Good afternoon, ladies and gentlemen, and welcome to AeroVironment's Second Quarter Fiscal Year 2020 Earnings Call. This is Steven Gitlin, Vice President of Investor Relations for AeroVironment. 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. Before we begin, 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 include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements and may contains words such as believe, anticipate, expect, estimate, intend, project, plan or words or phrases with similar meaning.

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 further information on these risks, we encourage you to review the risk factors discussed in AeroVironment's periodic reports on Form 10-K and Form 10-Q filed with the SEC, and the Form 8-K filed today with the SEC, along with the associated earnings release and the safe harbor statement contained therein.

This afternoon we also filed a slide presentation with our earnings release and posted the presentation on our website at avinc.com, in the Events and Presentations section. The content of this conference call contains time-sensitive information that is accurate only as of today, December 3, 2019.

The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after this conference call. Joining me today from AeroVironment are President and Chief Executive Officer, Mr.

Wahid Nawabi; and Vice President and Interim Chief Financial Officer, Mr. Brian Shackley. We will now begin with remarks from Wahid Nawabi.

Wahid?.

Revenue of $83.3 million increased 14% over last year. Gross profit of $35.2 million increased 24% over last year. Gross margin of 42% was 3 points higher than last year, primarily due to more favorable mix in revenue and higher volumes. Slide number 5 illustrates the product versus service revenue trend for the past five quarters.

GAAP earnings per diluted share of $0.31 increased $0.02 from second quarter fiscal year 2019 diluted GAAP EPS of $0.29. Non-GAAP earnings per diluted share of $0.35, increased $0.05 from second quarter fiscal year 2019 diluted EPS of $0.29.

Funded backlog of $146.7 million was 10% lower than last year, but remain high, compared to historical averages. With respect to operations, our team continued to make important achievements in several areas of our business as highlighted on Slide number 6.

Our small UAS business continues to lead the market for fixed-wing defense solutions with the largest share of U.S. DoD market, and it continues to grow globally. We recently announced the contract award from the U.S. Army for Raven Systems, radio frequency modification worth up to $55 million.

The Army refers to this award, as the Flight Control Systems domain or FCS. The Army requires this frequency modification, because the U.S. government auction the frequency spectrum for the DoD small UAS to commercial interest several years ago. AeroVironment was awarded this contract by the U.S. Army under a full and open competition.

The FCS contract was originally awarded in June 2019, but a protest delayed its commencement until the recent resolution of the protest. This contract award for FCS is one of six domains awarded as part of the Army's $248.5 million small UAS program announced in April 2018.

In total, AeroVironment has won four of the six domains associated with this program and is the only supplier to the Army for FCS, Raven spare parts, Puma spare parts and other major components. We compete for individual delivery orders on the new Raven and Puma systems domain.

Since 2013, we have won more than 90% of the dollar value of all delivery orders for the Army small UAS, IDIQ program. As a pioneer and serial innovator in small UAS, we're continuously working with customers to identify valuable new capabilities that can help them achieve their mission objectives.

Having identified a need to expand the endurance of small UAS, we introduced our newest small UAS product in October, the Puma LE, its name reflecting its long endurance.

Offering 5.5 hours of flight time with the ability to carry two support payloads, Puma LE delivers Group 2 capabilities and a Group 1 footprint and for a fraction of the upfront, as well as total cost. This means, significantly more mission capabilities to troops on the front line to help them proceed with certainty.

Puma LE has generated strong interest from multiple U.S. government customers, as well as a number of allied nations. And as the market continues to evolve, we believe there are several emerging opportunities to expand on our growth and success in the near term, including through the U.S. Army's SBS and SRR programs.

Our expansion from fixed-wing small UAS into unmanned helicopters is also showing progress. We have generated interest in our VAPOR products from multiple customers. We have successfully integrated all core business processes between our Kansas and Simi Valley operations.

We are on track to move the VAPOR product line manufacturing from Kansas to our Simi Valley operations by the end of our third fiscal quarter. This manufacturing consolidation is driving incremental capital expenditures for tooling and fixtures. Our team is making great progress with this new addition to our family of small UAS.

In the international market, we continue to generate significant demand for our family of small UAS. In the quarter, we received multiple awards from existing customers and Southeast Asia in the Middle East, totaling more than $20 million. Beyond the defense market, we received a $5 million Puma contract award for the U.S. Border Patrol.

This represents another procurement of our fixed-wing systems by the U.S. Border Patrol. We believe additional Border Patrol procurement opportunities will be forthcoming. In our tactical missile systems product line, we submitted our proposal for the three-year sole-source LMAMS award, we have been addressing in recent quarterly earnings call.

