AeroVironment Inc (AVAV) Q3 2023 Earnings Name Transcript

AeroVironment Inc (NASDAQ:AVAV) Q3 2023 Earnings Name dated Mar. 06, 2023.

Company Contributors:

Jonah Teeter-Balin — Senior Director of Company Growth and Investor Relations

Wahid Nawabi — Chairman, President and Chief Government Officer

Kevin McDonnell — Senior Vice President and Chief Monetary Officer

Analysts:

Peter Arment — R.W. Baird — Analyst

Austin Moeller — Canaccord Genuity — Analyst

Louie DiPalma — William Blair — Analyst

Ken Herbert — RBC Capital Markets — Analyst

Brian Ruttenbur — Imperial Capital — Analyst

Pete Skibitski — Alembic International Advisors — Analyst

Presentation:

Operator

Good day and thanks for standing by. Welcome to the AeroVironment Fiscal 12 months 2023 Third Quarter Convention Name. [Operator Instructions] Please be suggested that as we speak’s convention is being recorded.

I might now like at hand the convention over to your speaker as we speak, Jonah Teeter-Balin. Please go forward.

Jonah Teeter-Balin — Senior Director of Company Growth and Investor Relations

Thanks and good afternoon, women and gents. Welcome to AeroVironment’s fiscal yr 2023 third quarter earnings name. That is Jonah Teeter-Balin, Senior Director of Company Growth and Investor Relations for AeroVironment.

Earlier than we start, please word that sure data introduced on this name comprises forward-looking statements inside the that means of the Non-public Securities Litigation Reform Act of 1995, Ahead-looking statements embrace with out limitation any statements that will predict, forecast, point out or suggest future outcomes, efficiency or achievements and will include phrases akin to imagine, anticipate, anticipate, estimate, intend, undertaking, plan or phrases or phrases with related that means.

Ahead-looking statements are based mostly on present expectations, forecasts and assumptions, which contain dangers and uncertainties, together with however not restricted to, financial, aggressive, governmental and technological elements outdoors of our management that will trigger our enterprise technique or precise outcomes to vary materially from the forward-looking statements. For additional data on these dangers, we encourage you to evaluate the chance elements mentioned in AeroVironment’s periodic reviews on Type 10-Okay and different filings with the SEC together with the related earnings launch and protected harbor assertion contained therein.

This afternoon, we additionally filed a slide presentation with our earnings launch and posted the presentation to the Traders part of our web site at avinc.com within the Occasions and Shows part. The content material of this convention name comprises time delicate data that’s correct solely as of as we speak, March 6, 2023. The corporate undertakes no obligation to make any revision to any forward-looking statements contained in our remarks as we speak or to replace them to replicate the occasions or circumstances occurring after this convention name.

Becoming a member of me as we speak from AeroVironment are Chairman, President and Chief Government Officer, Mr. Wahid Nawabi; and Senior Vice President and Chief Monetary Officer, Mr. Kevin McDonnell.

We’ll now start with remarks from Wahid Nawabi. Wahid?

Wahid Nawabi — Chairman, President and Chief Government Officer

Thanks, Jonah. Welcome to our fiscal yr 2023 third quarter earnings convention name. I’ll begin by summarizing our efficiency and up to date achievements, after which Kevin will evaluate our monetary leads to better element. I’ll then present a abstract of our up to date expectations for the rest of fiscal yr 2023 earlier than Kevin, Jonah and I take your questions.

Earlier than I leap into the quarter, let me be clear about one factor, the basics and underlying demand drivers of our enterprise stay very sturdy and strong throughout all our product traces. Our enterprise’s core working metrics are clearly trending in a constructive path, together with file backlog, considerably higher gross margins and over 50% enchancment on our adjusted EBITDA. Our business tendencies ought to proceed to drive long-term sustainable and worthwhile progress for our enterprise. Briefly, I imagine the prospects for AeroVironment have by no means been higher.

Now, I’ll spotlight just a few key messages on the quarter, that are included on Slide quantity 3 of our earnings presentation. First, third quarter outcomes had been in step with or barely forward of our expectations as we proceed to efficiently execute towards our plan with stable enduring demand throughout our portfolio as evidenced by our file funded backlog on the finish of Q3 of greater than $400 million. Second, given our sturdy backlog, we’re narrowing our income steering vary and rising our adjusted EBITDA steering with the midpoint of our adjusted EBITDA vary representing greater than a 50% enchancment over final yr. And eventually, we anticipate fiscal yr 2024 to be one other yr of double-digit high line worthwhile progress for AeroVironment supported by our stable backlog and strong international demand for our modern and best-in-class portfolio of clever unmanned robotic options.

Now let me summarize our monetary outcomes for the quarter. We delivered third quarter income of $134.4 million in comparison with $90.1 million in fiscal yr 2022, representing a rise of almost 50% over year-over-year. The advance was primarily attributable to the next SUAS gross sales, which almost tripled in comparison with the prior yr interval. This enhance displays sturdy Puma 3 AE and Puma LE shipments tied to our file international navy gross sales or FMS contract that we introduced final quarter.

Gross margin for the quarter was $45.5 million, greater than double final yr’s $21.4 million and our gross margin share rose to 34% from 24% final yr. The improved gross margin was primarily a results of greater volumes and favorable product combine. As now we have beforehand mentioned, we anticipate gross margins to additional enhance in This autumn excluding asset acceleration and stay elevated in fiscal yr 2024 as our income combine shifts to extra favorable product gross sales. We reported adjusted EBITDA of $23.7 million in comparison with $5.4 million within the third quarter final yr. We ended the third quarter with a file backlog of $414 million, an 83% enhance year-over-year, reflecting the rising strong demand for our options.

Lastly, non-GAAP EPS was $0.33 per diluted share as in comparison with $0.31 per diluted share for the third quarter of fiscal yr 2022. This enhance was primarily pushed by greater revenues and favorable product combine greater than offsetting elevated working bills, curiosity bills and decrease tax advantages. For comparability functions, fiscal yr 2022 third quarter included a $15 million tax profit. Trying forward, latest contract awards and rising demand for our portfolio of clever multi-domain robotic options offers us confidence that we’re positioned for sturdy efficiency and value-creation past this fiscal yr.

