Image: AeroVironment.

The potential of the drone market is virtually limitless, and as one of the premier producers of unmanned aerial aircraft, AeroVironment (NASDAQ:AVAV) has stood to cash in on the rising popularity of drones for military and commercial applications. Coming into Tuesday afternoon's fiscal fourth-quarter financial report, however, AeroVironment investors weren't certain how to respond to another expected decline in the company's bottom line. As it turned out, the drone-maker wasn't able to avoid a drop in earnings, but its performance was still better than many had expected. Let's take a closer look at AeroVironment and what it said about the current environment for its business.

AeroVironment climbs upward
AeroVironment hasn't been able to give investors all the growth that they've wanted to see, but the company made a good showing this quarter nevertheless. Revenue climbed 18% to $86.5 million, outpacing expectations for sales growth closer to 16%. Earnings per share came in at $0.32 after adjusting for a penny-per-share loss on equity investment, and while that was down from last year's showing of $0.35 per share, it was still far better than the nearly 50% drop that most AeroVironment shareholders had thought the company would produce.

A closer look at AeroVironment's results shows the continued push and pull of its two primary divisions. On one hand, the Unmanned Aircraft Systems unit posted huge revenue gains of more than 30%, accelerating dramatically from last quarter and reflecting the potential from drones and other similar devices. As we've seen in previous quarters, though, the Efficient Energy Systems division suffered a dramatic 42% drop in sales, as demand for its electric-vehicle charging equipment appears to have fallen off a cliff.

AeroVironment managed to post gains in product sales, but contract services were a much bigger growth driver despite the relatively small amount of revenue it gets from them. Contract services revenue grew by 64%, far outpacing the 6% growth from sales of products. Also, as we saw last quarter, AeroVironment kept bulking up on its research and development spending, with more than triple the expenditures this quarter compared to the year-ago period.

CEO Tim Conver was pleased with AeroVironment's results, citing how the company "strengthened our market positions, moved key programs forward to generate value, and focused on innovation." Conver also noted that AeroVironment has a good mix between maintaining its core business and looking for ways to expand into new areas.

What's coming up for AeroVironment this year?
AeroVironment clearly expects to continue in a similar vein to how it has moved forward in the recent past. In its guidance for the 2016 fiscal year, the drone-maker said that sales would end up between $260 million and $280 million. As we've seen several times recently, though, AeroVironment expects to plow most of its operating profit back into the company in the form of marketing its unmanned aerial vehicles and investing in even more research and development moving forward.

Of some concern, though, is the fact that AeroVironment's backlog fell back to more typical levels after a nice jump last quarter. The company currently has $64.7 million in funded but unfilled firm orders, down about 2% from the year-ago balance and down much more from the $89.3 million AeroVironment reported just a few months ago.

Investors jumped into the stock on the news, pushing the share price up by nearly 6% in the first half hour of after-hours trading following the announcement. After seeing the stock languish for much of 2014 and early 2015, AeroVironment has considerable ground to make up, yet it seems as though the company is looking to build on its early success in trying to monetize the commercial capabilities of its unmanned aircraft. A number of obstacles remain, including the issue of whether drone operators will face substantial regulatory restrictions in operating drones. Nevertheless, with many people thinking up ways to take advantage of small aircraft, AeroVironment is well-poised to deliver whatever equipment the market will want to see to make commercial drones a reality in everyday life.