This hardware production contract to AeroVironment would cover government fiscal years' 2020 through 2022. The performance period includes one 12-month base period, and two additional 12-month options. We anticipate receiving this contract award by our fourth fiscal quarter and therefore is not included in our current funded backlog calculation.

We anticipate this award would be worth up to $160 million over that time period. Once awarded, this will be the single largest sole source multi-year award ever for our innovative, Switchblade solution. We’ve made significant progress with U.S. government export authorities on the possibilities of exporting Switchblade to our allies.

Multiple allies have expressed strong interest in Switchblade and we stand ready to help them protect their forces with this unique and disruptive capabilities once we receive the appropriate approvals and complete the associated negotiations.

We also continue to advance the development of our larger version of Switchblades, which is capable of significantly longer flight endurance and far greater mission effects. This larger variant of Switchblade will address a much larger potential market opportunity.

And another application of our groundbreaking technology, we are partnering with General Dynamics Land Systems to integrate AeroVironment's small UAS and Switchblade Systems and to GDLS' next generation armored combat vehicle for upcoming U.S. Army and Marine Corp programs.

GDLS is the only qualified bidder for the Army's potentially large next generation armored combat vehicle program and we are the sole provider of Switchblades and small UAS to GDLS for this specific opportunity.

Turning to our HAPS business HAPS Mobile Inc., which is our joint venture with SoftBank Corporation is positioning itself as a leader and catalyst for the global HAPS opportunity.

AeroVironment and SoftBank established our HAPS Mobile joint venture to bridge the global digital divide and we welcome all other participants in this exciting emerging market to join with us. We completed the first and second test flights of our Hawk 30 solar HAPS during the second quarter with flying colors.

Noted on Slide number 8, we continue to make progress, positioning AeroVironment to manufacture, supply, and support solar HAPS UAS for HAPS Mobile Inc. As we have previously stated, our contract with HAPS Mobile offers significant flexibility to grow with the program.

Early in 2018, when we initially signed the design and development agreement, the contract value was $65 million. Today we announced a new $14 million increase and the value of this contract. This brings the total value of the HAPs project to $149 million since its inception.

We anticipate our HAPS program bookings and revenue beyond fiscal year 2020 will be similar to this year, as the program transitions from the design and development to the testing and certification phase. We look forward to updating you as we continue to make progress in this exciting and large growth opportunity. Now.

Brian will provide a detailed financial overview of our second quarter.

Brian?.

Thank you, Wahid and good afternoon everyone. Our team delivered a strong financial performance in the second quarter of fiscal 2020. Revenue from continuing operations for the second quarter of fiscal 2020 was $83.3 million, an increase of $10.3 million or 14% from the second quarter of fiscal 2019 revenue of $73 million.

The increase was due to an increase in product deliveries of $10.3 million. Second quarter fiscal 2020 revenue by major product line or program is as follows. Small UAS was $59.2 million or 71% of total revenue. HAPS was $13.4 million or 16%, TMS was $7.9 million or 10% and other was $2.8 million or 3%.

Inception to-date, revenue under contract for the HAPS program is $103.2 million. The total value of all contracts with HAPSMobile is $148.9 million, which consists of $140.3 million for the design and development agreement and $8.7 million for preliminary design and other related efforts.

There is $45.7 million remaining on these contracts, which includes a portion that is currently unfunded. Gross margin from continuing operations for the second quarter of fiscal 2020 was $35.2 million or 42% of revenue, compared to $28.4 million or 39% of revenue for the second quarter of fiscal 2019.

The increase in gross margin was primarily due to an increase in product margin of $6.1 million and an increase in service margin of $0.7 million.

Gross margin as a percentage of revenue increased from 242% from 39%, primarily due to a favorable product mix and an increase in the proportion of product revenue to total revenue, partially offset by an increase in inventory reserve.

Product sales were 69% of total sales in the second quarter of fiscal 2020, compared to 64% for the second quarter of fiscal 2019. Looking at the rest of the income statement.

SG&A expense from continuing operations for the second quarter of fiscal 2020 was $16.3 million or 20% of revenue, compared to SG&A expense of $13.6 million or 19% of revenue for the second quarter of fiscal 2019. The increase in SG&A expense was primarily due to increases in commission expenses, legal expenses and employee related expenses.

R&D expense from continuing operations for the second quarter of fiscal 2020 was $10.9 million or 13% of revenue, compared to R&D expense of $8.1 million or 11% of revenue for the second quarter of fiscal 2019.

Income from continuing operations for the second quarter of fiscal 2020 was $8.1 million, compared to $6.6 million for the second quarter of fiscal 2019.

The increase in income from operations was primarily due to an increase in gross margin of $6.8 million, partially offset by an increase in R&D expense of $2.7 million and an increase in SG&A expense of $2.6 million. Net other income for the second quarter of fiscal 2020 was $1.4 million, compared to $2.4 million for the second quarter of 2019.