The battle in Ukraine over the past yr has showcased the distinctive worth of our modern options and the vital function they play in giving Ukraine, the U.S. and its allies a bonus on the battlefield, particularly towards close to peer adversaries. As our options proceed to play a vital function in Ukraine’s protection, we anticipate to capitalize on alternatives straight associated to this battle, whereas concurrently serving to the U.S. and its allies put together for the longer term. Regardless of shifting U.S. DoD funding away from medium UAS COCO operations, AeroVironment stays well-positioned for U.S. DoD’s key funds priorities.

Demand for our services has resulted in a brand new file backlog. Additional, proposal exercise stays elevated and we proceed to carry productive discussions with home and worldwide prospects. And eventually, we stay diligent in managing the continued international provide chain constraints and inflationary pressures in a good labor market. Our prudent actions have allowed us to fulfill the wants of our prospects whereas persevering with to speculate throughout our portfolio for progress and scale.

I might now like to modify gears and supply an replace on present developments inside every of our product traces. Let me start with our small UAS or SUAS product line the place income rose almost 200% in comparison with the prior yr interval. This primarily displays our latest file FMS award for Puma LE and Puma 3 AE programs. We introduced final quarter that this FMS contract had a most ceiling worth of $176 million and we now have present funding of $132 million. Throughout Q3, we expedited manufacturing and shipped a stable portion of the preliminary funding quantity. Further funding after the complete worth of this contract is anticipated and we anticipate deliveries to stay on the present tempo within the fourth quarter with remaining shipments occurring in fiscal yr 2024.

This yr has been pivotal for SUAS product line with sturdy progress, new product introductions and system upgrades that may set the inspiration for progress for years to return. The transformation of this product line has been the results of constant prudent funding, which has resulted in improved expertise that saved us forward of the competitors, particularly because the U.S. DoD and our allies turned our focus to close peer threats and contested surroundings operations. I additionally need to word that our workforce not too long ago visited Ukraine once more the place now we have individuals frequently on the bottom to make sure the success of our merchandise. We acquired wonderful suggestions that our Puma programs are scouting targets for each weapon system that the U.S. Division of Protection has offered to Ukraine. This speaks volumes to the aptitude and reliability of our options.

Suffice to say that our Puma programs are one of the crucial efficient property that the U.S. has offered to Ukraine all through this battle. Switchblade loitering munitions and different U.S. DoD provided weapons programs are much more potent when mixed with Puma for ISR, concentrating on and battle harm assessments. Our merchandise are confirmed to be important to the nation’s protection efforts and we’re honored to proceed our assist for the individuals of Ukraine. We’re happy with how necessary our SUAS merchandise have grow to be for the U.S. DoD and its allies throughout the globe who depend on them for his or her security and safety whereas we proceed to put money into the way forward for this product line.

Transferring to our Tactical Missile Methods or TMS product line. We proceed to expertise sturdy demand. Whole TMS income was up roughly 30% year-over-year, which displays the continued orders of our Switchblade 300 and 600 programs to assist Ukraine, together with the newest $2 billion safety help bundle introduced on February 24 and backfill depleted U.S. DoD stockpiles. On our workforce’s latest journey to Ukraine, we reaffirmed that our Switchblade 300s and 600s are performing properly in fight operations and Ukrainian navy officers are requesting many extra of them.

Order exercise stays elevated given the excessive diploma of visibility these programs have acquired over the previous yr. This previous December, the Lithuanian Minister of Protection introduced the nation’s intent to buy our Switchblade loitering munitions for his or her forces. This settlement with the U.S. DoD for the supply of Switchblade 600s would make Lithuania the second nation outdoors of the USA to obtain this battle confirmed functionality. We now have but to obtain this contract from the U.S. DoD and it isn’t mirrored in our backlog, however it’s anticipated to be up price roughly $45 million.

Given the present degree of curiosity and demand in Switchblade, we anticipate vital progress in our TMS enterprise going ahead. As with our Puma SUAS merchandise, AeroVironment stays a pacesetter in loitering munitions with unmatched reliability and efficiency setting us aside from the competitors whereas driving sturdy demand.

I’ll now talk about our Medium UAS or MUAS product line. We proceed to work on the Increment 1 of the U.S. Military’s Future Tactical UAS or FTUAS program, coaching personnel in Germany whereas present process flight testing on the U.S. Military’s Redstone Arsenal in Huntsville, Alabama. We’re additionally excited to share that the U.S. Military not too long ago chosen AeroVironment for Increment 2. Throughout this section, we are going to compete with a number of different distributors, which is able to permit the military to pick out the most effective system for its wants. We’re the one firm to have secured sole supply awards for Increments 0 and 1 of this contract.

Moreover, we additionally stay the one firm who has been chosen and awarded contracts for all three phases of the FTUAS program. As we enter this section of the competitors, we’re assured that our JUMP 20 system is probably the most mature and succesful answer in its class and we’ll proceed to work carefully with the U.S. Military to make sure we meet or exceed their efficiency wants, each as we speak and sooner or later. As a part of our choice for Increment 2, we acquired an preliminary award from the U.S. Military and there are further alternatives for funding all through Increment 2.

Since Ukraine has been the near-term precedence for U.S. protection spending, packages outdoors of this precedence together with people who usually make the most of the JUMP 20 aircrafts are merely not seeing as a lot exercise. With that stated, JUMP 20s have been included within the newest safety help bundle for Ukraine and we imagine long-term outlook for MUAS stays shiny. Worldwide curiosity within the JUMP 20 platform continues to develop and there are different giant U.S. DOD packages on the horizon. With a possible $1 billion program of file and a number of worldwide and home alternatives, we’re optimistic about MUAS progress potential within the years forward.

Transferring to our unmanned floor automobiles or UGV product line. Our workforce has been making progress on our beforehand introduced contract to offer telemax and tEODor floor automobiles to Ukraine. We now have already delivered eight telemax EVO robots beneath an accelerated schedule. Our file telemax fashions are identified for his or her superior specialised precision manipulation, autonomous performance and intuitive operation. As well as, whereas UGV gross sales had been down barely year-over-year, we acquired a file variety of orders this quarter totaling greater than $25 million. We additionally not too long ago launched a number of new equipment, together with a CBRN equipment, 360 diploma digital camera and a mini Bluetooth controller.

