Earnings Call Transcript - AVAV Q2 2022

Jonah Teeter-Balin, Senior Director of Corporate Development and Investor Relations

Thank you, and good afternoon, ladies and gentlemen. Welcome to AeroVironment's fiscal year 2022 second quarter earnings call. This is Jonah Teeter-Balin, Senior Director of Corporate Development and Investor Relations for AeroVironment. Before we begin, please note that on this call certain information presented contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include without limitation any statement that may predict, forecast, indicate or imply future results, performance or achievements and may contain words such as believe, anticipate, expect, estimate, intend, project, plan or words or phrases with similar meaning. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control that may cause our business, strategy or actual results to differ materially from the forward-looking statements. For further information on these risks, we encourage you to review the risk factors discussed in AeroVironment's periodic reports on Form 10-K and other filings with the SEC, along with the associated earnings release and safe harbor statement contained therein. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation on our website at avinc.com in the Events and Presentations section. The content of this conference call contains time-sensitive information that is accurate only as of today, December 7, 2021. The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after this conference call. Joining me today from AeroVironment are President and Chief Executive Officer, Mr. Wahid Nawabi; and Senior Vice President and Chief Financial Officer, Mr. Kevin McDonnell. We will now begin with remarks from Wahid Nawabi. Wahid?