The decrease in net other income was primarily due to a decrease in transition services performed for the buyer of our former efficient energy systems business.

The effective income tax rate from continuing operations was 11.7% for the second quarter of fiscal 2020, compared to an effective income tax rate of 13.5% for the second quarter of fiscal 2019.

Equity-method investment activity net of tax for the second quarter of fiscal 2020 was a loss of $0.9 million or $0.04 per diluted share, compared to a loss of $0.8 million or $0.03 per diluted share for the second quarter of fiscal 2019.

Net income from continuing operations attributable to AeroVironment for the second quarter of fiscal 2020 of $7.5 million or $0.31 per diluted share, compared to $7 million or $0.29 per diluted share for the second quarter of fiscal 2019.

Non-GAAP diluted earnings per share for the second quarter of fiscal 2020 was $0.34 per diluted share and excludes $0.03 per diluted share for intangible amortization expense and integration costs associated with the acquisition of Pulse Aerospace. GAAP and non-GAAP diluted earnings per share for the second quarter of fiscal 2020 was $0.29.

Now moving through our first half fiscal 2020 results. Revenue for the first half of fiscal 2020 was $170.2 million, an increase of $19.2 million, compared to $151 million for the first half of fiscal 2019.

The increase in revenue was due to an increase in product deliveries of $20.9 million, partially offset by a decrease in contract service revenue of $1.7 million. The first half of fiscal 2020 revenue by major product line of program is as follows. Small UAS was $125.9 million or 74% of total revenue.

HAPS was $25.7 million or 15%, TMS was $13.5 million or 8%, and other was $5 million or 3%. Gross margin for the first half of fiscal 2020 was $76.4 million or 45%, compared to $61 million or 40% for the first half of fiscal 2019.

The increase was due to an increase in product margin of $16 million, partially offset by a decrease in service margin of $0.6 million.

Gross margin as a percentage of revenue increased from 40% to 45%, primarily due to a favorable product mix and an increase in the proportion of product revenue to total revenue, partially offset by an increase in inventory reserves. Looking at the rest of the income statement.

SG&A expense for the first half of fiscal 2020 with $29.9 million or 18% of revenue, compared to SG&A expense of $25.6 million or 17% of revenue for the first half of fiscal 2019. The increase in SG&A is due to increases in commission expenses, legal expenses and employee-related expenses.

R&D expense for the first half of fiscal 2020 was $19.6 million or 11% of revenue, compared to R&D expense of $14.5 million or 10% of revenue for the first half of fiscal 2019.

Income from continuing operations for the first half of fiscal 2020 was $26.9 million or 16% of revenue, compared to $20.8 million or 14% of revenue for the first half of fiscal 2019.

The increase in income from tuning operations was primarily due to an increase in gross margin of $15.5 million, partially offset by an increase in R&D expense of $5 million and an increase in SG&A expense of $4.3 million. Net other income for the first half of fiscal 2020 was $3.1 million, compared to $11.7 million for the first half of fiscal 2019.

The decrease in net other income was primarily due to a one time gain from a litigation settlement of $0.26 per diluted share during the first quarter of fiscal 2019.

The effective income tax rate from continuing operations was 10.8% for the first half of fiscal 2020, compared to an effective income tax rate of 11.6% for the first half of fiscal 2019.

Equity method investment activity’s net of tax for the first half of fiscal 2020 with a loss of $2.2 million or $0.09 per diluted share, compared to a loss of $1.4 million or $0.06 per diluted share for the first half of fiscal 2019.

Net income from continuing operations attributable to AeroVironment for the first half of fiscal 2020 was $24.6 million or $1.02 per diluted share, compared to $27.4 million or $1.14 per diluted share for the first half of fiscal 2019. The first half of fiscal 2019 included a one-time gain from a litigation settlement of $0.26 per diluted share.

Non-GAAP diluted earnings per share for the first half of fiscal 2020 was $1.08 per diluted share and excludes $0.06 per diluted share for intangible amortization expense and deal and integration costs associated with our acquisition of Pulse Aerospace.

Non-GAAP diluted earnings per share for the first half of fiscal 2019 was $0.88 per diluted share and excludes $0.26 per diluted share from a one-time litigation settlement gain in fiscal 2019.

Our funded backlog as of October 26, 2019 was $146.7 million, a decrease of $17.2 million from the second quarter of fiscal 2019 and a decrease of $18.6 million from the first quarter of fiscal 2020 backlog of $165.2 million. Our funded backlog as of October 26, 2019 remained high, compared to historical averages. Turning to our balance sheet.

