AeroVironment, Inc.
Q4 2018 Earnings Call Transcript

Published: 26 Jun 2018

[Operator:]

Welcome to the AeroVironment, Incorporated Fourth Quarter and Full Fiscal 2018 Earnings Call. My name is Adrianne, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded, and I will turn the call over to Steve Gitlin. Steve Gitlin, you may begin.

[Steve Gitlin:]

Thank you very much, Adrianne, and welcome to our fourth quarter and full fiscal 2018 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 include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements; and may contain 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. Factors that could cause actual results to differ materially from the forward-looking statements, include but are not limited to, reliance on sales to the U.S. government; availability of U.S. government funding for defense procurement and research and development programs; changes in the timing and/or amount of government spending; our ability to perform under existing contracts including the asset purchase agreement for the proposed sale of our EES business and obtain new contracts; risks related to our international business, including compliance with export control laws; potential need for changes in our long-term strategy in response to future developments; the extensive regulatory requirements governing our contracts with the U.S. government and international customers; the consequences to our financial position, business and reputation that could result from failing to comply with such regulatory requirements; unexpected technical and marketing difficulties inherent in major research and product development efforts; the impact of potential security and cyber threats; changes in the supply and/or demand and/or prices for our products and services; the activities of competitors and increased competition; failure of the markets in which we operate to grow; uncertainty in the customer adoption rate of commercial unmanned aircraft systems; failure to remain a market innovator and create new market opportunities; changes in significant operating expenses, including components and raw materials; failure to develop new products, product liability, infringement and other claims; changes in the regulatory environment and general economic and business conditions in the United States and elsewhere in the world. For a further list and description of such risks and uncertainties, see the reports we file with the Securities and Exchange Commission. The content of this conference call contains time-sensitive information that is accurate only as of today, June 26, 2018. The company undertakes no obligation to make any revision to the statements contained in our remarks or to update them to reflect events or circumstances occurring after this conference call. We will now begin with remarks from Wahid Nawabi. Wahid?

[Wahid Nawabi:]

Thank you, Steve, and welcome to our fourth quarter and full fiscal year 2018 earnings conference call. On today's call, we intend to convey four key messages. First, our team continued to deliver outstanding financial and operational results in fiscal 2018. Second, we have developed a multi-year track record of meeting or exceeding our annual guidance and progressing toward our long-term value creation objectives. Third, we are reshaping our portfolio to put all our focus on solutions based on robotics, sensors, software analytics, and connectivity to serve promising large global markets consisting of defense, telecommunications, and commercial information solutions. And fourth, we are making strategic investments to realize these large and exciting opportunities. Two years ago, I was privileged to assume my current role at AeroVironment. Since that time, our team has remained committed to achieving success and creating value for all of our stakeholders. Today, I will begin by discussing the strategic reshaping of our portfolio with the formation of our HAPSMobile joint venture with SoftBank, and anticipated divestiture of our Efficient Energy Systems business segment. Then, I will summarize our strong performance in fiscal 2018 by highlighting our financial results, discussing how we performed against our goals, and reviewing our achievements. Next, Teresa will provide a more detailed summary of financial performance, and I will discuss our goals for fiscal 2019 before Teresa, Steve, and I take your questions. First, I would like to take a moment to discuss our recently-announced strategic portfolio reshaping through the divestiture of our EES business and our increased focus on UAS and TMS. As a result of our ongoing strategic review of our business portfolio and given the exciting opportunities in our UAS business for small UAS, Tactical Missile Systems, High-Altitude Pseudo-Satellite or HAPS, and Commercial Information Solutions, we determine that our UAS business will drive the greatest value for shareholders and requires a 100% focus and investment of time and resources. Given the anticipated divestiture of EES, which we expect it to be completed in our first fiscal quarter, the earnings from this business will be reflected as discontinued operations in our financial statement. Now, for our fiscal 2018 financial highlights; throughout the year, we executed our strategy effectively delivering strong financial results across our portfolio of businesses that exceeded our fiscal 2018 guidance. Fiscal 2018 results are as follows

