AeroVironment, Inc. (AVAV) Earnings Call Transcript & Summary

All right. We're going to kick it off. Intimate group here today, so it's good. We have Kevin McDonnell, the Chief Financial Officer of AeroVironment. Kevin, I understand you have a presentation.

So I got a presentation. So I think I'll just do it from here.

However you want to do it.

Yes, because this is more casual, okay?

Yes, yes.

So just to make it a little bit more fun and interactive, I do have a couple of videos embedded here. So you won't just have to listen to me drone on for -- drone on, hey, see that? So here's the first video. This is a little bit of an overview of AV. [Presentation]

Okay. So let's get a little bit of an overview there. We're traded on NASDAQ under AVAV, Today, we're just over a $5 billion market cap with our headquarters in Arlington, Virginia, but center of gravity is pretty much Simi Valley, California. We have operations all over the United States from California to Florida to Alabama, Northeast, et cetera. So -- and we're about 1,400 employees. But one of the things that kind of differentiates us between a relatively small defense company and some of the other defense tech-type companies, we've sold products to over 55 allied nations. So we're very much an international company. We have international brand recognition, primarily through our Puma or Group 1 product lines over the years, but about half of our revenue today comes from international customers. We're kind of -- we're both a platform company, and the more important part is the software. On the left, you see the platforms: Group 1 unmanned air vehicle as UAV or uncrewed air vehicle, Group 2 and 3, that refers to the size of the air vehicle. We're in the loitering munitions business, lethal drone business, ground robotics, logistics, UAVs and space helicopters. But what really kind of makes it all go and cutting edge is the software. So we've been leaders in communications, battlefield communications for UAVs for many, many years. We have command and control software; autonomy and AI capabilities; computer vision, which is critical to autonomy over time; object identification, visual navigation; ability to navigate without GPS, for instance; flight control systems and other advanced technologies embedded into our platforms. This shows you kind of our portfolio of our products. On the -- highlighted here now in our Group 1 and 2 UAVs, which is our Pumas primarily and Ravens and also a VAPOR helicopter, which is kind of going to be emerging as a Group 1 solution on some of the U.S. programs. In the middle -- and that was our first main product line. In the middle is our loitering munitions, which kind of came next. We've been delivering loitering munitions for almost 10 years. It's primarily been a niche market to U.S. Special Forces. But as I'll explain later, it's really become a much, much broader category and more ubiquitous type of product around the globe. And so we expect a lot of growth from that. And then kind of the last one I'll highlight is our Group 2 through 3 UAVs, which was through an acquisition called Arcturus, and that's primarily the JUMP 20, which basically means it's a bigger drone to fly, say, 10, 12 hours versus maybe a smaller drone might fly 6 hours, and things like that or 4 hours. We operate in 3. So we take all those products and we operate when we report in 3 business segments: one is unmanned or uncrewed systems segment, which is the Group 1 to 3 UAVs, so the medium, we call the medium and the small UAS and then our ground robots. The other business segment is the loitering munitions segment. And then the last segment is MacCready Works, which does a lot of advanced development work, new products funded partially by the U.S. DoD, funded some of it with our own IRAD, but they're both classified and unclassified. That's where we do all of our machine learning, AI, autonomy capability, all kind of comes out of MacCready Works. One of the big changes that's happened, say, in the last couple of years is the Ukraine war, as we all know. And that really created the recognition that things like loitering munitions, reconnaissance drones are an important part of the arsenal of a smaller country trying to fight a larger adversary. So that has kind of been a shift in the whole warfare game around the world. So you see some quotes on the right from different aspects of the Ukraine war. But it's really been kind of a shift in momentum for all the unmanned or uncrewed systems business. So we think we're in a great spot because we have this. We've been doing this for a long time. We have a large portfolio of uncrewed systems. We've been an innovator, that whole time, the leading edge, not only on the outside but on