Cash, cash equivalents, restricted cash and investments at the end of the second quarter of fiscal 2020 totaled $310.9 million, a decrease of $21.7 million from the end of fiscal 2019 of $332.6 million.

The decrease in cash was primarily related to our acquisition of Pulse Aerospace, as well as our increased investment in the HAPSMobile joint venture. Net accounts receivable, including unbilled receivables and retention at the end of the second quarter of fiscal 2020, totaled $103 million.

Unbilled receivables and retention was $62.4 million inclusive of $21.7 million of related party amount. Total days sales outstanding from continuing operations for the second quarter fiscal 2020 was approximately 105 days, compared to 87 days for the fourth quarter of fiscal year 2019.

Net inventory at the end of the second quarter of fiscal year 2020 of $52.8 million, compared to $54.1 million at the end of fiscal year 2019. Days in inventory outstanding for the second quarter of fiscal year 2020 was approximately 102 days, compared to 92 days for the fourth quarter of fiscal year 2019.

Accounts payable at the end of the second quarter of fiscal year 2020 was $11 million, compared to $16 million at the end of the fourth quarter of fiscal year 2019. Total days payable outstanding for the second quarter of fiscal year 2020 was approximately 21 days, compared to 24 days for the fourth quarter of fiscal year 2019.

Turning to capital expenditures. In the second quarter of fiscal year 2020, we invested approximately $4.9 million in property improvements and capital equipment to support our growth strategy and new product launches, and recognized [$2.4 million] of depreciation and amortization expense. Now, an update to our fiscal 2020 visibility.

As highlighted on Page 9 of the supplemental charts. As of today, we have year-to-date revenue in fiscal 2020 of $170 million.

Second quarter ending backlog that we anticipate to execute in fiscal 2020 of $125 million, Q3 quarter-to-date bookings that we anticipate to execute in fiscal 2020 of $22 million, and unfunded backlog from incrementally funded contracts that we anticipate to recognize revenue during the balance of the year of $2 million.

This adds up to $319 million or 89% of our fiscal year 2020 midpoint revenue guidance range. We anticipate a full-year effective tax rate of approximately 11%. This is higher than the fiscal 2019 full-year tax rate of 9%, primarily due to anticipated lower excess tax benefits from equity awards and other tax credit estimates.

Now, I'd like to turn the call back to Wahid..

Thanks, Brian. Our first half results closely match our plan with 47% of full year revenue in our first and second quarters. We're executing on our plan and are on track to achieve our fiscal year 2020 objectives and deliver a third consecutive year of profitable double-digit top line growth.

We see an increasing likelihood of another continuing resolution to extend the government's operations beyond the current December 20 deadline. A continuing resolution would likely hamper any new program starts and could impact funding for the procurement of our solutions, depending on its length.

With 89% of full year visibility to the midpoint of our revenue guidance range, as described on Slide number 9, we reiterate our guidance of $350 million to $370 million in revenue, $1.35 to $1.55 in diluted EPS, and $1.47 to $1.67 in non-GAAP diluted EPS.

We expect gross margin to decline in the third and fourth quarters, as a shift in revenue mix will compress margins. We continue to expect full year internal R&D spending to be about 11% of revenue. We have summarized our full fiscal year 2020 financial expectations on Slide number 10 of our supplemental charts.

We have higher SG&A investments planned for the second half of the fiscal year 2020, in order to support our pipeline of opportunities, and business growth. We plan to invest 5% to 6% of revenue in capital expenditures this fiscal year to support our growth strategy.

We also anticipate third quarter revenue will represent about a third of second half revenue. Before we take your questions, I would like to reiterate our key takeaways from AeroVironment second fiscal quarter. Our team's track record of delivering excellent quarterly results continues.

We are successfully executing our plan and remain on track to achieve our fiscal year 2020 objectives, and we continue to make great progress on our strategic growth initiatives.

I would like to take this opportunity to thank our employees for their focus and dedication, our customers for continuously challenging us to deliver the most effective solutions to support their mission success and you, our stockholders for your confidence in our team and our plans. We are dedicated to helping you proceed with certainty.

Brian, Steve, and I will now take your questions..

Thank you. Wahid. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Peter Arment at Baird.

Peter?.

Good afternoon, Wahid, Brian, Steve. Just I guess first question is, Wahid on the 89% visibility, could you maybe just give us a benchmark how that compares with previous years, where you've had – I guess the first six months.

I mean, it seems certainly pretty high compared to previous periods?.

Sure. So, Peter, good afternoon. First of all, our visibility and backlog numbers as Brian and I highlighted, is strong and higher relative to historical averages of multiple years. However, compared to last fiscal year, at the same time period, at the end of second quarter on our earnings call, we had a 97% visibility versus our 89% visibility today.

