AeroVironment, Inc.
Q4 2015 Earnings Call Transcript

Published: 1 Jul 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the AeroVironment Incorporated Fourth Quarter Fiscal 2015 Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after 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; Interim CFO, Teresa Covington; and Vice President of Investor Relations, Mr. Steven Gitlin. And now at this time I'd like to turn the conference over to Mr. Steven Gitlin. Please go ahead, sir.

[Steven A. Gitlin:]

Thank you, Tamara. Welcome to AeroVironment's fourth quarter and full fiscal 2015 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, June 30, 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?

[Timothy E. Conver:]

Thank you, Steve. The AeroVironment team made great progress on our business objectives in fiscal 2015. Our results are best summarized by the two following achievements

[Teresa P. Covington:]

Thank you, Tim, and good afternoon, everyone. AeroVironment's fiscal 2015 fourth quarter results are as follows. Revenue for the fourth quarter was $86.5 million, an increase of $13 million or 18% as compared to $73.5 million a year ago. Looking at revenue by segment, UAS revenue was $78.7 million, an increase of $18.7 million or 31% compared to last year. The increase was primarily due to higher product deliveries of $9.1 million, higher customer funded R&D work of $12.7 million, offset with lower service revenue of $3.1 million. EES revenue decreased $5.7 million or 42% to $7.8 million in the fourth quarter. This decrease was primarily due to lower product deliveries of our industrial EV charging solutions. Turning to gross margin, gross margin for the fourth quarter was $45.4 million, an increase of $15.2 million as compared to $30.1 million in the prior year. By segment UAS gross margin increased $16.8 million or 66% to $42.3 million in the quarter. The increase was primarily due to favorable product mix. As a percentage of revenue, gross margin for UAS increased from 42% to 54%. EES gross margin decreased $1.6 million or 35% to $3 million in the quarter, primarily due to lower sales. As a percentage of revenue, EES gross margin increased from 35% to 39%. SG&A expense for the fourth quarter was $15.6 million or 18% of revenue compared to SG&A expense of $17 million or 23% of revenue in the prior year. R&D investments for the fourth quarter were $22.3 million or 26% of revenue compared to R&D investments of $6.2 million or 8% of revenue in the prior year. Operating income for the fourth quarter was $7.5 million or 9% of revenue compared to prior year operating income of $6.9 million or 9% of revenue. Operating income was higher primarily due to higher sales and gross margin. Other expense net for the quarter was $0.5 million compared to the prior year other income net of $2.9 million. Other income was lower primarily due to the prior year gain related to our convertible notes investment. No convertible notes were held in the fourth quarter of this year. The effective tax rate for the quarter was minus 1.2%, a decrease from the prior year of 18.2%. Net income for the quarter was $7.1 million or $0.31 per diluted share compared to the net income of $8.1 million or $0.35 per diluted share in the same quarter last year. On an adjusted basis, which excludes the impact of the convertible bond and related equity investment, fourth quarter EPS would have been $0.32 per diluted share compared to $0.27 per diluted share in the same quarter last year. We have provided an EPS reconciliation table in the press release. Now moving quickly through the fully year fiscal ‘15 results. Revenue for the year was $259.4 million, an increase of $7.7 million or 3% as compared to $251.7 million in the prior year. UAS revenue increased $12.1 million or 6% to $221 million, primarily due to higher product deliveries of $12.2 million and higher customer funded R&D work of $8.6 million, offset by lower service revenue of $8.6 million. EES revenue decreased $4.4 million or 10% of $38.4 million, primarily due to lower product delivery of our industrial EV charging solutions and lower passenger EV charging solutions. Gross margin for the year was $104.3 million, as compared to $93.6 million in the prior year. This represents an increase of $10.7 million or 11%. UAS gross margin increased a $11.9 million or 15% to $92.7 million. The increase was primarily due to favorable product mix. As a percentage of revenue, gross margin for UAS increased from 39% to 42%.EES gross margin decreased $1.2 million or 10% to $11.6 million, primarily due to lower sales volume. As a percentage of revenue, EES gross margin remained at 30%. SG&A expense for the year was $55.8 million or 21% of revenue compared to $55.7 million or 22% of revenue in the prior year. R&D investments for the year were $46.5 million or 18% of revenue compared to R&D investments of $25.5 million or 10% of revenue in the prior year. Operating income for the year was $2 million or 1% of revenue compared to operating income of $12.4 million or 5% of revenue last year. Other expense net for the year was $0.1 million compared to the prior year other income net of $2.5 million. Other income was higher in the prior year primarily due to the gain related to the conversion feature of our convertible notes investment. The effective tax rate for the year was minus 52.9%, compared to the effective tax rate from prior year of 7.9%. Net income for the year was $2.9 million or $0.13 per diluted share compared to the net income of $13.7 million or $0.60 per diluted share last year. On an adjusted basis, which excludes the impact of the convertible bond and related equity investment, EPS would have been $0.13 per diluted share compared to earnings of $0.56 per diluted share in the prior year. Looking at backlog, funded backlog at the end of the fourth quarter was $64.7 million, down $1.2 million or 2% from April 30, 2014. Turning to our balance sheet, cash equivalents and investments at the end of the fourth quarter totaled $275.6 million, up $17.4 million from the prior quarter. The increase in cash equivalents and investments was driven by lower working capital needs and higher income. Turning to receivables at the end of the fourth quarter, our accounts receivable, including unbilled receivables, totaled $51 million, up $5 million from the prior quarter. Total days sales outstanding was at approximately 53 days compared to 61 days at the end of the prior quarter. Taking a look at inventory, inventories were $39.4 million at the end of the quarter compared to $48.8 million at the end of the prior quarter. Days in inventory were approximately 86 days compared to 106 days at the end of the prior quarter. Turning to capital expenditures, in the fourth quarter, we invested approximately $3 million, or 3% of revenue in property improvements and capital equipment. AV recognized $2 million of depreciation in the quarter. For the full-year, we invested approximately $5.3 million or 2% of revenue in property improvements and capital equipment and recognized $8.4 million of depreciation and amortization. During the fourth quarter of our fiscal year ended April 30, 2015, we identified a presentation error in our consolidated statements of cash flows for the fiscal years ended April 30, 2013 and 2014 and for the first three quarters of the fiscal year ended April 30, 2015. The amortization of premiums related to held-to-maturity investments was presented within the investing activity section rather than the operating activity section of our consolidated statements of cash flows. We corrected the error by restating those prior financial statements in the notes included in our Form 10-K for the year ended April 30, 2015. The error did not impact our consolidated balance sheet, consolidated income statements or the overall change in cash flow for any of those periods. Now an update to our fiscal ’16 visibility. As of today, we have fourth quarter ending backlog that we can execute in fiscal ’15 of $61 million. We had various orders; we’ve booked to date in the first quarter of $19 million. Incremental revenues to hold EES revenues flat year-over-year $38 million. And finally the balance of the government fiscal 2015 that we have not booked yet of $43 million. This adds up to $162 million or 60% at midpoint of revenue guidance. Now I'd like to turn things back to Tim to discuss AV's expectations for fiscal ’16.