[Teresa Covington:]

Thank you, Wahid, and good afternoon everyone. On June 1, 2018 we entered into an asset purchase agreement with Webasto Charging Systems, Incorporated, in which we agreed to sell substantially all of the assets of our Efficient Energy Systems business segment and to transfer certain liabilities related to the EES business. As of April 30, 2018, we determine that the EES business met the criteria for the classification as an asset held for sale, and represents a strategic shift in our operations. Therefore, the assets and liabilities and the results of operations of the EES business are reported as discontinued operations for all periods discussed. AeroVironment's fiscal 2018 fourth quarter results are as follows

[Wahid Nawabi:]

Thanks, Teresa. We are focused on delivering profitable growth through our innovative technology solutions. We believe we are in a leading position from multiple large global market opportunities, and with the reshaping of our portfolio we are well-positioned for long-term value creation. Our fiscal 2019 goals which are consistent with our long-term strategy are as follows

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Joseph DeNardi from Stifel. Please go ahead.

[Joseph DeNardi:]

Yes, hi, good afternoon everybody.

[Wahid Nawabi:]

Hi, Joseph.

[Joseph DeNardi:]

Wahid, last year you mentioned that TMS was also $75 million, maybe half of it was R&D, half of it was product-related; could you just give us an update on what that looked like last fiscal year?

[Wahid Nawabi:]

Sure, Joe. As I said in my remarks that we have achieved significant progress on our Tactical Missiles Systems business in general, given the record backlog that we booked in the fiscal year, primarily due to government fiscal year budgeting delays and appropriations that we saw in fiscal -- government fiscal year 2018, the timing of those bookings were such that our ability to deliver those products by the request of our customers within fiscal 2019, fiscal 2018 -- I am sorry, did not really take place. So, essentially that revenue showed up -- those order showed up as backlog, which we intend to execute in the fiscal year 2019. We feel very strong about the prospects of the long-term value creation and robust business in our TMS business long-term. As you know, the Switchblade product is the product of choice or the solution of choice within our U.S. DoD customers, and we have successfully won several of the competitions that are out there, and we also intend to expand that portfolio of the Tactical Missile Systems variants in fiscal '19 as you heard in my remarks. So we achieved a lot of milestones that I mentioned, but however, the government fiscal year budget timing delayed the recognition of that revenue in fiscal 2018.

[Joseph DeNardi:]

Yes, I guess what I am trying to get at it is, when you think about the potential from the variants of Switchblade, what was the customer-funded R&D for TMS last year if you can talk about it?

[Wahid Nawabi:]

So, unfortunately, due to the nature of those programs, I am not able to comment specifically on those particulars, but as I said in my remarks, we continue to see demand and desire from our customers for our Switchblade and its variants. We see -- we have booked revenue both in terms of product delivery revenue as well as services revenue for development of variants, which to me is both positive indicators for the TMS business, and we will share more details on this tomorrow during our Analyst and Investor Day.

[Operator:]

And our next question from Peter Arment from Baird. Please go ahead.

[Peter Arment:]

Yes, good afternoon, Wahid, Teresa, and Steve.

[Wahid Nawabi:]

Hi, Peter.

[Peter Arment:]

Wahid, question regarding -- hi, thanks for the revenue kind of the moving parts on the revenue side, you mentioned that I think on the earnings per share for the year for fiscal 2019, normally you’ve kind of provided a little bit of cadence how you think the bottom line, it sounds like it’s fairly balanced through the year just given the way the shipments are falling through, just maybe a little more color on that?

[Wahid Nawabi:]

Yes. Peter, so as I said on my remarks at the end that our revenue distribution throughout the year remains fluctuating primarily because of the nature of our business, right. We see – historically, we have seen higher fourth quarters and lower first quarters and first-halves, however, in fiscal 2019 as I said on my comments, we expect that half of our fiscal year's revenue to occur on the first-half of the year, and approximately half of the first-half revenue to occur within our first quarter of this fiscal year, so generally speaking the main contributor to that of course is these large historical levels of backlog, and the bookings that we have in our backlog that enables us to execute on that earlier within the year. And that would be the overall distribution of revenue throughout the year. In terms of EPS, we have only provided guidance for the full-year, and that is the range of EPS from continued operations -- $1.10 to $1.40, but that does include a one-time gain from a previously disclosed litigation of $0.25 to $0.26 per share.