So, both of those two percentages although this year is slightly lower than last year, it is fairly high, compared to historical averages.

And we are on track with our plans as we've spoken to you before, we’ve delivered excellent results so far in the first half and we're focused on executing our long-term growth strategy and delivering the outcomes that we expect out of ourselves for the remainder of the year..

Got it. And then just as a follow-up, if you could just, you mentioned that you were on a larger Switchblade variant, when would we expect to, for you to have a product in that category? Thanks again..

Sure. Peter. So, I have mentioned this in the last quarterly earnings call as well. Basically, saying that our customers are looking at us to expand the Family VARs tactical missile systems product line, similar to what we've done in our small unmanned systems, fixed-wing UAVs.

And we've been working actively with a funded customer for some time now to develop a much larger variant of our existing Switchblade. This larger variant goes a lot further in terms of flight endurance, and it also carry a much larger mission effect and payload.

What it does is essentially opens up a much larger market opportunity for us, as an addressable market for TMS business and product line. We are not in a position to be able to disclose the specific timing of when we're going to be launching that and releasing it to the market, but we're making great progress.

We believe that we're onto a very compelling solution and we'll keep you updated as we progress through that process in the coming quarters..

Thank you, Peter. And our next question comes from Ken Herbert at Canaccord Genuity.

Ken?.

Hi, good afternoon everybody..

Good afternoon..

Wahid, I just wanted to start out, appreciate the incremental color you provided here on the LMAMS process and where you stand. You sound very confident in this award, by the end of your fiscal year for the potential of $260 million.

Can you talk about sort of the next steps in terms of this getting from here to this potential award and what are still sort of the risks outstanding or how you’d handicap this in terms of the prospect specifically for AeroVironment?.

Sure. Thanks, Ken. So, I appreciate your feedback on the colors that we provided, we try to do the best we can based on the information available to us, to keep you guys informed. And essentially, we are already engaged in a sole source of negotiations with the U.S. government, with the contracting office on a potentially three years.

First year is obviously sure, but there is two additional years to make it up to 3 years. We believe the value of this contract will be about – $60 million in total. Now, the reason why I highlighted that is number one, that's not reflected in our backlog today.

And number two, because of the continuing resolution that continues and the government fiscal year 2020 budgeting process, there is some risk as to the timing of that award being definitized. We are confident that we're going to get that the definitized in sometimes in near future.

However, the exact timing really is out of our control and to some extent even out of our customers' control based on the – what we are learning from their side. So, we are pleased, because this is a – historically a very large contract award.

This would be the first time, where we're getting a multi-award in the tune of a $160 million for our original Switchblade, which gives us basically visibility for almost about a three-year period for this product line. We still believe in the value creation and the compelling value proposition of our TMS business and Switchblade.

We believe that, as I said on the remarks that additional international customers could potentially benefit from this. And their interested parties there that we'll engage with. And we're executing our plan and so far on track with our results and look forward to updating you in the future..

That's great. And just a follow-up on this Wahid. I'm assuming that none of this contract award is factored into your fiscal 2020 guidance.

And at what point, assuming the CRR extends into say January or February, I mean, at what point does this become a real risk for fiscal 2020 or how would you handicap that?.

Yes. I would – you're welcome, Ken. So, I wouldn't conclude that it's not reflected. We have – at any given time, we have a very large number of opportunities at different levels of profitability and risk factors and profiles in timing.

So, we take all that into our calculation and come up with what we believe is the most large – most likely range of outcomes that we believe is possible. And we review that internally, very rigorously and judiciously. So, our forecast at this moment is based on what we believe is the most likely range of outcomes today.

Obviously, we're only through our first half of the year with outstanding results and we still have another half of the year to work through. We remain on track with our plans, and I would suspect that by next earnings call hopefully, we'll have more information to update you on the status of that contract and let you know how that goes..

Thank you, Ken.

Next, we'll turn to Louie DiPalma from William Blair, Louie?.

Good afternoon. Wahid, Brian and Steve..

Good afternoon..

Good afternoon..

As you guys are aware Raytheon indicated that, it is expecting to soon receive approval to export their Coyote tactical missile system.

I was wondering, what feedback have you received in your application process over the past couple of years?.

Sure Louie, this is Wahid. Thanks for the question. So, as I mentioned, we are engaged with multiple international customers and allies, who have shown strong interest and need for the capabilities of our Switchblade. We've also been heavily engaged with the U.S.

DoD and as the state department and working through the process to make sure that we get the export licenses required and approvals to be able to first and foremost market this to those customers and but also to eventually provided to them. As I said before, my belief is that it's a matter of when versus if.