Proposal exercise stays stable and we anticipate sequential progress on this product line as properly. Inside our HAPS product line, we proceed to execute on our present contract with SoftBank for the next-generation Sunglider with the aim of growing and commercializing stratospheric-based telecommunication companies. On the similar time, we stay absolutely engaged with the U.S. DoD throughout a number of fronts that might result in contracts within the coming quarters. There’s a rising want for prime altitude extremely lengthy endurance persistent ISR capabilities for protection and safety purposes doubtlessly even towards foreign-based unidentified flying objects. Sunglider gives distinctive advantages in comparison with satellites and ground-based infrastructure. We now anticipate HAPS income between $35 million to $40 million this fiscal yr.

And eventually, I’ll share some thrilling developments on MacCready Works Superior Options. In February, our Ingenuity Mars Helicopter reached a milestone of 47 flights on its prolonged assist of the Perseverance rover serving to NASA seek for proof of engine life and the [Indecipherable] creator. Ingenuity’s unique manifest calls for less than 5 flights, however the mission has continued as a result of helicopter’s exceptional reliability and endurance as evidenced by the helicopter’s latest awakening from the Martian winter. Ingenuity has grow to be an necessary companion in scouting forward of — for Perseverance a lot in order that NASA and the European House Company have altered their future Mars pattern return plans to incorporate two new helicopters.

AeroVironment has not too long ago acquired an preliminary award for the event of this next-generation helicopter and we’re optimistic about future bigger contracts as this program strikes ahead. MacCready Works is experiencing regular demand throughout federal and protection businesses for packages, which worth synthetic intelligence, machine studying and contested surroundings logistics as we proceed to combine many synthetic intelligence and machine studying powered capabilities into our product portfolio. We anticipate that the MacCready Works product line will see rising inner and exterior demand as we transfer into fiscal yr 2024.

In abstract, we’re seeing constructive traction throughout all our product traces and the longer term seems to be shiny. Particularly, the previous few quarters have clearly set us aside and elevated our firm to a brand new degree. Throughout the yr, now we have positioned Switchblade as a best-in-class answer for loitering munitions and close to pure complicated, one of many largest ever Puma FMS order offering unmatched surveillance and reconnaissance in Ukraine and we had been chosen for U.S. Military’s FTUAS Increments 0, 1 and a pair of. AeroVironment’s broad portfolio of unmanned options is utilized each day throughout the globe to assist defend the lives of thousands and thousands and transfer humanity ahead via modern breakthroughs in Superior Engineered Options.

For example, all 4 of our largest product traces SUAS, MEUAS, TMS and UGV are taking part in a vital function by giving Ukrainian forces a bonus towards their a lot greater adversary. It is a testomony to how related and significant our modern options are in as we speak’s conflicts. We imagine we’re properly positioned to learn from this macro pattern as all militaries undertake extra unmanned programs as a part of their power buildings, whether or not or not it’s on Earth or Mars, we’re constructing merchandise that nations, leaders and scientists depend on to make higher selections going ahead.

With that, I wish to now flip the decision over to Kevin McDonnell for a evaluate of second quarter financials. Kevin? Thanks. Wahid. At present, I can be reviewing the highlights of our third quarter efficiency throughout which I’ll often check with each our press launch and earnings presentation accessible on our web site. Income for the third quarter of fiscal 2023 was $134.4 million, a rise of 49% in comparison with the third quarter of fiscal 2022 income of $90.1 million. Slide 5 of the earnings presentation gives a breakdown of income by phase for the quarter. Our largest phase through the quarter was our Small UAS enterprise, which completed the quarter with $69.4 million of income, up from final yr’s $24.4 million. As Wahid talked about, the rise in income within the quarter was primarily a results of the massive FMS Ukraine order acquired on the finish of the second quarter. Tactical Missile Methods or TMS contributed $24 million of income in comparison with $18.6 million final yr throughout Q3. This enhance was pushed by a higher-level of TMS manufacturing exercise within the quarter, which was acknowledged based mostly upon income time beyond regulation accounting. The Medium UAS phase completed the quarter with income of $15.4 million, a 27% lower in comparison with the third quarter of fiscal 2022. The discount in income was a results of decrease COCO service income, which in flip was brought on by a lower within the variety of MUAS websites operated. Our HAPS phase contributed $8.9 million in Q3, a lower from $9.5 million within the prior yr’s third quarter. Income from the opposite phase elevated year-over-year to $16.7 million versus $16.4 million in final yr’s third quarter. Turning to gross margins. Slide 5 of the earnings presentation exhibits the combination of product versus service income. Throughout the third quarter, product revenues represented 68% of complete revenues versus 47% in the identical quarter final yr. That is in step with our expectation that product combine shifts again to nearer to 70% for the second half of fiscal 2023 because of considerably greater gross sales of SUAS merchandise and a slight lower in MUAS service income. Slide 6 of the earnings presentation exhibits the pattern of adjusted product and repair gross margins, whereas Slide 12 reconciles the GAAP gross margin to adjusted gross margin, which excludes intangible amortization expense and different non-cash buy accounting gadgets. For the third quarter, GAAP gross margins elevated to 34% from 24% year-over-year and adjusted gross margins elevated to 36% from 29%. The rise in each GAAP and adjusted gross margins could be attributed to a lift in general income and the upper product combine from the rise in product income in each Small UAS and TMS segments. Nevertheless, this lower was partially offset by a $4.3 million accelerated depreciation of Medium UAS COCOC property, which had a unfavourable affect on service gross margins. We anticipate one other $6 million of accelerated depreciation of COCO property in This autumn associated to MUAS website reductions. Even with the accelerated depreciation of Medium UAS COCO property within the final two quarters and within the fourth quarter, our general adjusted gross margins for the yr can be in step with our FY ’22 general adjusted gross margins because the favorable product combine has offset the unfavourable affect from the accelerated depreciation. Adjusted product gross margins for the quarter had been 41% versus 38% within the third quarter of — versus 38% within the third quarter of final fiscal yr, primarily as a result of greater SUAS product combine. By way of adjusted service gross margins, the third-quarter was 26% versus 22% throughout the identical quarter final yr, primarily attributable to improved service combine. By way of adjusted EBITDA, Slide 13 of our earnings presentation exhibits the reconciliation of the GAAP internet loss to adjusted EBITDA. Within the third quarter of fiscal 2023, adjusted EBITDA was $23 million, representing a major enhance of $17 million from final yr. The primary issue contributing to this enhance was greater adjusted gross margins and this was partially offset by greater adjusted SG&A bills and investments in R&D. We anticipate adjusted EBITDA for the yr to be very sturdy at $89 million to $95 million and as Wahid talked about, this represents an over 50% year-over-year enhance to the midpoint of this vary. Now turning to GAAP earnings. Within the third quarter, the corporate skilled a GAAP internet lack of $0.7 million versus a internet revenue of simply above breakeven recorded in the identical interval of final yr. We had a major enhance in GAAP gross margins of $24.1 million versus final yr. Nevertheless, this was greater than offset by quite a lot of elements, particularly a $14.9 million lower within the tax profit, a rise of $3.2 million of unrealized losses on our fairness and fairness methodology investments, a $3.1 million enhance in R&D spending and a $2.2 million rise in SG&A bills and a $1.3 million enhance in curiosity expense. Slide 10 exhibits the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The corporate posted adjusted earnings per diluted share of $0.33 for the third quarter of fiscal 2023 million versus $0.31 per diluted share for the third quarter of fiscal 2022. I ought to word that our adjusted EPS calculation now excludes fairness methodology beneficial properties and losses from the adjusted EPS calculation. This exercise is clearly referred to as out on the revenue assertion and is non-operating. Turning to our steadiness sheet. Whole money, restricted money and investments on the finish of the quarter had been $104.5 million, which is a lower of $19.3 million from the second quarter of fiscal 2023. As indicated in prior quarters, we anticipate to see continued will increase in stock and different working capital to assist our file backlog and anticipated bookings as we handle via provide chain shortages by shopping for stock and demanding elements when accessible. We proceed to have a robust steadiness sheet with over $100 million of money, restricted money investments and roughly $100 million accessible beneath our working capital facility. I’d prefer to conclude with some highlights of our backlog metrics. Slide 8 of the earnings presentation gives a abstract of our present fiscal 2023 visibility. As Wahid talked about, our funded backlog on the finish of the third quarter of fiscal 2023 was a file $414 million. Our visibility as of as we speak to the midpoint of our revised steering vary is over 100%. In different phrases, we’re absolutely coated by the present backlog to attain our full yr income steering. We additionally anticipate orders to proceed to be sturdy for the rest of fiscal 2023. Now I’d like to show issues again to Wahid. Thanks, Kevin. As we method the tip of fiscal yr 2023, now we have enhanced visibility into our monetary efficiency this yr and subsequent. With a file funded backlog and rising demand throughout the board and given the latest MUAS website closure, now we have adjusted our present yr steering. Our up to date outlook for fiscal yr 2023 is proven on Slide quantity 7 and is as follows: we anticipate income of between $510 million and $525 million; we’re now anticipating internet revenue between $0.3 million to $5 million or a achieve of $0.01 to $0.21 per diluted share; non-GAAP adjusted EBITDA of between $89 million and $95 million and non-GAAP earnings per diluted share excluding acquisition associated prices, amortization of intangible property and different one-time bills of between $1.13 and $1.33. Whereas we’re elevating income and adjusted EBITDA steering, now we have diminished our GAAP and non-GAAP EPS outlook because of the closure of our remaining MUAS COCO website. I need to emphasize that the first affect from the closures from the acceleration of the depreciation on sure of our MUAS property and is a non-cash affect. As I discussed earlier, this resulted from shifting U.S. DoD priorities and we anticipate these occasions to happen within the fourth quarter with no affect in fiscal yr 2024 on our consolidated outcomes. As well as, now we have diminished internet revenue steering attributable to better than anticipated unrealized losses tied to fairness investments. This occurred because of mark-to-market accounting associated to our investments in strategic partnerships and enterprise actions. Nevertheless, we imagine adjusted gross margins will strengthen going ahead, pushed by favorable product combine and better volumes. We anticipate to ship adjusted EBITDA of between 16% and 18% of income for the complete fiscal yr. R&D investments for this fiscal yr is anticipated to stay between 11% to 12% of income. As I discussed earlier than, the elemental demand drivers of our enterprise stay sturdy and strong throughout the globe. Because the alternatives in entrance of us have grown, now we have continued to prudently put money into our individuals, merchandise, processes and inventories. These investments plus our elevated visibility bolstered by innovation, many years of battle confirmed expertise and unimaginable sturdiness in harsh environments positions us properly for the challenges of tomorrow. We now have quickly grown the corporate whereas sustaining a concentrate on effectivity and execution laying the inspiration for even greater efficiency going ahead. Earlier than turning the decision over for questions, let me as soon as once more summarize the important thing factors from as we speak’s name. First, we delivered third quarter efficiency in step with or better than our expectations as evidenced by a file backlog of $414 million. Second, with our file backlog and key wins over the previous few quarters, now we have a excessive diploma of confidence in our prospects for worth creation in fiscal yr 2023 and past. Whereas labor and provide chain challenges persist as we scale the enterprise, we’re overcoming these headwinds to fulfill the wants of our prospects and are assured in our skill to ship towards our targets and obtain one other file yr for the corporate. And third, we glance — as we glance forward, our portfolio is well-positioned to benefit from macro tendencies. Our options have confirmed important and guaranteeing the protection of the U.S. and its allies and we stand able to proceed to assist them now and sooner or later. I wish to once more thank our workers for his or her contributions this quarter. They’ve been instrumental in reaching these nice outcomes. We worth our workers, prospects and shareholders who put their belief in us each day to make the most effective programs and options that shield and enhance individuals’s lives. And with that, Kevin, Jonah and I’ll now take your questions.

