AeroVironment Loses Altitude on Weak UAV Performance

Image source: AeroVironment.

For years, investors have hoped that AeroVironment (NASDAQ: AVAV) would benefit from the rising interest in unmanned aerial vehicles, also known as UAVs or drones. Indeed, the positive performance of the stock over the past couple of months has come in part from a rise in interest in drones and favorable regulatory releases that could facilitate their deployment for commercial purposes. Coming into Tuesday's fiscal first-quarter financial report, AeroVironment shareholders wanted evidence that the company would start to take full advantage of this opportunity, but the results that AeroVironment released fell short of what investors wanted to see. Let's look more closely at what AeroVironment said and what lies ahead for the maker of unmanned aerial systems.

AeroVironment can't keep climbing

AeroVironment's fiscal first-quarter numbers were even weaker than pessimistic investors had expected. Sales plunged by more than a fifth to $36.2 million, which was well below the nearly $38 million in revenue that most had wanted to see. The company's net loss expanded by more than half to $11.6 million, and the per-share adjusted loss of $0.51 was about triple the amount of red ink that investors predicted in their consensus forecast.

Looking more closely at AeroVironment's performance, the two major divisions both struggled. Unmanned aircraft systems revenue was off almost a quarter compared to the year-ago period, and a drop in gross margin sent the division's gross profit down by more than half. The efficient energy segment didn't do much better, posting sales declines of 17% that sent its gross income down by almost half.

AeroVironment's cost structure didn't fall enough to match up with the decline in revenue. Regular overhead expenses were down by about 10%, and the company spent about an eighth less on research and development than it did in the fiscal first quarter of 2016 a year ago. Yet the net impact was a rise in operating losses by more than two-thirds, and only one-time impairment charges in the year-ago quarter made the comparisons look less unfavorable than they truly were.

One area of improvement came from the amount of backlog that AeroVironment had on its books. The company said that its funded backlog jumped more than 10% to $74.7 million compared to where it was at the end of April. That didn't quite claw back all the lost ground during the fiscal second quarter, but it did represent solid progress for the company.

CEO Wahid Nawabi focused on the positives for AeroVironment. "International demand for our small [unmanned aircraft systems] remains strong," Nawabi said, "and we are confident in our ability to build on significant opportunities with existing and new customers, particularly in Europe and the Middle East." At the same time, the CEO said that it expects to build momentum both with the Defense Department and by coming up with a commercial solution as well.

Can AeroVironment make progress?

AeroVironment is also optimistic about the longer-term future. As Nawabi said, "We expect a higher proportion of full year revenue in the second half of our year while working to achieve our fiscal 2017 goals. We are focused on executing our strategy to deliver high long-term growth with near-term progress in key initiatives."

Unfortunately, AeroVironment wasn't able to give investors better news about its full-year fiscal 2017 outlook. The company kept its revenue range of $260 million to $280 million and expects earnings of $0.20 to $0.35 per share. Yet the drone-maker cited seasonally low sales trends in the first quarter, along with lower bookings than it expected and the complexity of complying with regulatory requirements for international orders as holding the company back.

As a result, AeroVironment shareholders punished the stock, sending shares down by more than 12% in after-hours trading immediately following the announcement. Given how popular the idea of greater drone penetration has gotten, it's frustrating to many investors that AeroVironment hasn't made more inroads into meeting the demand as it starts to build.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends AeroVironment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.