And the exact timing of that, really, it's extremely difficult to predict exactly when would that happen. I believe that, the long-term prospects for that is pretty strong, and I would – as we get more updates and as we make progress through that process in some major milestones will be clear, we will be glad to update you on that as we're allowed.

So, that's where we stand on that. In terms of the Coyote there – I don't know, if that's exactly a similar product to this or not.

However, we are on track with our plans, we believe that, we've delivered excellent results for the first half, or the demand for Switchblade and our loitering Munition System is extremely strong as you saw for the funding line in the budgeting and the negotiations that we've got going. And we're focused on executing our strategy..

Okay.

And as a follow-up on that topic, what are the fundamental differences between Coyote tactical missile system and the Switchblade? And related to this, could the Switchblade also be used for counter UAS missions? In a previous answer, you spoke about how you're developing a Switchblade variant that could have new payloads? Could these new payloads be used for counter UAS missions?.

Sure Louie, so, I won't be able to comment into specific detailed differences, I'll be glad to – our team to provide that to you that most of that information is public, some of its publicly available. And I encourage you to look at those information’s.

But in general, when we conceived the concept and the design of our tactical missile systems or original Switchblade, we were very confident and so where our customers and the compelling and disruptive capability and differentiation of the solutions and its benefits. That fact still remains true.

And in fact, over the years we have been able to prove the fact that the customers, our customers who are using Switchblade see more-and-more benefits and advantages to the solution and for its capabilities. And that's why we've been able to grow that revenue and that business in that product line.

I’m confident that over the long term, we will be able to create a similar business or let's not larger than our small UAS business and our tactical missile family of systems and solutions.

So, I'm pretty bullish on the long-term prospects of our Switchblade in TMS business, and in terms of specifics differences, I encourage you look at some information that's available online. And there’s lots of that out there publicly available today. Now, in terms of additional payloads and capabilities for Switchblade for counter UAS.

We are very aware of the counter UAS demand and market opportunity and need. We've been engaged with multiple parties; we have not been able to disclose any of that publicly at this moment. However, our solutions, we believe has multiple applications beyond just the original use case of Switchblade that it was originally developed.

The partnership that we have with General Dynamics Land Systems, where we're equipping their ground combat vehicles with the future Switchblade systems and UAVs. And our partnership with Kratos, all are examples of additional use cases and capabilities that our systems bring to the Warfighter and our allies and the conflicts that we're involved in.

And we feel pretty confident about all those in the future..

Thank you, Louis. We’ll now take a question from Troy Jensen of Piper Jaffray. Troy? Troy you there. Okay. Is Ken Herbert, on the line our next question. Our next question..

Yes, Hi. Appreciate the follow-up. If I could Wahid, you also mentioned the significant interest or I think you said interest from multiple customers around the VAPOR product line and that you are also moving ahead with the plans to move production of that to Simi Valley, I believe you mentioned.

Can you just update on when you expect that process to be completed and when you expect that transition to be done? And any more detail on the interest you're seeing on the VAPOR and how that obviously is playing out relative to your initial expectations, since you made that acquisition?.

Sure, Ken. So, there are a number of different fronts that we addressing with the acquisition of Pulse and the VAPOR product line. First of all, in our sales and marketing activities, we want to make sure that we offer the set of new capabilities and mission capabilities to our existing both domestic, international customers.

In the back of all that, we also are integrating our operations, our core business processes, product development activities, future capability development and as well as operationally on our business processes, our enterprise resource planning processes, supply chain, production and all that.

So, my comments on the call earlier was that, overall, we're making really, really good progress with this acquisition and the integration activities.

Secondly, based on quite early, initial demonstrations and engagements that we've had with our existing customers with the VAPOR family of products, we've seen quite strong interest from both domestic, as well as international customers. And this was originally our plan and we're on track with that.

Obviously, these things don't happen overnight, because the acquisition process is very long process as you know from the rest of our solutions in our customers and the market that we're involved in.

However, based on our historical performances, we believe, we're making good progress and we continue to advance our strategy of creating value and leveraging this capability to our customers. And as we make more progress, we'll keep you updated.

So, by the end of our third fiscal quarter, we are going to be able to produce and manufacture the VAPOR product line and our Simi Valley operations where we make all of our small UAS, Made in America.

And we also have integrated our Kansas operations in terms of R&D and engineering, with the rest of our company in order to be able to develop the future products that we have in our pipeline in our roadmap..

I appreciate all the detail Wahid. If I could just one other follow-up. I'm sure, you've been following the Air Force and their Vanguard programs, and I'm just curious if the Golden Hoard, their swarming effort.

I know it's focused on munitions – smaller munitions initially, but I'm just wondering if there's any opportunity for the TMS product line or other parts of your portfolio as part of the swarming opportunity specifically the Golden Hoard opportunity from the Air Force?.