Questions and Solutions:

Operator

[Operator Instructions] Your first query comes from the road of Peter Arment with RB Baird. Your line is open. Please go forward.

Peter Arment — R.W. Baird — Analyst

Yeah, thanks. Good afternoon, Wahid, Kevin, Jonah. Wahid, are you able to give us an replace on simply the provision chain? How issues are evolving there? I do know there have been some discussions prior to now that issues had been beginning to get slightly higher with chips, however there are clearly a whole lot of different elements. And simply associated to how that’s affecting each after we consider Small UAS after which TMS?

Wahid Nawabi — Chairman, President and Chief Government Officer

Positive, Peter. Usually, the provision chain constraints has general improved barely, though it’s nonetheless a problem on a day-to-day foundation. For fourth quarter, now we have just about our provide chain properly addressed and brought care of, however past fourth quarter for subsequent fiscal yr, there are nonetheless some areas the place provide chain stays to be a constraint. A very powerful space for us stays the warhead for our Tactical Missile Methods or Switchblade 300 and 600, which we don’t make that. We obtain these from Common Dynamics and Northrop Grumman’s. Each of these two warheads are extremely in demand and provide remains to be a problem on a quarterly and annual foundation. In addition to the warheads for Small UAS, Medium UAS, UGV and different merchandise, there are nonetheless some semiconductors provide chain constraints, however general, since final quarter has improved to some extent, though it’s nonetheless an ongoing problem. We anticipate that to proceed all through subsequent fiscal yr, though the enhancements that we’ve seen within the final couple of quarters give me some hope and optimism that issues are going to get to — get higher and higher.

Peter Arment — R.W. Baird — Analyst

Yeah. And simply as a follow-up is you talked about the warhead. Is there different sources as a result of it looks as if you’re being held again by the demand for Javelin and among the different merchandise that use related sort warheads. May you talk about that slightly bit if that’s a chance for you long-term? Thanks.

Wahid Nawabi — Chairman, President and Chief Government Officer

Positive, Peter, nice query. Actually, there’s options, however that takes slightly little bit of time. We now have already began even earlier than the battle in Ukraine different paths to have the ability to supply different warheads for Switchblade 300 and 600. The problem with 600 is that it shares the identical warheads that the federal government furnishes for each the Javelin Missile in addition to our Switchblade 600, the anti-tank Javelin Missile. And so the manufacturing capability on that takes some time for it to ramp up and enhance. Whereas that’s happening, we’re already engaged on a number of, not only one, a number of different choices on the way to supply different warheads which can be equal and even warheads which have completely different mission capabilities for each Switchblade 300 and 600. That is high of thoughts for us. We’ve been targeted on that for some time. Though the certification course of and choice and qualification does take time and it’s a longer-term aim that we’re making progress in the direction of as we communicate.

Peter Arment — R.W. Baird — Analyst

I respect the colour. Thanks.

Wahid Nawabi — Chairman, President and Chief Government Officer

Thanks, Peter.

Operator

Thanks. And one second in your subsequent query. Our subsequent query comes from the road of Austin Moeller with Canaccord Genuity. Your line is open. Please go forward.

Austin Moeller — Canaccord Genuity — Analyst

Hello, good afternoon, Wahid.

Wahid Nawabi — Chairman, President and Chief Government Officer

Good afternoon.

Austin Moeller — Canaccord Genuity — Analyst

My first query right here, are the Switchblade 600s which can be being despatched to Ukraine is a part of the help bundle? Are these popping out the DoD stock or have you ever been capable of produce extra within the fall?

Wahid Nawabi — Chairman, President and Chief Government Officer

So Austin, we proceed to supply Switchblade 600s as we communicate. There are some restricted portions within the U.S. DoD’s stock. A few of these have been provided to Ukraine. After which — however there’s vital extra numbers that we’re producing that now we have been delivering to the client within the final couple of quarters. U.S. DoD’s stock of Switchblade 600s stays very low usually. It began out to be fairly low as a result of it’s pretty new stock for them, however now we have loads of capability to supply extra aside from the warhead. The warhead is the principle gating issue there and naturally, the U.S. DoD contracts has been one other one. So usually, the newest bundle that was introduced by the President Biden’s administration on February 24 included some Switchblade 600s and our JUMP 20s. These we’d be delivering to the U.S. DoD after which they are going to be deploying them to the Ukraine forces.

Austin Moeller — Canaccord Genuity — Analyst

Okay. That’s useful. After which simply for the reason that announcement from Lithuania, what progress have you ever made on Switchblade FMS gross sales to different European international locations? And do you anticipate a few of these to point out up within the fourth quarter and within the first quarter of 2024?

Wahid Nawabi — Chairman, President and Chief Government Officer

So Austin, all Switchblade gross sales to date has been via the U.S. DoD’s FMS workplace, international navy gross sales, to date. As I discussed on my remarks, Ukraine has acquired them already after which Lithuania publicly introduced that they will be buying Switchblade 300 and 600. We anticipate that to be about $45 million price of orders, FMS orders that’s and that’s not mirrored in our backlog. All of these — these gross sales plus many different international locations, now we have a number of different international locations that we’re engaged with and over the following a number of quarters, not simply a number of weeks or months, we are going to proceed to transform these into contracts. Most certainly majority if not all of them can be FMS contracts to date it looks as if and that’s going to be a pretty big demand for Switchblade into the fiscal yr ’24 and past. I think about the Ukraine battle an occasion a thoughts shift, an actual seismic thoughts shift within the minds of political leaders and navy leaders on what loitering munitions may do and particularly on Switchblade. And as you understand, we’ve gotten U.S. DoD’s approval to have the ability to promote to twenty plus international locations. And I see that an increasing number of of these international locations are requesting Switchblade 300 and 600 and extra of them will convert into contracts within the upcoming quarters and years to return.

Austin Moeller — Canaccord Genuity — Analyst

Superior. Nice quarter and thanks for all the small print.

Wahid Nawabi — Chairman, President and Chief Government Officer

Thanks, Austin.