[Peter Arment:]

Yes, just regarding the latter, do you know when that officially will be flowing through in terms of is it in the first-half or is it -- how do we expect to see that…?

[Wahid Nawabi:]

Yes, we expect that to occur, the one-time gain to occur during the first quarter of this fiscal year, and we also expect the EES divestiture to occur during the close, during the first quarter of this fiscal year.

[Operator:]

And our next question comes from Nick Johnson from Piper Jaffray. Please go ahead.

[Nick Johnson:]

Hey guys, congrats on a great fiscal 2018.

[Wahid Nawabi:]

Thank you, Nick.

[Nick Johnson:]

So I just -- it sounds like your domestic business is doing well, which is great, I just want to maybe touch more on your international opportunities, maybe give some update there, and any potential from the tariff or trade restrictions that have been going on internationally by our government, is that -- would that potentially impact you guys as well?

[Wahid Nawabi:]

Sure. So, most of the news that we see in the public domain related to foreign trade and foreign military sales are related to programmatic sort of products and capabilities within the U.S. DoD. However, given -- having said that, we expect our international business to remain strong. It's been very strong throughout the last several years as you have seen in our results. We are up to 45 countries now internationally in terms of new customers or existing customers for AeroVironment, and the amount of our revenue for Tactical, UAS internationally is also very healthy. We also booked the largest ever order from a Middle East nation as you saw on my remarks for $44.5 million. So, going forward in fiscal 2019, as I said for the past few years, we believe that our international business is strong and diverse, and we continue to see desire and interest and demand from our customers, and we expect to continue that momentum in fiscal 2019. The governments around the world, allied nations also see tremendous value in our capabilities given the type of conflicts that are going on around the world, essentially almost every continent and every region of the world. So we feel quite positive about our products. We do have to obtain export licenses for every single one of our UAS shipments for international customers. We have been very successful of that historically, and there is always a timing risk on that as before, but we don't expect that to be any issues in fiscal 2019.

[Nick Johnson:]

Okay, thank you. And then just as a follow-up, you mentioned in your commentary that there is some opportunity also in Homeland Security which we haven't seen before. So what kind of -- what's the size of that opportunity and maybe in comparison to the -- what you have seen in U.S. Army?

[Wahid Nawabi:]

Sure. So, similar to the other businesses that I mentioned earlier, the government's fiscal year '18 budget procurement and appropriation process delays caused some delay in the acquisition process and the obligation of those funded dollar that are already approved in the budget -- of the government's budget that's already approved in fiscal '18. So however, in fiscal -- government fiscal 2017 budget, there was about $4 million worth of appropriations, specifically for small UAS and our solutions for the Department of Homeland Security. There was approximately $10 million worth of funding approved in government fiscal year '18, which you can these figures publicly in the release documents from the government. So we have delivered the initial systems, which we shared with you guys publicly several quarters ago. However, the $10 million funding line item has not been obligated yet, and we are working with our customer through the process of fulfilling that demand, and we continue to see the demand and the request from DHS, specifically the customs and border patrol for our solutions. They see great value in our solutions. We believe that it delivers a very unique compelling value proposition for border patrol and border security. However, the timing delays due to the appropriation process could vary.

[Operator:]

[Operator Instructions] And our next question comes from Brian Ruttenbur from Drexel Hamilton.

[Brian Ruttenbur:]

Yes. Thank you very much. So first of all, if I could get a breakdown of depreciation and amortization going forward when you exclude the EES, I am just trying to figure out your cash flows and EBIDTA going forward, if you could talk a little bit about that and your guidance for cash generation in fiscal 2019?

