On a relatively calm, pre-Thanksgiving day for the market as a whole, shares of military drone-maker AeroVironment (NASDAQ:AVAV) bucked the trend Wednesday -- and in a bad way. Reports that fiscal Q2 2015 revenues dropped 19% year over year sent AV shares into a tailspin -- down more than 9% at last report, and probably heading lower. Why? Let's review.
In Q2, AeroVironment reported:
- Sales down 19% year over year to just $52.7 million.
- Gross profits taking an even bigger hit, down 25%, with the reduction in revenues being compounded by tighter gross profit margins -- off three percentage points at 34%.
- Compounding the damage, AV reported both operating and net losses for the quarter -- $4.1 million and $2.9 million, respectively.
That all added up to a $0.13 loss per share for AeroVironment stock -- nearly twice the per-share loss of yesteryear. It was also the company's second quarter in a row of missing analyst earnings estimates -- by three cents last quarter, and two cents this time around. And yet ... it wasn't all bad news.
Free cash resumes flowing
By this point in time one year ago, AeroVironment was a deeply free cash flow-negative company, having burnt through $15.7 million in the first half of fiscal 2014. Today, that trend has reversed, with AV reporting positive free cash flow of roughly $8.9 million.
Even more impressively, AV management noted that it currently has $125.2 million worth of orders in hand -- orders for which customers (primarily the U.S. Department of Defense) have already appropriated funds, and that are just waiting to be filled. Logically, AV must be piling up parts, partly finished, and just-finished unmanned aerial vehicles in preparation for filling all these orders. (And indeed, AV's 10-Q filing with the SEC shows a small uptick in gross inventories.) The fact that the company's boasting positive free cash flow despite higher cash outlays is therefore an achievement that deserves praise.
But can it continue?
Looking forward, AeroVironment management reiterated guidance for investors, saying it still expects to book $250 million to $270 million in revenues this year -- and that it further expects gross profit margins to perk back up to somewhere between 34.5% and 37.5%.
Either of those numbers -- or anything in between -- would be better than what AV achieved in Q2. And given that AV management also reiterated its promise to increase investments in "research and development and business development investments for Tactical Missile Systems, Commercial UAS and Global Observer business areas," AV will need to boost gross margins if it's to have any chance of ending fiscal 2015 in the black.
The upshot for investors
AeroVironment's continued warnings that investments in the company's future will "largely offset operating profit in the current fiscal year" suggest the chances AV will end this year with anything resembling a GAAP profit remain exceedingly slim. That said, with trailing free cash flow now exceeding $46 million for the past 12 months -- and eclipsing trailing GAAP profit by nearly a factor of four -- I just can't help thinking ...
... things aren't as bleak as they appear.