the inside with machine learning and autonomy. We're well positioned because of global tailwinds. Again, it's not just Ukraine, it's not just the U.S., but it's the 55 allied nations that we sell to around the globe, buying new products that we have in current categories or new categories. And we've been doing this with customers in the field for over 20 years. So it's not just PowerPoints or on a piece of paper or prototypes, we've been in there innovating and changing and improving for over 20 years. It goes without saying that the world has become a much more unstable place. And that instability creates demand for our products in multiple regions, from Africa to the Middle East to Europe to Asia. And that's reflected in the fact that we've -- post-Ukraine war, you've seen defense spending go up significantly around the globe, both in Europe and the European countries. The box here on the right just shows you what the pre-Ukraine forecast for 2027 was, was about $1.8 trillion, and now that would be $2.3 trillion of defense spending around the globe. So a significant increase post-Ukraine war. For us, we're going after some fairly large markets. The biggest now would be the loitering munitions market, which we would estimate at least at $5 billion and rapidly growing. The medium UAS market is about $4 billion in our estimate. The small UAS market, which was our traditional market is about a $2 billion market, and the ground vehicle markets under $1 billion. So as you can see with the acquisition of Arcturus, we added a big chunk in market -- potential market. And now with the loitering munition and all the changes in the dynamics around the globe, we now have a much, much larger market we're going after. So our addressable market over the last 2 years has increased significantly. So just now a little bit on the different business segments, the small UAS or uncrewed -- or the uncrewed systems segment, which is comprised of our small UAS and our medium UAS and our ground robots. On the small UAS, we've been the 800-pound gorilla in that market for many years. Again, 55 countries. Pretty dominant market share there. Even when people see the product today, they say that Puma is the best product in the market, even though the Puma has been around a while. But we've been upgrading not only the software but also the optics and things like that. So day/night, these types of things are critical for the warfighter on the edge. In the Group 2, Group 3 market, that's more of a -- we're more of the disruptor than the incumbent there. So we're fighting for market share from some bigger players there. But over the next couple of years, there's at least 15 different opportunities. That kind of market is turning over. The incumbents have been there for 5, 10 years or 10 years. Now countries are starting to look at, well, what's next? And we believe we have a good shot at hitting some of those opportunities, and then incorporating our autonomy and machine learning, computer vision into these products gives them a leading edge. Loitering munition segment. This is our big growth engine. We've been, like I said, been doing it for over 10 years. We've shipped thousands of units. But now we're moving to a whole different era here to something that we believe is a $1 billion at least opportunity for us in the not-too-distant future. We're looking at different variants. We now can sell to over 50 countries. That wasn't true 2 years ago. So we were limited only to the U.S. military. There's multiple programs of record over $1 billion on the horizon. We've just recently got some good news from the DoD for the Replicator program, which is a showcase of U.S. unmanned systems. We were named as the only company. There are several companies selected for the first tranche. There'll be other tranches, but we were named specifically, AeroVironment, in that. We've also got the initial order on the Army LASSO program, which is now they're going to be their large program for the Switchblade 600-class loitering munitions. And then we just also got news that we were down-selected to 1 of the 3 participants in the Marine Corps Light program, which is basically the Switchblade 300-class system. Another little video. This is a real quick one. Just showing the one of the keys at a loitering munition. So you can shoot something off, maybe find a target and hit it or based upon GPS coordinates. But one of the strengths of the Switchblade, its ability to track a target. And in this video, you're going to see it tracking and hitting a boat. So think about a boat moving in the ocean, rocking around. It's not a sitting target, it's a moving target. Hopefully, let me go back one more. There we go. Let's do this. Let's see. [Presentation]