Operator

Thanks. And one second for our subsequent query. Our subsequent query comes from the road of Louie DiPalma with William Blair. Your line is open. Please go forward.

Louie DiPalma — William Blair — Analyst

Wahid, Kevin and Jonah, good afternoon.

Wahid Nawabi — Chairman, President and Chief Government Officer

Good afternoon.

Kevin McDonnell — Senior Vice President and Chief Monetary Officer

HI, Louie.

Louie DiPalma — William Blair — Analyst

Hello. Slide 8 offered a number of backlog metrics and within the 10-Q you disclosed how the unfunded backlog features a $235 million contract with a third-party that’s pending an export license approval. That’s clearly a really giant complete contract worth. Can you shed any mild by way of the likelihood of receiving that export license and the potential timing of that?

Wahid Nawabi — Chairman, President and Chief Government Officer

Positive, Louie. You’re completely proper that on our unfunded backlog, there’s about $235 million or roughly contract for Switchblades. It’s a DCS contract for a international nation and navy. And the explanation for that’s as a result of that navy wants them and has requested for them and requested them. The rationale why it’s unfunded is as a result of we weren’t certain in regards to the U.S. DoD’s willingness to permit for such a big contract worth for Switchblade to be initially DCS. That’s why you see extra bulletins from the U.S. Division of Protection on Switchblade FMS gross sales. So whereas that contract nonetheless exists in our unfunded backlog, I don’t really matter on it as a lot as a result of I’m much less assured about U.S. DoD giving approval for DCS gross sales for such a big contract for Switchblade.

Now whether or not or not that contract will get approved for a DCS sale and accredited via the State Division, I nonetheless imagine that the demand remains to be there. The client has already requested the identical quantity if no more of them via FMS venue avenue and channels and I anticipate that to truly convert to FMS gross sales or contract within the coming quarters. So wither approach, I believe it’s going to work itself out, however I’m much less optimistic on DCS gross sales and way more optimistic on FMS gross sales, which we’re gaining an increasing number of traction with the announcement that occurred within the final couple of quarters.

Louie DiPalma — William Blair — Analyst

Nice. That element was incredible. And on one other matter, has there been a rise in curiosity in your Sunglider plane within the wake of the Chinese language balloon incident?

Wahid Nawabi — Chairman, President and Chief Government Officer

Louie, thanks once more for a terrific query. The reply is completely sure. Even earlier than the Chinese language balloons on the U.S. aerospace, there was vital discussions that we’ve had over the past yr plus with the U.S. DoD on Sunglider for protection purposes. The latest occasions of the Chinese language balloon actually elevated that to a complete completely different degree. And what it’s achieved, it has elevated its urgency. And I’m — as I stated on my remarks, I’m extra optimistic in regards to the potential for securing a some small contract quantity to get us happening Sunglider for U.S. DoD wants and purposes. Clearly, will probably be a longer-term improvement and engagement and contract, however the preliminary one, I anticipate that to occur inside the subsequent quarter or so. There’s a whole lot of curiosity in that functionality. Sunglider has a extremely distinctive and highly effective worth proposition for stratospheric ISR and different varieties of mission for protection and the occasions with China in addition to the battle in Ukraine and Russia and what’s happening across the globe has actually elevated the significance of this and the urgency of it has additionally elevated fairly dramatically.

Louie DiPalma — William Blair — Analyst

Nice, thanks, Wahid. Thanks Kevin and Jonah.

Wahid Nawabi — Chairman, President and Chief Government Officer

Thanks.

Kevin McDonnell — Senior Vice President and Chief Monetary Officer

Thanks, Louis.

Operator

Thanks. And one second for our subsequent query. Our subsequent query comes from the road of Ken Herbert with RBC Capital Markets. Your line is open. Please go forward.

Ken Herbert — RBC Capital Markets — Analyst

Yeah, hello, good afternoon all people.

Wahid Nawabi — Chairman, President and Chief Government Officer

Good afternoon.

Ken Herbert — RBC Capital Markets — Analyst

Hey, Wahid, perhaps or Kevin simply to start out off, I needed to see if you happen to may present slightly extra element on the MUAS phase and particularly gross revenue. I do know that you just’re investing considerably on this enterprise. How can we take into consideration perhaps profitability on this enterprise via the rest of this fiscal yr and into subsequent yr and perhaps at what level or perhaps at what income level ought to we begin to see gross margins actually inflect positively on this phase?

Kevin McDonnell — Senior Vice President and Chief Monetary Officer

I’ll begin after which Wahid can fill in. Effectively, principally, they’re getting a big order from Ukraine as we’ve been speaking about over the past a number of quarters. They’re shifting extra to a product enterprise that was anticipated with – additionally with FTUAS potential coming on-line right here. So we see their gross margins enhancing as they grow to be extra of a product enterprise over time. So it is best to see gradual enchancment within the contribution.

Ken Herbert — RBC Capital Markets — Analyst

Okay.

Wahid Nawabi — Chairman, President and Chief Government Officer

Yeah, and once more, Ken, that enterprise as you understand, it’s primarily a COCO service as we speak. Our technique after we acquired that enterprise was to transition it extra to product gross sales. There are a number of type of pathways that we’re pursuing to attain that. One was that we’re relying much less and fewer on the COCO operations. Two is to extend worldwide gross sales and the potential Ukraine order that was introduced by the presidential newest help bundle is a major potential for JUMP 20 after which this would be the first of its form that U.S. has given to Ukraine aside from our Puma 3s and Puma LE programs. And by far, our UAVs are the workhorse of the Ukraine battle as we speak.

After which lastly, now we have a number of further worldwide prospects which can be on this JUMP 20 programs for product gross sales. What I forgot to additionally point out is that the military FTUAS choice that we simply thought acquired a small incremental contract is a doubtlessly $1 billion program. After that, there are a number of different packages inside the U.S. Marine Core and the U.S. Navy that we’re contemplating, though these are slightly longer-term than this subsequent yr. The U.S. Military announcement was now and the choice ought to most likely happen typically by the tip of our subsequent fiscal yr. And so all of these occasions, Ken, will assist enhance the margins and the profile of that enterprise, which was precisely the plan that we had after we bought the corporate to start with.