[Timothy E. Conver:]

Thank you, Teresa. We’ve a strong position in our core small UAS and efficient energy systems business, as demonstrated by our leading market share and ongoing competitive success. The core business has strong profitability as evidenced by our gross profit and the markets for both segments suggest long-term growth trends. We anticipate single-digit growth in our core business this fiscal year and continued opportunity for long-term growth. But our growth strategy for AV goes far beyond our core business. In our growth portfolio, our 2015 incremental investments solidified the positions we’ve been building to compete for and capture identified tactical missile systems, Global Observer, and MALE UAS opportunities. We expect contract decisions on each of these opportunities are likely to be decided over the next 24 months. Each of these three opportunities represents initial adoption into potential billion dollar markets. With the strong positions we’ve established last year, we can fund the ongoing pursuit of these new significant opportunities as well as support growth in our core business without incremental IR&D and SG&A spending levels this year. Building the strong position we want in the very large commercial UAS market opportunity that we believe is emerging, will require incremental investment in both IR&D and SG&A this year. We intend to invest this year to develop enterprise solutions for global vertical markets including energy and agriculture and an innovative commercial small UAS. Third-party forecasters project billion dollar market growth in commercial UAS. Our potential return on investment could be very large with success in this opportunity, but we will need to invest prudently now or risk missing a wave of adoption. These incremental investments in commercial UAS market solutions could offset much of the operating profit, our core business would otherwise generate this year, resulting reduced or possibly no operating profit in fiscal 2016. As a result, we will guide profitability for FY2016 at a gross profit margin level. With that background, we expect fiscal 2016 revenue of between $260 million and $280 million and gross profit margin between 36% and 37.5%. We will maintain focus and visibility on the underlying gross profit, competitive effectiveness and revenue growth of our core business throughout FY16, while we pursue key new opportunities in tactical missile systems and large UAS. We will prudently manage gated investment decisions to develop winning solutions for our new commercial UAS business. We see a future full of opportunities to drive shareholder value through success in these new markets. We built our core business by developing innovative new solutions and we’re familiar with the process of new market adoption. We will remain constructively engaged with lead adopting customers which positions us to make informed decisions on investments in order to be first to market with the right solution. As new opportunities develop in these dynamic emerging markets, we will continue to be guided by optimizing our return on invested capital and maximizing shareholder value. There are numerous specifics regarding our innovative solutions for these new opportunities that we cannot discuss in order to maintain a competitive advantage or because of customer confidentiality agreements. To the extend that these constrains ease in the future, we will share these bold and innovative solutions with you. Across our business, our technology solutions are designed to bring our current and our future customers the confidence to proceed in the complex and uncertain world in which they operate. Others have recognized our performance with Aviation Week selecting us as the top performing company in the $250 million to $1 billion revenue category. This recognition reflects the quality and the performance of our people. From design engineering to production, from procurement to sales, our people strive everyday to do what's right for our customers and our shareholders. As always, thank you to the members of the AeroVironment team whose creativity, passion and grip turns bold ideas into compelling value propositions for our customer’s. To those customers who place their trust in us and to you on this call for your interest in AeroVironment. Teresa and I will now take your questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Andrea James with Dougherty & Company. Your line is now open. Please go ahead.

[Andrea James:]

Hi, guys. Thanks so much for taking my questions. Can you touch upon …?

[Timothy E. Conver:]

Hi, Andrea.

[Andrea James:]

Hi. You touched upon this in your opening remarks. So I was hoping if you could go a bit deeper. You said you’re expecting single digit growth in your core business. And I guess that accounts for all of the guidance. So I just want to make sure it does the FY ’16 guidance imply any recognized revenue growth against Switchblade Commercial UAS or Global Observer?

[Timothy E. Conver:]

Well Andrea, I think I mentioned in the prepared remarks are observed that we have been delivering revenue from Switchblade programs for the last few years, that’s a combination of hardware deliveries, customer funded R&D and services. So, certainly ongoing revenue from Switchblade in fact probably growing revenue from Switchblade this year. In terms of Global Observer, we don’t have Global Observer revenue built into our core plan. I did mention that we expect the first opportunity for a contract decision on Global Observer from a foreign government within the next 24 months back to predicting the timing of adoption of innovation being difficult.

[Andrea James:]

Okay. And then, I guess I’ll just throw this out there, because it was in the news this week. Do you have any thoughts on the board structure in light of the activist letter that kind of made the rounds?

[Timothy E. Conver:]

Well we haven’t responded to that letter at this point. As always we continue to welcome open communication with all of our shareholders and we value the input that is particularly direct towards enhancing shareholder value. So, we’ll continue to make all of our decisions around the business from a management and a board level with the focus on strong corporate governance and maximizing shareholder value.

[Andrea James:]

Thank you. I’ll hop back in the queue.

[Operator:]

Thank you. And our next question comes from the line of Troy Jensen with Piper. Your line is now open. Please go ahead.

[Troy Jensen:]

Hi, congrats on the nice quarter and the margins.

