. Tim I think you have spoken before about wanting to make a decision at some point as to whether investing profits from the core business into commercial, how long that can continue.

So can you just talk about whether that’s still the thought process or whether the pipeline now you think supports continuing that into next year?.

Well we clearly are in the midst of developing the product solution, service solution itself as I described earlier as well as refining our understanding of customer needs and the value proposition to them and we intend to continue to build out that solution throughout this year and we don’t see that being finalized and launched as an operating service this fiscal year.

So those elements are pretty clear and that’s the plan we’re proceeding on. How far we go beyond that before we are launched in the market? I think we will have to wait and see another couple of quarters..

Okay and then on larger UAV, I mean I think it was about six months ago that you said, you expected - or an announcement around 12 months from then.

So should we expect something within six months, just any update you can provide there, is it still the same customer you are speaking to or are there more customers now involved in that capability?.

Yes we are engaged with more than one customer on stratosphere satellite solutions, I still think that timeframe is for getting a solid indication of what the probable outcome will be in the level of interest is still good.

Although I vaguely remember, I said 12 months to 18 months rather than 12 months, but your memory maybe better than mine, but I was largely thinking we are going to see that crudely next calendar year. Crudely in terms of accrued estimate of timing..

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

Hi Tim, my question for you, I was hoping for an update on your joint venture in Turkey regarding the global server, has anything changed post their November election also with escalating turmoil in the region?.

Hi Josephine. We are continuing to the actively engaged in that joint venture in the pursuit of opportunities for global observer and as you might - I suspect that the period of time when between elections in Turkey may have preoccupied decision makers.

So I think they clearly result their election process now, I suspect they are as most countries are in the process of resetting their government and moving forward. So to the extent I have no insight in to what extent that may affect or have affected our opportunity, but we have not seen a diminishment of the opportunity..

Great, I would also appreciate an update on your joint venture in India under the U.S.

India defense technology transfer initiative?.

We remain engaged with our MoU with our partner in India, and we had been selected as one of the pilot programs for the program between the U.S. government and the Indian government.

That's going slowing, there was a high level of activity early on and the level of activity has diminished and it’s hard for me to predict the timing or the outcome of that opportunity at this point..

Thank you [Operator Instructions] Our next question comes from Kevin Ciabattoni from KeyBanc Capital Markets..

Hey good afternoon guys. It’s actually Mike Ciarmoli on. Tim just one kind of big picture expense budget question. This recent to your budget deal, coupled with the recent events in Paris, I mean as you guys look at the contract environment, you look at potential programs that are out there.

I mean do you get a better comfortable level with sort of with the contracting velocity and stability over this kind of call it the period while this deal kind of encompasses us or do you not think it will have that much of a meaningful impact on your business?.

Mike, I think one of the major challenge is in our short cycle defense environment, the short cycle of nature of our business in the defense environment is uncertainty of budgets from our customers’ perspective. So the more uncertainty the less willing our customers are to make short-term commitments.

So I think one of the strongest indicators for us is a longer period of certainty in budget which allows our customers to plan and make priority decisions in the context of a longer period of financial comfortable. Whether it's a higher or lower number, I think is less important than the level of certainty. So I guess that answer is yes..

Got it. That's helpful. That's all I had guys. Thanks..

Thank you. We have a follow-up question from Mr. Joseph DeNardi of Stifel..

Hey thanks, Tim can you quantify for us, just on your comments about some of the retrofit being completed for the army and marines.

Can you quantify what sort of headwind that represents for you maybe until you get the next set of upgrade from them?.

I don’t see it as a headwind Joe, I think that the Raven retrofit has largely been completed for I’m guessing about a year or so ago. So I don’t think it’s effecting our current business, I think the cycle and the pattern of adoption and retrofitting is a significant opportunity going forward, but I don’t see a headwind character to it..

Okay, it makes sense. Thank you..

Thank you..

Thank you. We have a follow up question from Mr. Howard Rubel of Jefferies..

Thank you.

Tim the Tern technology, are you free to use that for other applications and have you found uses for such?.

I believe we are free to use that Howard, we intend to continue dialogue with customers that are potentially interested in what is probably a unique capability there.

And if we find that interest, we will support it and move ahead with it, but as I said right now that the IR&D that we were supporting the program with, we have shut down and that team has moved on to other more immediate return opportunities..

So that means that if you looked at what your budget was for this year for that program, then there’s a little less R&D than you would have otherwise planned on?.

To a very small degree Howard, most of the IR&D committed plans for Tern was coincident with phase two of the program and the contract structure that DARPA had anticipated and that we were planning on would have been such that any new IR&D we would have planned to support phase three would not start until about next fiscal year..

Speakers, I’m showing no further questions at this time. I would like to now turn the call back over to Mr. Steven Gitlin..

Thank you Sherin and thank you all for your attention and for 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 wwe.avinc.com. We wish you a joyous and healthy holiday season and look forward to speaking with you again following next quarter’s results..

Ladies and gentlemen this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect..