5 Things AeroVironment’s Management Wants You to Know

Just because you don't have time to listen to the "earnings conference call," doesn't mean you don't have the right to know what management said in it.

Aug 20, 2014 at 10:37AM

Here at The Motley Fool, we know you've got a life. Between working while the sun shines and catching Z's when it doesn't, you may find it hard to keep up to speed on Wall Street events -- corporate "post-earnings conference calls," with stock analysts for instance.

These calls ostensibly benefit investors, but they usually take place in the early morning, or late afternoon, when ordinary investors are, you know -- working. Or commuting to and from work. Result: all too often, investors don't ever hear the news that management thinks they need to know.

That's where I come in. I listen to the conference calls  so that you don't have to.

AeroVironment's "Raven," arguably the world's most popular UAV. Photo: AeroVironment.

Today, I'm recapping the news from AeroVironment's (NASDAQ:AVAV) July 8 earnings call. Without further ado, here are a few of the things that management wants you to know about its business -- and the facts that you investors need to know to put them in context:

Profits will be easier to come by
"We adjusted the organization to lower our breakeven level from $60 million to $65 million a quarter to $50 million to $55 million, allowing us to operate profitably at current DOD procurement levels."

As you've probably heard, the Pentagon is under the gun (so to speak) to make budget cuts on many of its programs. Government spending is down pretty much across the board in the defense industry, and AeroVironment is adjusting to the new, tighter spending environment by cutting operating costs so as to enable the company to turn a profit even with less revenue.

Last year, AeroVironment booked $252 million in revenues. According to S&P Capital IQ figures, this was about equal to the amount of business the company did in 2009 and 2010 -- but in those years, AeroVironment was able to turn $250 million-ish revenues into net profits of $20 million or greater. In 2013, similar revenues resulted in net profit of less than $14 million. AeroVironment's cost cutting, therefore, is an attempt to reverse this trend, and return to turning more of the revenues it gets, into profits on the bottom line.

But cash could be harder to come by
"We reduced year-end inventory by 18%, from $62.5 million in fiscal 2013 to $51 million in fiscal 2014. And we increased free cash flow by 72%, to $21 million."

Although presented by CEO Tim Conver as two separate thoughts, these are actually two sides of the same coin. AeroVironment was able to increase free cash flow in fiscal Q4 2014, in part, by reducing inventory in favor of cash. At The Motley Fool, we're big fans of free cash flow.

What we'll want to see now, is whether AeroVironment can keep these cash profits growing in the quarters to come -- or if Q4 was a one-time event.

And for that matter, even profits aren't 100% certain
AeroVironment boasts "a market leading profitable core business with strong growth prospects... [but] tactical missile systems, commercial UAS, and Global Observer [are] largely pre-revenue key growth opportunities [investments in which] may largely offset operating profits from our core business in fiscal 2015."

I'm stringing a few quotes together here, but bear with me: the upshot of all this is that Conver is putting a bright face on a pretty bleak prospect for the current fiscal year. AeroVironment expects to generate at least $250 million in revenues this year, and by cutting costs, believes it can continue to generate profits in its "core business" at this level of revenue.

Unfortunately, the core business isn't where AeroVironment sees the greatest prospects for growth. Investments in the growing areas of tactical missile systems (such as the Switchblade unmanned aerial vehicle, or "UAV"), civilian drones for industry (such as the Puma drone that BP (NYSE:BP) will be using to monitor its Prudhoe Bay oil fields), and the Global Observer experimental high-altitude, long-endurance, hydrogen-powered spy drone, are likely to drain away profits from core operations in fiscal 2015. The net result, according to Conver, is that operating profits could be negligible after accounting for development costs in these areas.

Result: Most analysts who've heard this warning predict AeroVironment will earn less than $0.10 a share  this year.

Every cloud has a silver lining
"Switchblade revenue nearly doubled from fiscal 2013 to fiscal 2014. Public statements from the Army suggested an upcoming [LMAMS] program of record."

That's not to say the investments in cutting edge tech aren't worthwhile. The fact that the Switchblade guided missile UAV is selling well is definitely a plus, and a clear validation of one area in which AeroVironment has been investing. The U.S. Army has already spent tens of millions of dollars buying Switchblades from AeroVironment -- before the product was even a program of record. If and when it becomes the Army's preferred "Lethal Miniature Aerial Munition System " (a UAV that can be guided to its target by camera, then detonate), the revenue opportunity for AeroVironment will only get bigger.

And every silver lining has a cloud at its center
"In the international small UAS market, we continue to grow our footprint by securing new customers and by expanding relationships with existing customers. More than 30 allied nations have now procured our small UAS, and revenue increased nominally in fiscal 2014."

Passing the "30 allied nations" mark on its customer list is another point in AeroVironment's favor. But focus on what Conver says next. Not all of those new customers are buying product in quantity. Despite the expanded customer list, revenue increased only "nominally."

That's a key reason why the company needs to make the additional investments in developing new product lines -- to offset weak revenue growth in its traditional, core UAV business. It's just a real shame that the investments needed to keep sales growing are going to have such a big impact on profitability.

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Switchblade UAV. Photo: AeroVironment.


Rich Smith has no position in any stocks mentioned. The Motley Fool recommends AeroVironment. The Motley Fool owns shares of 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.

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