[Timothy E. Conver:]

Thank you.

[Troy Jensen:]

Just to follow-up a little bit on the commercial opportunities here. Do you think you’d be selling military quality UAVs in the commercial applications or do you plan on like a new line of hardware to get into the commercial space or will you guys entrance be more on the services side like you’re doing with BP?

[Timothy E. Conver:]

We have a primary focus on enterprise solutions that would address large global vertical markets like energy, like agriculture and our experience to date has brought us down to a business model that we’re developing that would comprise capturing data from small unmanned aircraft and that amounts to specific and sometime specialized payloads on small UAS platforms that we think will be optimized for these enterprise solutions in industrial markets. So probably a long way of saying that our target solution would be built around platforms that would be optimized for commercial applications rather than military applications.

[Troy Jensen:]

Right.

[Timothy E. Conver:]

Beyond that collection of course we’ve got a lot of data analytics and software presentation capability to close the loop on an actionable information enterprise solution. The entry into our engagement with commercial customers however has been based on applying our previously developed and proven small UAS from the military and Puma being the first FAA certified small UAS for commercial applications has been a great help in working with BP and others in that area.

[Troy Jensen:]

And so, if I could follow-up with a couple of questions for Teresa here mainly on the model and mainly on the expense side. I understand you kind of talked about the investments maybe offsetting the operating profits, but if we just look at the R&D, I mean it was up significantly here in April quarter, how do we think about modeling that on a quarterly basis through 2016? And you maybe touched on SG&A it spiked up a bit here, does it grow from this level or was there some onetime stuff in the fiscal fourth quarter?

[Timothy E. Conver:]

The R&D in Q4 was abnormally high from our prior run rate and is not a level that we expect to maintain going forward. We were closing out a year of incremental investment to position ourselves in these new markets and we got off to a bit of a late start and a strong finish.

[Troy Jensen:]

But I guess, I was wanting Teresa -- or for Teresa specifically that we’re too much into the quarter, so you’ve got to have a fairly good grasp on what your R&D expense should look like this quarter. So could you just kind of give us a range of where you think that number will be?

[Teresa P. Covington:]

I think the R&D for the first quarter, if you exclude the fourth quarter from 2015; the range for R&D will be in the range of the quarters from fiscal ’15, quarters one, two and three.

[Troy Jensen:]

So you’re talking $7 million to $8.5 million roughly on a quarterly basis.

[Teresa P. Covington:]

Correct.

[Troy Jensen:]

But you said excluding July quarter, most of that would -- might be at a higher level?

[Teresa P. Covington:]

As Tim mentioned, the fourth quarter was abnormally high at $22 million. Our first three quarters of fiscal ’15 were closer to our historic levels in terms of R&D investment.

[Operator:]

Thank you. And our next question comes from the line of Peter Arment with Sterne, Agee. Your line is now open. Please go ahead.

[Peter Arment:]

Hi, yes. I guess, just to follow-on on that Tim. The last couple of years you’ve kind of had a revenue base that kind of was 40% in the first half of the fiscal year and kind of 60% in the second half of the year. With the guidance range you put out and obviously there’s a lot of moving parts and I don’t want to have any doubt on any of it, but how do we think about kind of the revenue progression throughout the year?

[Timothy E. Conver:]

I think the best -- a good way to approach that is just looking at those historic patterns that you mentioned. We have been about 60% in the first half -- 40% in the first half, and 60% in the second half. Even as we look at 2016, Q1 this year probably looks a lot like Q1 last year.

[Peter Arment:]

Okay. That’s helpful. And then Tim, if I could ask you about, in terms of your building cash position. You guys continue to obviously generate a lot of cash and make the necessary internal investments on these, a lot of these growth opportunities. But at what point do we, either the cash just for term record, shareholders or you see an external use for where you’re going to look to acquire or something. Can you give us a little color on your thoughts on that? Thank you.