Wahid Nawabi, President and CEO

Thank you, Jonah. Welcome to our fiscal year 2022 second quarter earnings conference call. I will start by summarizing our second quarter performance and discuss recent achievements. Next, Kevin will provide a more detailed summary of our financial performance for the quarter. And then I will follow up with a discussion of our goals for fiscal year 2022 before Kevin, Jonah and I take your questions. Let me emphasize three key messages, which are included on Slide #3 of our earnings presentation. First, we delivered solid financial results in our second quarter and first half of fiscal year 2022 in line with our expectations. Second, we are experiencing stronger macro headwinds this quarter. These headwinds include supply chain constraints due to the global COVID-19 pandemic, delayed awards of several customer contracts due to an uptick in pandemic-related travel restrictions and lack of approval of the National Defense Authorization Act for government fiscal year 2022, resulting in continuing resolutions and a tight labor market. All of the above factors are impacting our outlook for the second half of fiscal year 2022. And third, with a solid backlog and enduring long-term demand for our portfolio of solutions, we remain confident in our vision for the company and ability to create long-term shareholder value. Before going through these themes in depth, let me summarize our financial results for the second quarter. We delivered revenue of $122 million compared to $92.7 million last year, a 32% increase year-over-year. The revenue growth was primarily due to increased sales, particularly in our Medium Unmanned Aircraft Systems segment. These, along with other organic and acquisition increases, offset the negative impact from lower small unmanned aircraft systems product line shipments. We achieved a solid backlog of $252 million driven by new wins across multiple business segments and in part by recent strategic acquisitions that are already yielding strong results. Gross profit for the second quarter was $42.5 million, an increase of 4% year-over-year. Gross margin percentage fell to 35% from 44%, reflecting product mix and supply chain effects. We reported net income of $2.5 million or $0.10 per diluted share as compared to $2.1 million or $0.09 per diluted share for the second quarter of fiscal year 2021. While we're pleased with our results this quarter and still expect year-over-year growth across our business, we're adjusting our guidance for the full fiscal year 2022 to account for the headwinds we expect in the second half of the fiscal year. On last quarter's call, I touched on three global issues that could impact our business: the U.S. withdrawal from Afghanistan; the COVID-19 pandemic; and the global supply chain disruptions. Today, I would like to provide an update on the latter two as well as additional headwinds affecting our business and the broader industry and economy. These additional headwinds include contract awards due to the global pandemic and current continuing resolution environment and labor shortages. As we mentioned last quarter, current supply chain constraints are impacting our business. There are two aspects of this. First and foremost is our ability to manufacture and deliver products to customers in a timely manner. Supply chain bottlenecks have hindered our ability to do this, even as our dedicated teams have focused on mitigating the situation to the best of their abilities in the last 12 months by working with new and existing suppliers to find component parts. The other aspect of this predicament is increased costs, reflecting higher material costs, shipping expenses, warehousing costs, inventory costs and overall working capital management as we continue to build inventory to meet current and future demand for our innovative solutions. With regards to the COVID-19 pandemic, increased concerns over the Delta and Omicron variants of the virus have resulted in further domestic and international travel restrictions. This, along with other pandemic-related delays, negatively impacts our ability to secure new contract wins in a timely manner, both domestically and internationally, even though our backlog remains robust. Additionally, due to the current U.S. DoD's continuing resolution budget environment in Washington, certain awards have also been negatively impacted. We expect this uncertainty to persist throughout the rest of this fiscal year. We have worked diligently to meet the administration's mandate to have all employees vaccinated by January 4, 2022. However, this has led to increased challenges in hiring within an already tight labor market. The staffing challenge, to an extent, is hindering our ability to hire adequate qualified engineering professionals across our growing business. It is important to emphasize that our commitment to AeroVironment and delivering value for our shareholders and other stakeholders remains stronger than ever. So these challenges in aggregate, namely global supply chain constraints, ongoing pandemic-related constraints, U.S. DoD's continuing resolution and tight labor markets, have led to a slower contract award environment in general and are hindering our ability to achieve the expected full-year results we initially intended. Due to these headwinds, we find it appropriate to adjust our guidance for fiscal year 2022 as follows. Full-year revenue is now expected to be between $440 and $460 million. Net loss from continuing operations is forecasted to be between $12 and $8 million. Adjusted EBITDA is anticipated to be between $59 and $65 million. Our diluted loss per share will be between $0.47 and $0.33, and non-GAAP diluted EPS is forecasted to be between $1.23 and $1.37. While these results differ from our initial expectations, rest assured, our team is dedicated to mitigating the issues. Some of these issues may be transitory in nature. However, supply chain constraints and tight labor markets in particular do not appear to be short term and we've already begun working to mitigate