Sure, Ken. So, I am aware of the Golden Hoard potential program and also the concepts of swarming and the value and the capabilities that swarming could provide to the U.S. DoD and our allies.

I am of the belief and so is our team that our small UAS being fairly well-positioned for those types of applications and mission effects and mission capabilities.

We believe that having small UAVs, whether it's Switchblade or even our small UAV or fixed wing and rotary UAVs, all can play quite a compelling role in the swarming initiative and concepts that U.S. DoD has for future warfare systems and causes of operation. Very early for us to be able to provide any more details.

We are engaged with our customers; we are thinking about that we're informing them and showing them it's sort of a concept that we – they could be using that. But I think at this point, it's premature to claim or make any forecast as to where the actual specific application could be for this capable – for our systems today.

Long-term, as I said, we're very bullish on the long-term value creation potential of our business. We're executing our strategy, as we've seen quite well and we're delivering excellent results so far, and we look forward to updating you in the next few quarters of the year..

Thanks for the follow-up, Ken. Will try Troy Jensen again from Piper Jaffray.

Troy, are you there?.

Yes. Sorry, sorry about that guys. But congrats on the nice results..

Thank you, Troy..

So, Wahid, you mentioned several times kind of in your prepared remarks sole source for the LMAMS contract, is this your conviction that that's the case.

And is there any – ever any situation where they dual search?.

No. So, we made sure that we communicate this with our customer. It is our understanding, based on what it's publicly been already announced on various government public announcements that their engagement with AeroVironment is on a sole source nature. There was a full and open competition a couple of years ago, maybe more than two years ago.

And we've had several open competitions in the Switchblade product line and obviously we're proud of our track record because we've been the winner of those competitions essentially every single time.

So, we are quite confident that what we're hearing from our customers and what we've read publicly that we’re the sole negotiation – negotiating party in this contract because that's how it was published and that's how it's been communicated to us directly, Troy..

Alright, perfect. And then just my follow up would be on HAPS.

So, just be curious, you know what the next steps are, and when we will see the next trial flight?.

Sure. So, there is a few key points I want to point out about the HAPS program. Number one, we've executed our strategy and our plans very well so far. We've had two successful initial flights, and we're very proud of that. Our team has made phenomenal progress in the last two or so years.

We're now sort of ending the phase of the design and development and entering the phase of testing and certification. Testing and certification phase of this business launch really is a long process.

Imagine a commercial airliner that get certified through FAA, there is an extensive process you go through and there is going to be quite a lot of testing that is going to take place in that process.

We're at a very early stages of this and we will be conducting multiple, multiple flights over the period that we foresee in the future beyond fiscal 2020. That's also why I mentioned on my remarks that we don't expect the bookings in revenue for this business to change dramatically in the short-term or mid-term.

We expect that to continue as we have seen in the past couple of years. Lastly, I would say, this is an exciting opportunity. Because we're positioned really, really well from very large global market opportunity.

And while we're working towards building that business, we're generating revenue, we're developing a product that we could also use for defense applications, and we have contractual rights to be the sole designer, manufacturer, and hopefully also even the supporter of such HAPS systems, to our joint venture partnership with SoftBank.

So, to me, this is excellent results so far. We'll keep you updated as we have more significant milestones and we're making great progress..

Thank you, Troy. [Operator Instructions] We will now take a question from Joe De Nardi at Stifel.

Joe?.

Hi guys, this is John on for Joe. Wahid, can you kind of update us on the – can you update us on the UAV adoption rate trends that you're seeing with your international and domestic customers. I guess what we’re kind of looking for, are you making any headway in terms of accelerating the adoption rates. Internationally, especially and has the U.S.

government been helpful on that end?.

Sure. So, John, as you saw from our results, our small UAS continues to grow internationally, both in terms of existing customer and breadth of those customer share of wallet and spend, but also with repeat orders and expansion with investments with those customers and new customers and new geographies.

We have been very focused on that for the last three plus years very, very heavily. And our results demonstrate that. We also have a very strong track record of working with the State Department and achieving the required regulatory export licenses to be able to export that. Now, we're up to 45 plus countries worldwide. So, yes, the U.S.

government has been very supportive, they understand the value of this store allies and the – complex that we're involved in the world. And we see tremendous potential here. And our track record in the last three plus years also demonstrate, how strong this business has been and it could be in the future as well.

So, we're pretty pleased with that and the addition of our VAPOR family of systems, to our portfolio, obviously enhances the mission capabilities of our small UAS even further. It's another reason why we did that acquisition because it solves more of our customers' problems in a better way.

So, our business remains strong, our growth portfolio continues to advance and internationally, we're showing very strong as things in terms of growth and results as well..