So one of the things is obviously hitting boats, but we're also developing launchers off of boats. And so again, another problem is this thing comes out of a tube and the boat is rocking around in the ocean. It's got to orientate itself very quickly to get off to do its mission. Last thing, MacCready, which we're very excited about what's happening here. It's our smallest business today on paper in terms of revenue, but they're doing really exciting things in autonomy, machine vision and things like that. This is kind of our focus to that. And they're working on several products for the U.S. DoD like, for instance, long-range or contested logistics, delivering supplies with autonomous UAVs that can fly hundreds of miles and deliver goods or supplies to them. That's where the HAPS product is being developed, which is a stratospheric cell tower in the sky, but also has some DoD capability. And that's where we've built up all of our library of images, annotated images of military targets that we think is the largest library in the world. So people talk about autonomy. This chart just talks about the different kind of stages of autonomy. At the end of the day, what you're trying to do is either lower the cognitive load of the operator, like so maybe instead of flying 1 reconnaissance drone, you can fly multiple. You can say, [ view 3 ], go up, cover this area. Our systems will autonomously determine who will cover what area, for instance, or it can go all the way to fly around and find -- try to look for a tank, that type of thing. Or -- and if you find a tank, send a message back about it or it could go to a lethal side where find a target, take out the target. But as I said earlier, kind of one of the key enablers here is image recognition. So you have to be able to understand what you're seeing in order to do autonomy. You can't do autonomy if you don't know what targets you're seeing, what terrains you're seeing. And we feel that's where we have a very good position relative to our competitors to have leading-edge image recognition capability through our LEAP division. And this example, that's a lot of print and type and stuff, but the idea is we have a product where it's called SPOTR-Edge. You can see it on the bottom there. And these products are used for multiple things like force protection, overhead imagery analysis, that was we used SPOTR - GEO, it's called. Airborne computer vision, that's SPOTR-Edge. A lot of our -- even competitors are going to be using SPOTR-Edge on their platforms to identify targets. Surface detection, person detection, again, another part of the SPOTR project, might even go down to runway surface detection or data annotation, things like that. So we're very active with multiple agencies and our peers in this market to deliver computer vision. And so this leads to many advanced capabilities: autonomous operation, autonomous search, autonomous survey, 3D mapping, detection of targets and coordination of multiple platforms, as I was saying earlier within the area. A little video on this. [Presentation]

A couple of things that brought to mind was that one of the -- so number one, a lot of the capabilities being developed in MacCready Works are now being transitioned to all of our platforms, from the Group 1/2 to the JUMP 20, the larger platform to the Switchblade platform. So you're going to see a lot more of this type of capability built into those platforms in the next couple of years. And two, one of the things I didn't really talk about earlier but is part of this. But going back to the Pumas operating Ukraine, one of the challenges is the ability to operate in a GPS-denied environment. So that's one of the challenges that we've learned a lot in that fight and really tune the product and create capabilities for it to operate in that type of environment successfully. And it's been very successful in Ukraine, not without a little trial in there at times. Okay, now the fun stuff, financial overview. A lot of people ask us, you're getting a lot of business here in Ukraine. Can you -- so what does that mean for the growth in the future? We put this chart together to try to explain kind of our growth path for the next, say, 10 years. So in the short run, yes, we are benefiting from Ukraine sale. We just announced again in another aid package to Ukraine for both Switchblades and Pumas, and that will continue to help drive some growth. We also -- they used a lot of existing Switchblades for the Ukraine war, so we have to eventually replenish those. And now we'll be able to, in the short run, be able to sell the Switchblade to allied countries. So those are kind of some of the short-term drivers. But in the not-too-distant future, as evidenced by some of the recent announcements, we're looking at multiple large programs of record with the U.S. DoD. We really have not traditionally -- we've had programs of record in the past, but the last few years, we really haven't had any large U.S. programs of record. So we're shooting for multiple Switchblade programs. In the Marine Corps, there's 3 of them. Now the Army has a large program. We're kind of in the first -- picked for the first tranche of that. The Replicator program we talked about, the LRR, which is an Army reconnaissance -- long-range reconnaissance drone kind of equivalent to Puma. And then we have the medium-range reconnaissance drone, which would be more like a VAPOR-class product. And then we have a long-range Switchblade 300 flying off a helicopter or something like that. The Switchblade has multiple projects for different platforms, shooting off of boats, shooting off of planes, shooting off of trucks and all that. So that's another whole market, market for us. I guess that's the second one down there, integration of Switchblade platform on existing -- integration of Switchblade on existing platforms. And then kind of if you look out even further or maybe even a little bit, there's a lot of exciting stuff being developed through MacCready Works, not only in the software side, but as I said earlier, long range -- contested logistics and things like this are being developed in MacCready Works, we all think have legs for potential issues in the Pacific. In terms of our results through our third quarter, our fiscal year just ended in the end of April. But in terms of the last 12 months, about $706 million of revenue, 66% of that came from our uncrewed systems or unmanned systems; 23% from loitering munition; and MacCready Works was 11%. But over time, you're going to see that loitering munition amount grow significantly. Our adjusted EBITDA is about $152 million, which is around 17%, 18%. We have a good funded backlog of $463 million. But one of the kind of differentiators from a traditional defense company is our investment -- R&D investment. That is -- runs in the 10% to 12% of revenue range, which is a pretty high amount of money. And then this just shows you our revenue trajectory over time. We've grown significantly over the last few years, 20% in FY '23, 30% in FY '24. Since FY '22, we've shown continual improvement in adjusted EBITDA, and we would expect that hopefully to continue. And that's it. So 10 minutes for questions.