their impact this fiscal year. We're optimistic that such issues will also eventually work themselves out, but we currently lack visibility in terms of when that may occur. Before turning the call over to Kevin, I'd like to provide some updates on current developments within our individual product lines. I will start with our Small Unmanned Aircraft Systems, our largest product line, where we were pleased to see growth opportunities ahead. We continue to see strong demand for our Puma AE and Raven systems, both domestically and abroad, and recently showcased a sensor-to-shooter demonstration, including Crysalis integration. This took place in September as part of NATO's robotic experimentation and prototyping augmented by Maritime Unmanned Systems 2021 event, Europe's largest maritime unmanned systems experimentation exercise hosted at the Portuguese Navy Center in Troia, Portugal. This successful maritime demonstration of our Puma 3 AE Small UAS and Switchblade 300 tactical missile system was part of a U.S. and NATO interoperability to interchangeability initiative. It showed that our sensor-to-shooter solution dramatically elevates operator situational awareness and reduces the chances of mis-targeting, which we believe should help with broader adoption of these intelligent systems for naval applications worldwide. In September, we announced that the U.S. Army exercised its third and final option under the Flight Control Systems or FCS domain of a multi-year Small UAS contract. The value of this option was approximately $11.7 million, including flight control system kits, ground control stations, and various spare parts for the Army's existing fleet of AeroVironment systems. Delivery of this contract award is scheduled to be completed by September of next year. Next, within our Tactical Missile Systems segment, we continue to see growing demand for our products and believe there is a great opportunity to replace traditional munitions on ground, air and sea vehicles. In the quarter, we successfully demonstrated the integration of our Switchblade 300 loitering missiles and JUMP 20 medium UAS for increased mission autonomy and efficacy. This air-launched effects proof-of-concept demonstration took place in August, launching an inert Switchblade 300 from the JUMP 20 and successfully recovering both air vehicles. This end-to-end integrated solution provides customers with greater time on station than if they were to deploy a Switchblade on its own, resulting in the ability to conduct more real-time surveillance, increasing the probability of identifying correct targets and minimizing collateral damage. We continue to make progress on our Switchblade 600. We are actively manufacturing low-rate initial production quantities for operational fielding of the ground version while developing the maritime variant under our existing customer-funded R&D contract through its integration into naval vessels for the U.S. Special Operations Command. I will now move onto our Medium Unmanned Aircraft Systems segment, which has been quite active this year. Following our recent success with SATCOM, we submitted a JUMP 20 proposal for the U.S. Army's Future Tactical UAS or FTUAS Increment 1 and will soon submit a proposal for Increment 2 opportunities. In aggregate, the U.S. Army's FTUAS program is expected to be worth over $1 billion in potential opportunity over a 10-year period. As a reminder, the U.S. Army's proposed fiscal year 2022 budget calls for over $140 million of funding for progressing this potential program. We're very focused on competing for this large growth opportunity and expect to be awarded a contract for the Increment 1 opportunity soon. We're also engaged with international customers to bid on additional future potential opportunities and ensure strong growth in the years to come. It has been an exciting few months for our Unmanned Ground Vehicles product line, which was created through our acquisition of Germany's Telerob. Telerob recently received a multi-million dollar firm fixed price order from the Latvian Ministry of Defense for telemax EVO HYBRID and tEODor EVO unmanned ground vehicles, along with engineering support. We also delivered a telemax EVO HYBRID to the U.S. Pentagon Force Protection Agency earlier this summer. Designed to be operated by EOD and HAZMAT technicians, the Telerob UGV can safely and effectively dispose of explosive ordnance, hazardous material and chemical, biological, radiological and nuclear threats. We're pleased with the expanding interest shown in these products since our purchase of Telerob earlier this year, and believe in the significant value potential for our shareholders. In our HAPS product line, we continue to move ahead in designing the next-generation aircraft under the terms of our five-year master design and development agreement with SoftBank. As we said last quarter, we are progressing with Phase 2 of our partnership during which we will build a third aircraft to perform further flight testing, demonstrate longer duration flights and progress through FAA certification. At the same time, we continue to assess various U.S. DoD opportunities that can leverage Sunglider's unique capabilities. As a reminder, our Solar HAPS performance characteristics provide unique defense applications for both counterinsurgency and peer and near-peer conflicts. And finally, our MacCready Works Advanced Solutions group continues to develop new applications in autonomy and artificial intelligence. We are engaged in many customer-funded R&D projects in the area of autonomous multi-domain robotic solutions and have seen new levels of interest since the success of Ingenuity, the Mars Helicopter, which our MacCready Works team helped design for NASA. We are very proud of these accomplishments, which underscore our leadership in designing and delivering state-of-the-art solutions with high reliability and ruggedness for extreme environmental conditions. With that, I would like to now turn the call over to Kevin McDonnell for a review of second quarter financials. Kevin?