[Timothy E. Conver:]

Yes, absolutely. The management and the board are regularly looking at capital allocation and evaluating options for return on invested capital. To date, we have continued to look at that in the terms of primarily these very large growth opportunities that we are pursuing and that we’ve been talking about today in positioning for multiple new market opportunities that have billion dollar potential. Our investments to date have primarily been in, on the income statement to position ourselves for those markets. When those markets adopt, we expect the likelihood and historically we have seen the necessity to increase our investments to ensure adoption. And once they have adopted and begin to scale across an industry, if we then have proven -- if it then proves to be the kind of large opportunity we believed, we will either be displacing or attracting the largest competitors in the space. Which means, we will have to move with great agility and make meaningful investments to secure a leading position in order to deliver the return to our stock holders that we have been investment for all these years. That ability to move with agility is significantly enabled by the cash on the balance sheet and that’s what has driven our structure to date. At some time in the future, if in the context of those compelling returns on executing our plan, the board -- if the board ever determines that we continue -- that we, in that time have excess cash then obviously we will consider other uses of that cash.

[Peter Arment:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Bobby Burleson with Canaccord. Your line is now open. Please go ahead.

[Bobby Burleson:]

Hi. This is a question for Tim. I was curious when I look at the opportunity for Commercial UAS, can you talk about additional investments in enterprise solutions. How much is data analytics part of that investment in developing your own proprietary data analytics? And how long could you sustain that investment, if you’re looking at energy and agriculture and maybe other verticals, how much re-use do you get out of what you developed for one?

[Timothy E. Conver:]

Data analytics, we believe will be a significant element of that system solution that we intent to deliver and that we believe will be the basis of the winning solution. To date we have addressed that with the combination of internal development and extensive use of external partners. So I think we will continue that approach. We do not intend to build out everything from scratch. So wherever possible as we have to date, we’ll engage with the existing enterprises that have large and optimized solutions much like we’ve done in addressing the multiple applications with BP on the North Slope. So its -- I don’t know if that fully answered your question, but I’ll wait to have you follow-up.

[Bobby Burleson:]

No, that definitely helps. So you obviously don’t want to compete with your customer lets say in the agricultural space it sounds like.

[Timothy E. Conver:]

No. But the agricultural vertical at least this much if not more so than energy is, is a pretty complex set of opportunities that runs through across the growers operation and precedes it and follows they proved after that leaves the grower. So it’s a pretty interesting opportunity rich new frontier I believe.

[Operator:]

Thank you. And our next question comes from the line of Greg Konrad with Jefferies. Your line is now open. Please go ahead.

[Greg Konrad:]

Good afternoon. I was hoping just to start on the EV business. I looked at EES in the quarter, it was down a bit. I think you said some of that was the industrial business. When I think about the past couple of years, you’ve announced a number of agreements with electric cars for, on the charger side. Can you maybe discuss a little bit what type of take rate you’re seeing there, and some of the larger opportunities to announce other agreements with OEs?

[Timothy E. Conver:]

Well we do have a half a dozen relationships with some of the largest auto manufactures in the world. They’re a very important part of our business strategy. One of our channels for distribution of our charging systems is through the dealer networks of those OEMs. We think it’s particularly important that we’ve been able to announce this recent adoption of Volvo of TurboCord that now included TurboCord with the delivery of their plug-in vehicles that will begin with their premium model launch in North America later this year. That’s an entirely new distribution channel. It has the potential to grow across we believe other OEMs. It seems to us like a compelling advantage to consumers. And that channel has the ability to significantly lever volume, because it comes with the car when the consumer buys it.

[Greg Konrad:]

That makes sense. And then just to follow-up on cash, you had a very good conversion rate this year and it seems like inventories came down quite a bit. What should we expect going forward and kind of given the growth expectations of ’16, should we expect working capital to come up a bit from ’15?

[Timothy E. Conver:]

I think the biggest -- we were very focused on driving that inventory number down this year. That inventory number peaked a couple of years ago and it’s been a priority for the -- the operating management team to get to the target that they achieved at the end of the fourth quarter. I think at this point going forward, it would be a good assumption to just plan on us keeping the same kind of rations as we move along with growing revenue.