Go ahead.

How long does it take you to get drones [indiscernible] by the DoD, NATO versus non-NATO?

For what?

For NATO versus non-NATO.

Well, if it's not lethal, then we just get an export license for that. So they don't necessarily -- we have export license to market that around the world. The nonlethal drones are a lot easier than lethal drones. So that's why it was a big deal when we got the ability to market the lethal drones around the world to 50 countries. .

And where is the data actually stored? So if a drone actually ends up on the ground, where is the data stored and can the data be retrieved by somebody else before it goes back?

There's -- no, the product gets hardened, so you can't do that, yes. You can't get inside of it.

And are you doing any capacity expansion?

Say again?

Are you doing any capacity expansion?

Yes. So we expect the Switchblade product line to grow significantly over the next few years. So we've talked publicly that our factory could probably -- current factory can get us to probably about $500 million in revenue for that product line. So we think we need to look at something in the next couple of years. So we're kind of actively looking for another secondary site, probably closer to where we do the warhead integration and the testing which is in Utah.

The video that you guys showed had the C2 that you use in the field testing drones [ mobile-ly ]. Is that just for AVAV's products? Or could that be expanded out for...

Are you talking about the tablet or the...

The tablet but the tracking system and then just all of that command and control that's happening. Can you -- is it just AVAV? Or could that be opened up to...

Well, we bought a product company called Tomahawk last year, which has the kind of the tablet, but more importantly, the mission control software, which is being used in multiple -- with multiple platforms. So that does extend there. Some of those capabilities are -- would be extended, but some probably aren't. So I don't know where the break is on that.

Let me jump in. Where does AI fit into all this, right, because there's other folks in the world doing AI stuff. So when you think about your product offerings versus, say, the software that Anduril has or the software that Shield AI has, where does the AVAV product fall?

Well, as I was trying to say, is basically what is AI? I mean from our product perspective, AI is a lot about autonomy, its ability to recognize where you are, the targets that are there and do something, right? So that's where the AI part comes in. So it starts with the image recognition. And our products, to a certain degree over the last several years, have all had some type of autonomy to them. We've had that capability to throw up 3, 4 drones at a time and do reconnaissance in the area. And they figure out themselves here's how we're going to divide this up. That's kind of like AI. So -- and then over time, that autonomy can be find these targets. But without -- the key is like in a contested environment like Ukraine, you don't -- you can't rely on communications. You can't rely on GPS. You have to have other ways to accomplish the mission, which one of those ways is just pure autonomy. Your ability to say, go find these targets and come back and either come back and tell us or send a quick signal that might not be detected when you fly at a higher altitude or when you're out of the dome of contested environment and things like that.

And then maybe for folks that aren't as familiar with it, can you just explain what is Replicator and what it really means? Because it's a huge one for you guys.