Kevin McDonnell, CFO

Thank you, Wahid. Today, I will be reviewing the highlights of our second quarter performance during which I will occasionally refer to both our press release and earnings presentation available on our website. Revenue for the second quarter of fiscal 2022 was $122 million, a 32% increase from the prior year's comparable period. Slide 5 of the earnings presentation provides a breakdown of revenue by segment for the quarter. Small UAS led the way with $54.7 million of revenue, which was down slightly from last year's second quarter of $58.3 million. Our newly acquired Medium UAS segment had a strong second quarter with revenue of $26.5 million, a sequential improvement versus our first quarter of fiscal 2022. Our Tactical Missile Systems or TMS segment contributed $18.4 million of revenue during the second quarter. The TMS was impacted by supply chain issues in Q2 and we expect these issues to continue at least for the remainder of the fiscal year. Revenue from the other segment, which includes HAPS, increased year-over-year to $22.4 million versus $15.4 million in fiscal 2021 second quarter. The increase is a result of revenue from the acquired Progeny ISG and UGV businesses. Year-to-date, we saw a decline in organic revenue of 12%. As Wahid discussed in his remarks, we continue to face headwinds on many fronts and expect organic revenue growth to be limited or decline in FY 2022. Turning to gross margins. Slide 5 of the earnings presentation shows the mix of product and service revenue. We saw some improvement in mix to 58% product, up from 53% product in Q1. For the full year, we are tracking towards a 55% product mix, down from our original expectation of 60% product. Our reduced revenue outlook has a disproportionate negative impact on product revenues. Slide 6 of the earnings presentation shows the trend of adjusted product and service gross margins and Slide 12 reconciles the GAAP gross margins to adjusted gross margins, which exclude intangible amortization expense and other noncash purchase accounting items. I will speak to our adjusted gross margins. Overall adjusted gross margins for the quarter were 39%, up from 32% in the first quarter of FY '22. This positive trend was a result of improved product service mix and improved product and service margins. Adjusted product margins in the quarter were 48% versus 42% in the first quarter. However, for the remainder of the year, we expect to see product gross margins in the mid- to low-40s. In terms of adjusted service gross margins, we also saw sequential improvement to 27% in the second quarter versus 22% in the first quarter of the year. We expect the Q2 service margins to be indicative of what we will see for the remainder of the year. Now turning to operating expenses. SG&A expense for the second quarter was $24.8 million and includes intangible amortization and acquisition-related expenses of $5.6 million compared to $0.5 million last year. When you exclude the intangible amortization and acquisition-related expenses, SG&A expense as a percentage of revenue in the second quarter of fiscal 2022 was 16%. We expect SG&A, excluding intangible amortization and acquisition-related expenses, as a percentage of revenue for the year to be in line with the first half actual of 17%. R&D expense for the second quarter was 12% of revenue and 13% year-to-date. We expect R&D as a percentage of revenue to be in line with our guidance of 11% to 12% for the full year. We also had a significant non-operating item in the quarter. We accrued an additional $10 million of legal settlement expense related to the claims by the buyers of our former EES business as part of a settlement agreement. This was recorded as part of the other expense in the quarter. Looking at the bottom line. Our GAAP net income for the second quarter of fiscal 2022 was $2.5 million or $0.10 per diluted share compared to net income of $2.1 million or $0.09 per diluted share for the second quarter of fiscal 2021. The year-over-year increases in net income were primarily due to a $12 million increase in tax benefits and a $10.7 million favorability in equity investment income as the second quarter of fiscal 2021 includes a loss related to the HAPS Loon write down. This was largely offset by a $10 million decrease in operating income, primarily driven by an increase in intangible amortization related to the acquisitions and a $10.1 million increase in other expenses for the recording of a legal settlement discussed previously. The large tax benefit in the second quarter of fiscal 2022 is driven by a combination of our year-to-date and projected full-year pre-tax losses. In terms of adjusted EPS, Slide 10 of our earnings presentation shows a reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per share per diluted share of $0.78 for the second quarter of fiscal 2022 versus earnings of $0.48 per diluted share for the second quarter of fiscal 2021. Year-over-year improvement in adjusted earnings is a result of increased adjusted gross margins offset by higher operating expense and positively impacted by the tax benefit in the quarter. Turning to the balance sheet. Total cash and investments at the end of the second quarter was $124.2 million, which is slightly up from the first quarter of this fiscal year. We continue to have a strong balance sheet with over $120 million of cash investments and a $100 million working capital facility. Now, I'd like to highlight some of our backlog metrics. Slide 7 of the earnings presentation provides a summary of our current fiscal 2022 visibility. As of today, total visibility towards the midpoint of our $440 million to $460 million revised revenue guidance range is 90%. Our funded backlog at the end of the second quarter of fiscal 2022 was $252 million. Now, I'd like to turn things back to Wahid.