[Teresa Covington:]

Hi, Brian. We have not provided guidance on the cash in the past. On the capital side, in 2018, we invested $9.6 million in depreciation and amortization. Historically, over the last couple of years from continuous operations, we have invested 4% of revenue in capital. And so -- and historically it's been in the 3% to 5% range. We would expect it to be in that range in fiscal 2019. Regarding cash, we haven't forecasted cash; we had very strong cash from operations in fiscal 2018.

[Brian Ruttenbur:]

Okay. So what is your depreciation, amortization on a going forward basis excluding the EES?

[Teresa Covington:]

Well, we had $6 million in fiscal '18. We haven't provided a forecast of what that looks like in 2019, but we do expect the amount of capital that we are spending to be in the 3% to 5% range of revenue.

[Brian Ruttenbur:]

Okay. And then plans for cash, you have roughly $300 million in cash, I think that you are talking about ramping up certain operations getting ready to perform on this opportunities in front of you on demand side, what kind of capital is that going to require outside of your traditional CapEx? Do you see that there is going to be increased use of your capital outside of that?

[Wahid Nawabi:]

So Brian, this is Wahid. That's a really good question. As I said in my remarks, first and foremost, the board and our leadership team, we review our capital allocation and the return on that capital regularly, and quite rigorously. Inherent to our business strategy is the timing of certain market adoptions that we are pursuing within our business strategy. And when and if those adoptions take place, the demand for cash to scale our various businesses still remains quite strong and healthy. So for example, we have utilized some of our cash in fiscal '18 as you saw and the formation of our joint venture for HAPSMobile with SoftBank Corporation, and there is primarily two methods or means of utilization of capital for that business. One, as we ramp up that business and demonstrate the capability we will be building facilities and manufacturing capacity to manufacture airplanes to sell to the joint venture, AeroVironment will. And then secondly, we still have an option to increase our ownership in the joint venture from 5% today up to 19% at a certain time. And so, if we were to increase that, that will consume additional capital for that. And obviously, this is considered to be a very large global business. The rollout of 5G connectivity and mobile telephony and telecommunication is a multibillion dollar opportunity based on several, several reports publicly, and HAPSMobile is right at the center of that opportunity in terms of the enablement capabilities to achieve that globally. So that's just one example of uses of our cash amongst many other such as our Tactical Missile Systems business, International business et cetera.

[Operator:]

And the next question comes from Nick Johnson from Piper Jaffray. Please go ahead.

[Nick Johnson:]

Sorry, I just had one more follow-up here. I know in the past you split out revenue between UAS and EES, I know obviously EES is going forward, maybe we could get the figures for this quarter, help give an idea of kind of core business growth projected in 2019?

[Wahid Nawabi:]

Nick, are you referring to EES revenue as discontinued operations for this fiscal year's first quarter?

[Nick Johnson:]

No, for fiscal fourth quarter, this previous quarter here; I know in the past you guys have given out revenue between the two segments.

[Teresa Covington:]

So Nick, in the fourth quarter, UAS revenue was $117.4 million. In the first quarter of '17, UAS revenue was $115.7.

[Nick Johnson:]

So, it was - okay, I see. So, the total not there - kind of not from EES, is that correct?

[Teresa Covington:]

That is correct. That's just the continuing operations.

[Wahid Nawabi:]

Yes, the balance of it would be the EES…

[Nick Johnson:]

Got it.

[Wahid Nawabi:]

-- discontinued operations.

[Nick Johnson:]

Understood, thank you.

[Wahid Nawabi:]

You are welcome.

[Operator:]

This concludes our question-and-answer session, and I will turn the call back over to Steve Gitlin for final remarks.

[Steve Gitlin:]

Thank you, Adrianne, and thank you all for your attention today, and your interest in AeroVironment. An archive version of this call, all SEC filings and relevant company and industry news can be found at our Web site, www.avinc.com. A live audio webcast of tomorrow's Investor and Analyst event will begin at 8

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating, and you may now disconnect.