Image: AeroVironment.

Drones have captured the imagination of entrepreneurs, with many seeing their uses ranging from commercial delivery to nearly limitless surveillance functions. Yet even though AeroVironment (NASDAQ:AVAV) has a natural head-start with its expertise in the area, investors haven't been certain whether the company could cash in on the opportunity, and coming into Tuesday afternoon's fiscal first-quarter financial report, shareholders were nervous about its latest prospects. For its part, AeroVironment's results showed that investors did have something to worry about, as falling revenue produced a substantial loss. Let's look more closely at how AeroVironment fared and whether it can pull out of its recent tailspin.

Why AeroVironment started falling
After a solid performance last quarter, AeroVironment's latest numbers were particularly disappointing. Revenue fell 9% to $47.1 million, which was well short of the 4% gain in sales that investors had expected to see. A net loss of $7 million for the quarter was nearly double what it posted in the previous year's quarter, and even after making adjustments for impairment losses, adjusted loss of $0.24 per share was nearly a dime worse than the consensus forecast among shareholders.

Unlike what we've seen in past quarters, though, AeroVironment's results were weak in both of its key segments. The essential Unmanned Aircraft Systems unit saw sales decline by $1 million, while the Efficient Energy Systems division endured a larger $3.8 million drop in revenue. Yet the drone segment did manage to see a rise in gross margins, as costs of sales fell sharply from year-ago levels. Nevertheless, a rise in overhead expenses and research and development expenditures contributed to a sizable increase in operating losses for the quarter, and a $2.4 million charge related to AeroVironment's investment in CybAero exacerbated the company's red ink for the quarter.

One bright spot for AeroVironment came from its backlog figures, which rose by more than a third to $89 million. In addition, even as product sales plunged, contract-services revenue more than doubled, showing the value of a diversified stream of money coming in.

CEO Tim Conver highlighted the importance of the backlog increase, pointing to potentially better performance for the rest of the fiscal year. "Our market leading core businesses remain on track for our fiscal 2016 plan," Conver said, "and we continue to make meaningful progress moving our growth portfolio forward."

Can AeroVironment regain lost altitude?
Looking forward, AeroVironment still sees brighter skies ahead. In Conver's words, "We will continue to manage strategic R&D and SG&A investments and monitor the progress of our initiatives to create new market opportunities." Moreover, even with the sales shortfall, AeroVironment reiterated its full-year guidance for revenue to come in between $260 million and $280 million.

Moreover, AeroVironment executives believe that the company still has plenty of runway for future growth. In particular, the company believes it can expand its market opportunity for its products to help industrial customers charge electric vehicles. At the same time, between small and large-scale unmanned aircraft systems, AeroVironment sees opportunities to provide system upgrades for its government customers and to expand to a larger extent internationally. AeroVironment also has potential for growth in tactical missile systems, with the hope of turning its Switchblade system into the foundation of a broader array of future products.

Nevertheless, investors weren't happy with AeroVironment's unexpectedly weak fiscal first-quarter numbers, sending the stock down almost 11% in the morning trading session the day after it announced its results. With so much potential from drones, investors want to see far more progress and growth than AeroVironment has managed to produce thus far. Only then will the company likely get the positive treatment from shareholders that many believe it deserves.