Wahid Nawabi, President and CEO

Thanks, Kevin. As you can see, we continue to make progress in advancing our market-leading positions while achieving critical milestones. Before turning the call over for questions, let me sum up the quarter with three key messages. First, we delivered a solid quarter and first half in line with our expectations. Second, we're experiencing macro headwinds in the second half of fiscal year 2022 and to account for these challenges we have adjusted our fiscal year guidance. And third, with a solid backlog and 90% visibility to the midpoint of our guidance range, we remain focused on delivering another year of top-line growth across our business portfolio while delivering long-term shareholder value. We continue to expand the company's base of business, strengthening our leading position across the unmanned robotic systems landscape. Our team remains committed to managing the near-term macro challenges while achieving the long-term vision of our company and creating shareholder value. Looking ahead, we continue to execute our strategy of broadening our capabilities, integrating multi-domain robotic systems, artificial intelligence and an intuitive user interface to provide more effective solutions than ever before. We've enjoyed the opportunity to meet and speak with our investors over the past quarter, and thank you for your continued interest in AeroVironment. We wish you and your loved ones a great holiday season and happy New Year. I want to say thank you to our customers, team members and shareholders for your support and for challenging us to deliver excellence. We continue to focus on delivering on our promise to help you proceed with certainty. Kevin, Jonah and I will now take your questions.

Operator, Operator

Our first question is from Peter Arment of Baird.

Peter Arment, Analyst

Wahid, can you discuss the revenue outlook and clarify how much of the change is driven by the CR, how much is influenced by supply chain factors, or provide some additional insights on this?

Wahid Nawabi, President and CEO

Sure, Peter. So, overall, as I mentioned, we're experiencing those primarily three headwinds, the three categories. And I would say the supply chain and supply chain-related constraints are a significant contributor to that headwind. So we've been able to address that for the last 12 to 18 months very effectively so far. However, what's happened is that the length and duration of this pandemic and the restrictions that have gone along with it, no one really expected it to go this long. And so, therefore, as a result, all of the preliminary and proactive measures that we have taken for the last 12 to 18 months essentially were exhausted where the supply chain as a whole, even suppliers and distributors and manufacturers were not able to help us anymore because we've proactively planned so much of it. And so we adjusted our plans accordingly. And then the other two issues will be related to order delays as some of that related to the pandemic and travel, some of it related to good supply chain and some of it related to obviously the CR as well. And then, lastly, but also tight labor market, especially for highly qualified engineering talent, which we have a strong desire and demand for because our business continues to grow, has been another contributor. We haven't really broken it down specifically to dollar amounts per, but those are the top three areas that contribute to overall headwinds for us, Peter.

Peter Arment, Analyst

Okay. As a follow-up, does it seem like the order delays are more related to timing, and do you expect those to eventually return to normal? Or are you noticing any changes from your customers?

Wahid Nawabi, President and CEO

Sure. As I mentioned earlier, some of these issues are temporary and will likely resolve themselves sooner rather than later. For instance, we expect improvements in travel delays, which have already shown signs of getting better, although disruptions caused by the Delta and Omicron variants have affected that progress. I believe that, in the short term, these challenges will eventually diminish. However, the market is very dynamic, with changes happening almost daily or weekly regarding the supply chain and existing constraints, making long-term predictions difficult. There are specific concerns like the global supply chain issues related to high-performance graphic processors and semiconductor components, which are critical to many of our products. Additionally, the labor market challenges appear to persist longer than we anticipated. We will keep you informed as we receive more updates, but it's a situation that requires close monitoring and proactive management of issues as they arise regularly.

Operator, Operator

And our next question is from Ken Herbert of RBC. Your line is open.

Ken Herbert, Analyst

I wanted to just obviously follow up on the guidance question. But from an EBITDA standpoint, you've lowered the full-year EBITDA significantly more than the full-year revenue outlook. Can you just talk about the puts and takes from an EBITDA standpoint? And are there any specific items impacting EBITDA or profitability disproportionately relative to the revenues?

Kevin McDonnell, CFO

I think it's because we are removing some of the higher margin business when we adjusted that guidance. That's one of the reasons it has a significant impact on EBITDA.