[Operator:]

Thank you. And our next question comes from the line of Michael Ciarmoli with KeyBanc Capital Markets. Your line is now open. Please go ahead.

[Michael Ciarmoli:]

Hi, good evening guys. Thanks for taking the question. Tim, you kind of mentioned it before, I mean in terms of creating shareholder value, I mean what do you think you guys might be doing wrong? The playbook you guys have now, I guess its still -- it’s still generally similar to the S1 filed nine years ago. There’s a lot of growth opportunities, earnings aren’t growing. It seems like the commercial market to some extent is passing you guys by when you look at DJI or what GoPro wants to do, Google and Amazon I mean, I don’t -- do you think the market really cares about exquisite optimized solutions or do they just want cheap drones with off the shelf analytics out there. Just trying to get a sense, from a strategic standpoint and a shareholder value standpoint, what you guys are thinking out there. Because it just seems like some of that first mover advantage has kind of eroded on you guys?

[Timothy E. Conver:]

Well we’ve talked about multiple market opportunities. You’re addressing the commercial UAS market opportunity explicitly Michael, and I think the -- we continue to see a very large opportunity with the major organizations in large verticals that I described. Now that’s quite different than the market for consumer quadcopters that you’re addressing and certainly that’s generated a lot of market cap and a lot of initial investment that’s been publicized in the last few months. Nevertheless we believe that our validation with large industrial users of this enterprise model is going to produce a significant opportunity that we continue to pursue. Outside of the commercial UAS market, we’ve been pursuing global observer and mail and tactical missile system market opportunities and we see beginning last year significant increased adoption activity from customers that activity has sustained and increased over the last year and we’re now in a position to be able to look at likely contract decisions in those three areas this year and next year that if made positively would signal the adoption of billion dollar potential markets with these new solutions. So I think we have proven the underlying truth of the statement we’ve made for many years that it’s hard to predict the timing and the rate of adoption of innovations.

[Michael Ciarmoli:]

Got it. Even on something like, I mean, you mentioned and I mentioned each AI the quadcopters, are you -- you’ve got the Shrike product, you guys probably could have attack that market first, I mean, is there -- when you guys look at your product roadmap and kind of or do you think you’re at the right price points, to spark this adoption or is it still too early, too tough to tell?

[Timothy E. Conver:]

We are using a very end of our Shrike product in the cube system that we work with public safety agencies with as they evaluate the adoption of UAS in their enterprises. That’s not -- that is much closer to a variant of a defense product than it is a quadcopter in the consumer class that you’re describing. So we’ve not entered the market with a low price point product that you’re describing and that’s not our espoused strategy.

[Operator:]

Thank you. And our next question comes from the line of Josephine Millward with Benchmark Company. Your line is now open. Please go ahead.

[Josephine Millward:]

Hi Tim. So can you guys hear me? Hi there.

[Timothy E. Conver:]

Yes, we can. Hello.

[Josephine Millward:]

Hi there. Given your backlog of $65 million, can you walk us through how you get visibility for guidance? Now Teresa, I think you said you have 60% visibility based on your backlog and it sounds like you expect DoD UAS sustainment and upgrades to remain fairly steady and you expect Switchblade and international to drive growth. Can you expand on that?

[Teresa P. Covington:]

Let me walk through the fiscal ’16 visibility again. We have $61 million of Q4 ending backlog that we believe we can execute in’16. Orders that we booked thus far in the first quarter of $19 million, $38 million holding EES revenue flat and then we believe the balance of government fiscal 2015 not yet booked of $43 million, and so that totals to the $162 million.

[Josephine Millward:]

Okay. Is that $43 million from the base budget? Because that seems quite high.

[Teresa P. Covington:]

It is not from the base budget. As you know from our history, our actual orders often exceed what is published in the government budget. So this represents expectations of bookings.

[Josephine Millward:]

And the other 40% what can you expand on what areas they might come from?

