When drone-aircraft maker AeroVironment (NASDAQ:AVAV) reported its year-end fiscal 2017 earnings last month, management delivered a warning: Sales in the current quarter will probably fall about 16% short of analyst estimates, while earnings -- well, there won't be any earnings. Instead, AeroVironment is looking for a loss of as much as $0.40 per share for fiscal Q1 2018.
Investors panicked, and sold off the stock by 8% (in after hours trading) -- but that panic didn't even last into morning. Within 24 hours after earnings, AeroVironment stock had recovered all of the prior evening's losses, then advanced 8% more. It hasn't looked back since. In fact, at a closing price of $39.47 per share Thursday evening, AeroVironment stock has now gained 21% since earnings.
Why are investors so confident as they rush headlong into what will probably be a loss-making quarter? The answer might lie in what AeroVironment management had to tell investors in its post-earnings conference call -- and the prospects it enjoys for long-term success. Here are five of the most important things we learned during that call.
Q4 was no accident
When we developed our fiscal 2017 plan, customer order timing resulted in a heavily weighted fiscal fourth quarter. ... We delivered record fourth quarter results as follows: revenue of $125 million, an increase of 48% year-over-year ... fully diluted earnings per share of $1.30, an increase of more than 450% from the prior year ... and fully diluted earnings per share of $0.54, well above our guidance and a 36% increase year-over-year. -- AeroVironment CEO Wahid Nawabi
AeroVironment booked nearly as much revenue in fiscal Q4 ($125.4 million) as it had in the previous three quarters combined ($139.5 million). Its $1.31 per share in Q4 profits entirely offset the $0.78 per share in losses booked in the preceding three quarters, and brought AeroVironment up to a $0.54 per share full-year profit.
These Q4 results seemed astoundingly good at the time -- but as management explained, they were pretty much what it had expected would occur (aside from the fact that earnings ended up being "well above ... guidance.")
International is big news
AeroVironment's international revenue ... grew from 28% to 36% of company revenue in fiscal 2017. ... [The company] increased adoption ... from western to eastern Europe, from the Middle East to Asia and Oceania, expanding our list of allied customers to more than 40 countries [and adding] Latvia, Lithuania and 3 other NATO and Middle East countries as customers. -- Nawabi
As AeroVironment diversifies its business globally, it becomes less dependent on the vagaries of U.S. defense spending in particular. That's a good thing in general, and could help smooth out the cyclicality of the company's results, making it a bit easier for investors to feel comfortable with the stock.
The strategic investments we've been making to build our [tactical missile systems business, which includes Switchblade and similar loitering munitions] continue to deliver results. In fiscal 2011, our TMS revenue was about $6 million, growing to more than $40 million in fiscal 2016. In fiscal 2017, TMS revenue grew to more than $75 million, an increase of more than 80% over the previous year. From fiscal 2011, this represents a compound annual growth rate of 56%. ... TMS now accounts for 29% of total company revenue. -- Nawabi
If there's one thing I like best about AeroVironment, it's its Switchblade drone, a disposable UAV designed to seek out a target and explode on impact -- at which point, voila, AV gets to sell the Army a replacement Switchblade. That's a built-in recurring revenue stream, folks.
Problem was, we hadn't heard much from AeroVironment since way back in September 2016, when the Army ordered $22.8 million worth of "Switchblade inert training vehicles" from the company. What's more, that was the only AeroVironment contract reported on the Pentagon's contracts announcement website that year.
But as management revealed in its conference call, there appears to have been plenty of Switchblade activity going on under the radar -- 56% annualized sales growth, and a revenue stream that now makes up 29% of AeroVironment's business! What's more, Nawabi went on to say that he eventually expects to see "Switchblade and its variants" selling $1 billion a year to the U.S. military alone.
Translation: This single product, which accounts for 29% of AeroVironment's current annual revenues, could eventually account for nearly 400% of what AV sells in a year, today.
You heard about Volvo, right?
In our EES business, we grew revenue by 18% year-over-year and accelerated our global EV charging strategy by winning a contract with Volvo to support their plug-in vehicle rollout in Europe and China, which we announced in March. -- Nawabi
Switching gears to AV's commercial business for a moment, Volvo made news last week when it announced that by 2019, every single car it sells will come equipped with an electric motor -- either hybrid gas-electric or fully electric. We probably should have seen this coming, given that months prior to Volvo's announcement AeroVironment announced its own partnership to support Volvo's electrification project. If Volvo's electric rollout turns out to be as big a success as a lot of people think it will be, then that should translate into success for AeroVironment as well.
Backlog and forward earnings
We have Q4 ending backlog that we expect to execute in fiscal 2018 of $75 million. Quarter-to-date bookings that we anticipate to execute in fiscal 2018 of $17 million [and total backlog of about] $120 million, 41% at the midpoint of revenue guidance. -- AeroVironment CFO Teresa Covington
We expect revenue to grow to between $280 million and $300 million this year. [However] we expect the mix of revenue ... to result in lower gross margin this year than last year. ... We anticipate ... fully diluted earnings per share between $0.45 and $0.65. -- Nawabi
I'll close with a quick word on earnings. AeroVironment's backlog is strong, and with 41% of the company's expected revenues already "in the bag" in the form of backlog, this year can't go far wrong. That said, the next few quarters could be bumpy.
Much like last year, management expects Q1 to be a seasonally weak quarter, and for the company to start off the year with another loss (of between $0.32 and $0.40). Management anticipates booking about 40% of its total yearly revenues in H1, though, as opposed to 32% last year. That implies a quick bounce-back in Q2.
The rest of the year could be bad news, good news as well. Even with sales growing, lower margins have management forecasting earnings of about $0.55 per share at the midpoint, versus $0.54 last year, so it looks like earnings may not grow much in fiscal 2018. While AeroVironment's business clearly has a bright long-term future ahead of it, in the short term, an elevated stock price plus limited prospects for earnings growth could keep a lid on this stock's potential to rise.