Wahid Nawabi, President and CEO

We also have adjustments in the second half of the year, Ken, where certain fixed costs based on volume play a role. A lower volume generally has a negative impact on our profitability for this fiscal year. These are the two main effects: one driven by product mix, as Kevin mentioned, because we typically deliver more products than services in our revenue mix. Consequently, the challenges we face in terms of supply chain and other headwinds have a more significant impact on growth, margins, and profitability than services do.

Ken Herbert, Analyst

Okay. And, if I could, just a follow-up on that. On the revenue side, were any of the push outs due to specific competitive losses or contract sort of setbacks relative to expectations on specific programs, Wahid?

Wahid Nawabi, President and CEO

Not so far that we know of. In fact, our team is making very good progress in general in terms of the markets and opportunities that we're pursuing. We, in fact, in many areas look better than we did before. As I mentioned, we did the interoperability interchangeability demonstration with the NATO partners in Europe. This is a very, very big milestone because it shows how a sensor-to-shooter concept of operation can be implemented and we delivered that capability. We demonstrated it live with our Switchblade and our Puma AE 3s. Additionally, on our MUAS, the JUMP 20, FTUAS program for the U.S. Army, we have already submitted our proposal. We like our chances. We believe that we are in a leading position, and that is a significant opportunity that we think we are positioned quite well on that as well. And similarly in our Tactical Missile Systems product line, we've made quite a decent progress in a lot of the areas of our business. We are continuing to make products and deliver on the existing Switchblade 300, although at a slower pace because of the supply chain constraints. Switchblade 600 is progressing very, very effectively with the customer adoption and lower initial production, and we're developing a next variant of it. So, overall, our win rate in the market remains strong. It's just that these headwinds are pushing things that are right as it's affecting pretty much almost every company that I know of across the board and the entire macro level of the economy and the industry.

Kevin McDonnell, CFO

And the product, TMS has shown a lot of good reception in the marketplace out of the box.

Wahid Nawabi, President and CEO

Absolutely.

Operator, Operator

And our next question is from Austin Moeller of Canaccord.

Austin Moeller, Analyst

Wahid, I just have a quick question here on the supply chain. Some other contractors that I've spoken with in the past few weeks have sort of targeted and estimated resolution for a lot of the supply chain delays and disruptions for sort of mid calendar year '22, which is of course in your fiscal year '23. I know you didn't say anything specific around timing, but does that sound like a reasonable estimate to you?

Wahid Nawabi, President and CEO

Good evening, Austin. Based on our observations in the market, the tight labor markets and supply chain constraints are affecting both the delivery of our systems and services as well as our manufacturing capabilities, which is causing delays in orders. I expect these challenges to persist for a while. The situation is very dynamic, and changes can occur significantly on a weekly basis. Since the start of the pandemic, our team has been fortunate to proactively address many of these issues ahead of time. We carefully planned by purchasing parts early, arranging for our suppliers to hold inventory for us, and building out our plans proactively. Most, if not all, of our contingency plans have been tested during this pandemic and global disruption. There are numerous factors currently impacting the situation. However, we are doing everything possible to manage the factors within our control. There are external factors that we cannot influence, but we are making an impact on the areas we can control. Therefore, I would suggest that expecting some resolution around the middle of next calendar year seems reasonable, but I cannot provide a clear picture on that yet.

Austin Moeller, Analyst

Okay. That's very helpful. And then just one follow-up. If we look in the current drafts of the NDAA and the Defense Appropriations bills, there is approximately $68 million in there consistently for the Army LMAMS' Switchblade program and then around $70 million for Future Tactical UAS. I assume you still have a high degree of confidence in that ending up in your fiscal year '23 just once the budget is actually passed and sent to the President's desk.

Wahid Nawabi, President and CEO

Austin, the figures you mentioned are correct. They are included in the proposed National Defense Authorization Act and the fiscal year 2022 budget request. We are in touch with the U.S. Army regarding the LMAMS and FTUAS, and we are confident about our position. I cannot comment on fiscal year 2023 activities right now, as our main focus is on executing this year. However, we believe the long-term outlook for our businesses and product lines is strong. We continue to lead in our market segments. The demand for our products, solutions, and innovative capabilities is evident and persistent. We are diligently working to capture these opportunities, even as we navigate various external challenges.