Alright, thank you. Just kind of pivoting to the GD news, given your teaming arrangement there with GD Land System. Can you kind of update us on how you're approaching the news that GD was the sole contractor on the Army's optionally man fighting vehicle.

How are you viewing this opportunity internally, and can you kind of give us some details on how you're thinking about the size and the timing of this work?.

Thanks, John. Yes. I'm glad you noticed that based on the latest public announcements and publications that GDLS now remains to be the only qualified provider for that OMFV competition.

And not only GDLS was the only competitor or supplier left on that competition or opportunity, we're also their only partner in this and we really value that partnership mutually. We are working towards progressing those prototypes and concepts.

Obviously, that program is a multi-year program, the timelines are already published publicly and it's known in the market. And we are working actively with them to essentially mature that capability and deliver it to the end customer for possible eventual program record.

When the program happens and if it happens, there are several opportunities there. First, there is an opportunity for Greenfield that I refer to, which is, any new armored vehicles as part of that OMFV program potential, is qualified to receive an integration of our Switchblade and small UAS family of systems.

Secondly, also the existing installed base of armored vehicles, is qualified to some extent and could be a potential market for us to retrofit with our systems. So, we look forward to that and it's another way to see the potential application and prospects of growth for our solutions and its value creation for our shareholders and our customers..

And our last question comes from – follow-up question from Louie DiPalma at William Blair.

Louie?.

Thanks guys.

In terms of helping us build out our financial models, how does the potential future $160 million, three-year Switchblade procurement contract compare with what you're currently doing as an average run rate for Switchblade LMAMS procurement? I have calculated a rough $30 million increase based on how you publicly disclose $67 million in LMAMS contracts since April 2018.

Would you consider that to be in the right ballpark in terms of how this contract is incremental to what you're currently doing?.

Yes. So, Louie, the way that I would interpret [$160 million] is that, in the past, we've had – what I referred to as [indiscernible] joint urgent operational need statements, which enabled our customer to procure Switchblade on what I call almost an ad hoc basis.

What's unique about this contract and this potential award is that, it gives us a three-year window and one runway with that ceiling potential of about $160 million. And the $160 million comes from the government approved fiscal year 2019 budget, plus the unapproved, but submitted and proposed government fiscal year 2020 budget line items.

If you add those two-line items in the government fiscal year, it adds up to about $190 million or so. And so, we estimate that to be about $160 million sale environment as a result of that. Obviously, that is not guaranteed and it's also not potentially limited, because once we have a contract vehicle and government fiscal year 2021 comes along.

There is obviously a potential for us to go ahead and work with our customers based on demand and supply and see what needs to be done.

In terms of your questions, specific as to how should you comprehend that in your model? I'm not specifically privy to your model right now, what I can tell you is that, so far none of the $160 million that will be coming under this contract is reflected in our backlog. We do not have any of that reflected in our backlog as of today.

So, all of that basically, most likely will be incremental to our existing business on Switchblade going forward..

And just add to Louie’s point, our data to date that report TMS revenue, includes more than just the Switchblade production, there is customer-funded R&D and other kinds of revenue associated with other pieces..

That's right. Our TMS revenue includes more than just original Switchblade system..

Right.

Do you have any sense of, I guess what percentage of TMS revenue is Switchblade procurement?.

No, we do not unfortunately have that specific detail and we don't break them down by individual product for a number of reasons. Mainly, because of our customers' sensitivity towards that to begin with..

Okay.

And just one clarification, for your scripted remarks in which you said that you obtained more than 90% of the dollar volume for the task orders, was that for the five-year $248 million IDIQ that you were part of for April 2018 for the [long-range reconnaissance] is that what you were referring to?.

No, So, what I was referring to, Louie was that, roughly from 2013 until now, if you look at the IDIQ contract for small UAS, which was awarded by the U.S. Army to AeroVironment and multiple other competitors on that award. We have been able, based on task orders and delivery orders, secure over 90% of the dollars of that contract value.

And essentially, my point was that, while we have competition within our category, when it comes to competing for individual task orders, we have a very high win rate, and our record show that, demonstrate that, and support that.

We never count on that, we always respect competition, we always respect our customers' desire to have better-and-better performing solution, but it is a track record that it's worth noting to all of you..

And just to add a little bit to that question to answer your question. Louie, we won the initial Army UAS – small UAS contract back in 2005. We run its recompete and it has since been renewed, a couple of times, so prior to the April 2018 announcement of this latest $248.5 million IDIQ, we were operating under the prior iteration of the contract.

And so that explains any revenue from 2013 up through this current IDIQ..

And with that, we have no further questions. And we 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 www.avinc.com.

We wish you a healthy and a joyous holiday season and we look forward to speaking with you again following next quarter's results. Wishing you a good day..