Ken Herbert — RBC Capital Markets — Analyst

Yeah, thanks, Wahid. And as we — and I apologize if you happen to went via this, however as we take a look at the plane you’ve delivered as a part of Increment 1 on the FTUAS contract, are you able to touch upon how these are performing and any perhaps classes discovered? And the way you suppose particularly the outcomes of Increment 2 are positioning or serving to you is clearly moved into Increment 2 alternatives?

Wahid Nawabi — Chairman, President and Chief Government Officer

Positive. In order that’s a extremely necessary level that you just deliver up which is that we’re the one one who has been chosen sole-source for Increment 0 and Increment 1 and we’re the one one which has been chosen for 3 phases. Increment 1 remains to be early. The rationale I’m saying early is as a result of we’ve delivered the {hardware}. We’re within the course of of coaching the U.S. military personnel, each in Germany and in the USA in Huntsville, Alabama. The military has taken a slower — it’s not going as quick as we anticipated at it go, that means that they now should deploy it on the market and it goes via an in depth set of testings. From our perspective and based mostly on our expertise and based mostly on our engagement with our buyer to date their expertise with us has been extraordinarily good.

We imagine that now we have the benefit in that competitors to date based mostly on our monitor file of efficiency and our fairly a significantly extra compelling and differentiated answer. The necessities that the U.S. Military has for FTUAS on Increment 2 and the ultimate choice are issues that we will ship now. Most different distributors aren’t even near that but and we’re at the least just a few steps forward of these people by way of delivering the capabilities and the reliability that the U.S. Military is on the lookout for on military FTUAS. So general, we be ok with it, however we additionally remind ourselves each day that we’re competing with a number of severe gamers and we take nothing as a right and we’re going to maintain proceed to work and execute as now we have achieved prior to now.

Ken Herbert — RBC Capital Markets — Analyst

That’s nice. And simply lastly, is it honest to imagine that the stock degree on the steadiness sheet, good portion of that’s within the MUAS or with the JUMP 20 contemplating the quantity of plane you’ve bought in course of as you put together clearly for this ramp?

Wahid Nawabi — Chairman, President and Chief Government Officer

We now have some stock. However no, the general degree of stock rising is intentional for 2 causes due to the provision chain points, primary. We’ve been shopping for forward as a result of we expect these prospects to take supply as shortly as quickly because the contracts are available. And quantity two has been we’ve been experiencing vital progress this yr and we anticipate much more progress subsequent yr. And so for these with a view to safe our stock on our merchandise for our prospects and most of those conditions are very pressing and excessive precedence for the U.S. DoD and for allies. That’s why the stock is up with a combination of each Small UAS, TMS and UAS and even some UGV enterprise as properly. All of these companies are rising and we’re going to require inventories to assist these companies for fourth quarter and financial ’24.

Kevin McDonnell — Senior Vice President and Chief Monetary Officer

Yeah, keep in mind, the Ukraine contract was over $170 million. In order that they solely delivered a portion of that right here within the within the third quarter.

Ken Herbert — RBC Capital Markets — Analyst

Glorious. All proper. Good quarter. Thanks, Kevin. Thanks, Wahid.

Wahid Nawabi — Chairman, President and Chief Government Officer

Thanks Ken.

Kevin McDonnell — Senior Vice President and Chief Monetary Officer

Thanks.

Operator

One second for our subsequent query. Our subsequent query comes from the road of Brian Ruttenbur with Imperial Capital. Your line is open. Please go forward.

Brian Ruttenbur — Imperial Capital — Analyst

Sure, thanks very a lot. Superb quarter. To start with, by way of money, the place do you anticipate ending the yr by way of money? You had a giant drop from quarter-to-quarter clearly. I need to get your perspective on that.

Kevin McDonnell — Senior Vice President and Chief Monetary Officer

Effectively, I imply, we don’t predict the money steadiness on the finish o -the yr, however I might anticipate inventories to proceed to rise. However on the similar time, we’re going to be shifting the cycle on a few of these Ukraine billings. So we must be bringing among the receivables down, however we’re once more going to finish the yr with a big quarter. So you can see some working capital use nonetheless into the fourth quarter.

Wahid Nawabi — Chairman, President and Chief Government Officer

And usually talking, Brian, our money place, our steadiness sheet may be very sturdy and wholesome. We watch that and we regulate it. Our skill to have the ability to fund the enterprise operations isn’t going to be a difficulty in our thoughts.

Brian Ruttenbur — Imperial Capital — Analyst

Completely. It ought to normalize. The money place ought to normalize. I do know there — if you’re rising quick, like that a whole lot of shifting components, however ought to normalize inside the subsequent two or three quarters. Is that what you anticipate?

Kevin McDonnell — Senior Vice President and Chief Monetary Officer

Yeah, normalize to sure extent, however we do proceed to develop. We’re anticipating to develop as I believe Wahid stated at lest double-digit subsequent yr. So that might suggest a major progress year-over-year. And so that you’ll proceed to have some working capital utilization, however there’s some potential efficiencies over time as a few of these provide chain points ease and we don’t should do as a lot pre-buying as we’re doing proper now.

Brian Ruttenbur — Imperial Capital — Analyst

Nice. After which simply final query, because you talked about the double-digit progress in fiscal ’24. Are you able to discuss slightly bit about what you anticipate to see going to the underside line by way of the expansion? Clearly, a lot — properly, I’m making the assertion clearly, however better progress on earnings and EBITDA. May you give us any type of parameters round that?

Wahid Nawabi — Chairman, President and Chief Government Officer

So Brian, we clearly have a really giant fourth quarter in entrance of us proper now. We’re executing towards that. We can be updating you with all of our monetary steering for subsequent fiscal yr on our subsequent name. General, what I can say is that we anticipate one other yr of enhancements in just about nearly all of our metrics. I believe our high line will develop. I believe our gross margins will maintain and even develop barely extra as we achieve scale. Our combine between {hardware} versus {hardware} and product gross sales versus companies will enhance and all of that might additionally imply that we are going to get some scale and leverage, which implies the underside line will enhance considerably as properly.