Operator, Operator

And our next question is from Pete Skibitski of Alembic Global.

Pete Skibitski, Analyst

Can we discuss the revenue or the revenue guidance reduction by product line in more detail? I assume you're experiencing the most pressure in Small UAS and TMS. Is that correct?

Wahid Nawabi, President and CEO

So, Pete, this is Wahid. Generally speaking, as you know, a significant portion of our revenue comes from product sales and shipments. Many of the issues I mentioned regarding the headwinds affect our ability to manufacture and deliver products, as well as secure related contracts. Overall, these factors will significantly impact the product business. Additionally, since our product business has a more favorable profitability profile, it will also influence the bottom line somewhat more. There are extra expenses related to expedited shipping, material costs, and warehousing. Thus, while reductions are affecting all our businesses, the product segment is experiencing a slightly greater impact.

Pete Skibitski, Analyst

I think in your release you mentioned slower decision-making in DC. I'm curious if that only refers to the budget. Have you faced any challenges obtaining FMS export approvals for any of your products since a lot is now shipped overseas for both Small UAS and TMS?

Wahid Nawabi, President and CEO

So, Pete, that’s a very good point. In general, the slowdown has multiple factors influencing it. First, the global pandemic continues to hinder our customers and teams' ability to travel domestically and internationally as we did before. Second, the ongoing resolution in the U.S. defense budgets is also affecting our ability to process transactions and advance them through the sales cycle as anticipated. Regarding the FMS office, the overall impact on international shipments is affected not only by the government's permission to ship items via FMS but also by the need to secure and process the necessary paperwork for contracts. Overall, the entire industry is facing significant and multifaceted challenges.

Operator, Operator

Our next question is from Brian Ruttenbur of Imperial Capital.

Brian Ruttenbur, Analyst

A lot of my questions have been asked. But I did have a question on Solar HAPS. Can you give us an update on that? Where are we? Are we on track? Has anything gotten delayed because of the pandemic, pushed to the right? Can you give us a general update there?

Wahid Nawabi, President and CEO

Thanks, Brian. This is Wahid. Regarding our HAPS business, we are making steady progress in that program. The business plan consists of three phases, and we have successfully completed the first phase, which involved designing, developing, demonstrating, and delivering two airplanes. Now we are in Phase 2, which focuses on creating the final version of the airplane and obtaining certification and testing approvals from the FAA and other agencies. We have started this process and are following a detailed project plan. We are in the early stages of this phase. Overall, the program is on track concerning deliverables to our customer and partner, SoftBank and HAPSMobile. However, we are facing challenges due to resource shortages and tight labor markets, particularly regarding the engineers required for expansion and preparation for the upcoming flight season this summer. These challenges are affecting supply chain and material lead times. Everything in this area has felt some impact. Nonetheless, we remain on track to meet our milestones with our customer and partner, as we have adjusted our plans based on the pandemic. However, the current labor market and supply chain issues present additional challenges at this time.

Brian Ruttenbur, Analyst

Okay. So there are some delays, but nothing really new in the last quarter on HAPS. Is that the summary?

Wahid Nawabi, President and CEO

That is correct.

Operator, Operator

And our next question is from Louie DiPalma of William Blair.

Louie DiPalma, Analyst

I just have one question. Of the $100 million in guidance reduction, are you able to quantify how much of that $100 million is still in your pipeline versus how much you'd be able to deem, like has been like canceled outright by the customers?

Wahid Nawabi, President and CEO

So, Louie, most of that is still in our pipeline. I don't provide a detailed breakdown because the items are very extensive. Overall, the vast majority of those have been delayed due to several headwinds I've mentioned earlier. There are some sustainment orders that are somewhat perishable, so if we can't fulfill those orders, we risk losing them permanently. It's hard to quantify the exact dollar amount related to this issue. However, we have a large installed base and believe that over time, things will improve. Additionally, we are working on new generation solutions that will help create new demand. In summary, the majority has been delayed in some way. Some may not be recoverable, especially due to the time that's passed concerning certain sustainment orders.

