What happened

Shares of AeroVironment (AVAV -1.19%) fell 15.7% in September, according to data provided by S&P Global Market Intelligence, with nearly half of that drop occurring immediately after the drone maker released quarterly earnings, and the rest of the decline following as investors digested the results.

So what

AeroVironment is best known as the maker of backpack-size drones used by soldiers to get a better view of what lies around the corner. In early September, the company reported fiscal first-quarter results that at first glance appeared encouraging, but investors had different ideas.

An AeroVironment drone.

Image source: AeroVironment.

AeroVironment said that quarterly revenue grew 16% year over year to $101 million, topping analyst expectations by about $2 million, and the company's $0.17 per share loss in the quarter came in about $0.08 better than expectations. The backlog of future business was up more than 20% from the last quarter to $257.7 million.

But even with that backlog, guidance was not what investors had hoped for. AeroVironment expects to earn between $2.50 and $2.70 per share for the year, implying some potential downside to the $2.64 per share consensus estimate. Revenue told a similar tale, with the company projecting $560 million to $580 million compared to the $569 million consensus.

The stock fell about 10% in the days following the announcement, and continued to drift lower in the weeks that followed.

Now what

There's nothing in the quarterly report that should set off alarm bells, but the results did potentially highlight a transition inside AeroVironment into a more mature, but potentially slower-growing defense contractor. Over the past 18 months, the company has done a series of deals designed to broaden its portfolio, including buying Arcturus UAV to expand its drone offerings to include larger aircraft.

The guidance in part reflects the changing product mix. The larger drones made by Arcturus tend to have lower profit margins relative to the small drones AeroVironment has traditionally leaned on. Management said during the earnings call that it expects product mix to shift toward higher-margin sales as the year goes on, but based on guidance, it might not be enough to totally satisfy analyst expectations.

This can still be a market-beating company, and indeed Cathie Wood's ARK Invest exchange-traded funds were buyers as AeroVironment shares fell. But It could be tough for the larger, more diverse company to repeat the 286% return it enjoyed over the past five years, and in September investors were digesting that new reality.