[Timothy E. Conver:]

Well, as usual at this time of the year Josephine, we have what Steve Wright [ph] used to refer to as a go get element of our business plan for the year. And that’s defined by a set of business opportunities that we have identified with customers that we’re in various stages of pursuing and they’re in various stages of contracting for. To the degree that there is uncertainty farther out in the year in those bookings, then we use a method to discount the probabilities of either the contract not being placed or more likely a delay in contract placement such that we can get to a probability of revenue that then leads to our plan and to the guidance we’re providing you.

[Operator:]

Thank you. [Operator Instructions] And I’m showing a follow-up from the line of Andrea James with Dougherty & Company. Your line is now open. Please go ahead.

[Andrea James:]

Hi. Thanks for taking my follow-ups. Just a couple of housekeeping and then more strategic. Teresa, what was your customer funded R&D in Q4? Can you hear me?

[Timothy E. Conver:]

Yes, she heard you. She is just checking the number Andrea.

[Andrea James:]

Oh thank you. I appreciate it.

[Teresa P. Covington:]

For the fourth quarter, the customer funded was $19.1 million.

[Andrea James:]

Thank you. And then -- that’s the other [indiscernible] was $19.1 million, okay. And then, so net net by the end of this year, FY16, you think you’ve added to the cash balance over the course of the year?

[Timothy E. Conver:]

Could you repeat the question please?

[Andrea James:]

If you plan to -- I’m just looking at free cash flow and kind of what I think you’ve communicated so far in this call; do you think you’ve added to the cash balance over the course of this fiscal year, by the end of the year?

[Timothy E. Conver:]

Well we did last year. We have historically, we don’t guide on cash, so I don’t -- we don’t have a forecast that we’re prepared to guide on at this point, but we continue to have confidence in the strength of the core business.

[Andrea James:]

That’s helpful. And then to build off an earlier question, what’s the strategic conversation that you guys have had or to what level have you had a conversation about possibly going after that consumer market, the quadcopter market and why not? Is it because its commoditized or just what is your thinking about whether or not to go after that business and leverage maybe your brand name a little bit?

[Timothy E. Conver:]

Well, as we’ve mentioned for the last year, we’ve been focused on the commercial enterprise solution. But the opportunity to address the consumer appetite for these products with a leapfrog technology has not escaped the innovation halls of AeroVironment engineering. So I probably don’t want to get too far ahead of myself on that, but it’s an interesting question you pose.

[Andrea James:]

And it sounds like you guys; it’s something you might be studying at least? Fair enough, okay. I appreciate you taking my follow-ups. Thank you.

[Timothy E. Conver:]

Thank you, Andrea.

[Operator:]

Thank you. And our next question is a follow-up from the line of Josephine Millward with Benchmark Company. Your line is now open. Please go ahead.

[Josephine Millward:]

Hi, Tim. I just wanted to ask you when do you expect a Phase 3 of TERN to be awarded and if you can talk about the size of the program and do you have that -- some of that in your guidance?

[Timothy E. Conver:]

Our best understanding is that DARPA expects to make a decision on the Phase 3 of the TERN program probably in the second half of our fiscal 2016. We are -- as I mentioned in my prior comments, we’re very focused on executing on Phase 2 and positioning ourselves well for Phase 3. We think we have a strong position, but we know we’re competing against one of the world’s largest and most successful suppliers. We’ve got a very strong industry team working with us on this that are as excited about this opportunity as we are and to, I guess, in terms of the component of our revenue plan that would anticipate this program, I’d go back to the earlier answer on the how we address uncertain -- uncertainty in late in contract opportunities that fall late in the year and that tends to be adjusted for probabilities. Mostly in the past we found that when the actual results vary from the potential results, it’s the cause is dominated by schedule slides rather than some other reason.

[Josephine Millward:]

And the size of the program, Tim?

[Timothy E. Conver:]

I don’t believe that I’ve seen a number published by DARPA on that program. They have said, they intend to produce an operating solution. So we’re talking about a MALE airplane, I would guess it’s a material contract.

[Operator:]

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back over to Mr. Steve Gitlin for any closing remarks.

[Steven A. Gitlin:]

Thank you 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 Web site www.avinc.com. We look forward to speaking with you again following next quarter's results. And good luck women’s soccer team in today’s game.

[Operator:]

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