Louie DiPalma, Analyst

Great. And of that $100 million, was there any specific contract concentration such that like there might have been like a very large Raven order or a very large Switchblade 300 order that you anticipated? Or would you say that it was like evenly distributed and it wasn't abnormally large relative to your normal contracts?

Wahid Nawabi, President and CEO

Louie, the situation varies depending on the specific product line as we offer a wide range of items in certain categories. For our Small Unmanned Aircraft Systems, we cover various components such as Puma and Raven parts. In the Tactical Missile Systems segment, our primary products are the Switchblade 300 and 600, which significantly contribute to our revenue. While these are our main offerings, there's no single specific opportunity or product because we utilize advanced processors and semiconductor components throughout our entire product line. Therefore, a shortage of a specific chip or semiconductor component impacts multiple products. We've taken several steps to manage this, including swapping components, redesigning boards, seeking alternative sources, and purchasing in advance. We are exploring all options within our control. However, there are significant macro-level challenges that are beyond our control, which is why we adjusted our guidance. That said, we have 90% visibility to the midpoint of our guidance and a robust backlog of $252 million, which gives us confidence in our execution for this year, though the situation remains fluid and can change daily.

Operator, Operator

And our next question is from Pete Skibitski of Alembic Global.

Pete Skibitski, Analyst

One or two follow-ups. Many people are discussing the possibility of a full-year continuing resolution for fiscal '22, which means we won't have a proper budget. Given that you're halfway through your fiscal year, how are you thinking about fiscal '23 internally? Is it reasonable to expect it to remain flat year-over-year, or possibly decrease, considering the uncertainty with the budget and supply chain?

Wahid Nawabi, President and CEO

Yes. While I am not an expert in predicting the government's ongoing resolutions, I won't speculate on that. However, I can assure you that we are confident in our ability to execute and achieve our fifth consecutive year of growth this year. We are a growth company. The demand for our systems and solutions remains strong in the long run. Our Tactical Missile Systems are tapping into a significant multi-billion-dollar market opportunity, and we are just beginning to explore that potential. Our MUAS JUMP 20 system presents substantial short-term and long-term growth opportunities for our business. Additionally, our Small UAS and HAPS businesses represent large growth opportunities as well. We believe in our growth potential and that the demand for our solutions will remain strong in the long term. We will provide more updates on fiscal '23 as we approach our fourth quarter.

Pete Skibitski, Analyst

Okay. And last one from me on FTUAS. I think you said Increment 1 award could be soon. Just correct me if I'm wrong. But for Increment 1, is that a competitive down select or are all three of the competitors getting awarded for kind of further refinement?

Wahid Nawabi, President and CEO

That's a great question, Pete. I'm glad you asked it because I mentioned this earlier. We have submitted our proposal for FTUAS Increment 1, which is strategically very important as it lays the groundwork for future program acquisitions, plans, and requirements. The customer has indicated they will decide whether to award it to a single vendor or multiple vendors. We believe we are in a strong position with our submitted proposal, and we feel optimistic about our chances for success. However, there is still work to be done. This is a significant opportunity with many competitors vying for it, and we are committed to winning because we believe our solution is highly compelling and differentiates us from the other options available. Increment 1 is crucial as it guides the government and the U.S. Army's future deployment and acquisition planning. Although the dollar amount for Increment 1 is small, its strategic importance is substantial.

Operator, Operator

Thank you. And there are no further questions on queue. Do you have any closing remarks?

Jonah Teeter-Balin, Senior Director of Corporate Development and Investor Relations

No. Thank you. We're ready to wrap up the call.

Wahid Nawabi, President and CEO

We are ready to wrap up the call operator. Thank you all for your interest in AeroVironment, and we look forward to just talking to you again in the near future. And happy holidays.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you again for participating, and we look forward to speaking with you again next quarter. You may now disconnect.