So I believe that now we have executed extraordinarily properly this yr towards very, very tough challenges and difficult type of headwinds and positioned the corporate for a number of years of progress and prosperity. I believe that it’s going to be a shift in approach individuals notice and take a look at Small UAS and Tactical Missile Methods and loitering munitions usually. Just about the longer term conflicts goes to be about unmanned programs on the air, on the bottom and with all with deadly precision capabilities akin to Switchblade. I believe we’re getting ourselves positioned for that. We labored actually onerous for that. We’re going to have a terrific yr and I believe we’re going to proceed to have even a greater yr of ’24 and past.

Brian Ruttenbur — Imperial Capital — Analyst

Nice. Thanks.

Wahid Nawabi — Chairman, President and Chief Government Officer

You’re welcome, Brian.

Operator

[Operator Instructions] Our subsequent query comes from the road of Pete Skibitski with Alembic International. Your line is open. Please go forward.

Pete Skibitski — Alembic International Advisors — Analyst

Hey, good afternoon guys. Guys one factor that’s tough to trace is that this Ukraine funding because it grows I believe greater than $100 billion. It’s simply type of the overall quantity that you just’re anticipating. So I’m certain you’ve form monitor with a effective tooth comb, however may you give us any type of an estimate by way of the Ukraine funding initiatives which have been introduced to date? How a lot of that’s as but to make it into your backlog even that is simply tough order of magnitude.

Wahid Nawabi — Chairman, President and Chief Government Officer

Positive. So Pete, it’s a very fluid scenario, primary, as a result of the battle is an ongoing factor. And frequently, the U.S. DoD retains giving our programs to Ukraine and the efficacy of these programs are phenomenally good and the demand for it continues to extend. Whereas that’s taking place, U.S, DoD can also be beginning to notice now we have to have extra of those programs for their very own backlog and for their very own stockpiles of weapons programs and unmanned programs. And along with that, there are different worldwide allies.

We take a look at this on the neighborhood and even outdoors the neighborhoods of Ukraine which can be requesting and demanding the identical programs — related capabilities. So to date, I might say we’re most likely getting perhaps half to a 3rd of what’s been introduced into our bookings and our backlog. I believe that that’s going to proceed to develop and present an increasing number of of it in our backlog. The largest beneficiary to date has been our Small UAS with Puma AE and Puma LE programs, which is by the way in which, the workhorse of the U.S. DoD’s property that’s given to Ukraine. We’re informed that each weapon system the U.S. DoD has given to Ukraine has one in all our Pumas of Puma LEs mendacity in entrance of them.

So it’s the workhorse of Ukraine battle towards Russia and their defenses. It scouts targets, it sweeps the targets for prime Mars and different weapon programs. It then truly helps them to shoot it after which as soon as it’s achieved and it does with battle assessments. So number of completely different missions have been achieved by Pumas and Puma LEs very successfully and really cheaply for Ukraine and for U.S. I believe that pattern goes to proceed. I believe we’ve solely seen a small parts of that reflecting on our backlog to date and extra of that to return within the fiscal yr ’24 and past.

Kevin McDonnell — Senior Vice President and Chief Monetary Officer

And the latest announcement isn’t in our backlog.

Wahid Nawabi — Chairman, President and Chief Government Officer

And not one of the latest bulletins, Pete, that you just heard from the 24 February is mirrored in our backlog, neither is the Pumas, the Switchblade 300 and 600s or the JUMP 20 programs. All of these we anticipate to transform into backlog within the subsequent one or two quarters.

Pete Skibitski — Alembic International Advisors — Analyst

Okay. Yeah, I imply one third to 1 half implies much more to go it looks as if. And simply let me follow-up in your feedback on fiscal ’24 progress. Lots of people I believe imagine we may have a full yr CR for DoD and the federal government fiscal ’24 or at the least an prolonged CR. Is that factored into your pondering, your double-digit progress pondering for fiscal ’24 and does that matter? Does that potential long-term CR matter much less given you’re ending backlog right here — funded backlog?

Wahid Nawabi — Chairman, President and Chief Government Officer

So Pete, CRs all the time do matter to some extent, however given the — our backlog, our backlog on the finish of Q3 was over $400 million. Identical time final yr was a lot decrease than that, considerably decrease than that. Even final quarter was about $293 million on the finish of Q2. So we’re speaking about nearly the two instances enhance in our backlog in comparison with third quarter of final fiscal yr. Going into fiscal ’24 that provides us a whole lot of confidence in our skill to have the ability to obtain that yr. Clearly, the massive issue goes to be provide chain and availability of merchandise and lead time of elements. However general, I believe that the CR ought to — all the time has some affect, however not as a lot to our enterprise as different companies.

There’s — like I stated, one is the backlog cause. Another excuse is the truth that the system is a excessive precedence and excessive urgency for each U.S. and Ukraine and I don’t see that really lowering over time, whether or not there’s or there isn’t a CR usually. I believe that the macro degree demand drivers for our enterprise may be very, very wholesome. And let’s not additionally neglect, overwhelming majority of our gross sales now, I shouldn’t say overwhelming majority, a good portion of our gross sales come from worldwide demand, each for Small UAS in addition to for now Tactical Missile Methods as many international locations which can be eager about them. So I believe all of these mixed internet, internet, we’re going to — we’re trying ahead to a extremely sturdy yr in 2024 and even past.

Pete Skibitski — Alembic International Advisors — Analyst

Okay. Nice.Thanks guys.

Wahid Nawabi — Chairman, President and Chief Government Officer

You’re welcome, Pete.

Kevin McDonnell — Senior Vice President and Chief Monetary Officer

Thanks, Pete.

Operator

Thanks. And I might now like to show the convention again over to Jonah Teeter-Balin for any additional remarks.

Jonah Teeter-Balin — Senior Director of Company Growth and Investor Relations

Thanks all as soon as once more for becoming a member of as we speak’s convention name and in your curiosity in AeroVironment. An archived model of this name, all SEC filings and related information could be discovered on our web site at www.avinc.com. We want you a very good night and look ahead to talking with you once more following subsequent quarter’s outcomes.

Operator

[Operator Closing Remarks]