AeroVironment (AVAV) is trading modestly higher today after reporting a much better than expected 3Q17 (Jan) earnings report. In case you're not familiar with AVAV, a little background would help. The company is primarily a supplier of small unmanned aircraft systems (UAS), or drones, and tactical missile systems. Its primary customers are the US Dept of Defense and allied military services although it's branching into the commercial market as well. AVAV also has an Efficient Energy Systems (EES) segment which supplies charging systems for electric vehicles (EVs). Approximately 80% of sales come from its UAS segment and 20% from its EES segment.
Turning to the JanQ results, AVAV reported a loss as expected but it was much narrower than the market was expecting at $(0.09) per share. This is down from a $0.27 profit in the year ago period. Revenue fell 21.3% year/year to $53.2 mln, which also was better than expected. AVAV reaffirmed guidance for FY17, sees EPS of 0.20-0.35 and revenue of $260-280 mln.
Two factors contributed to the loss. First, revenue was lower than AVAV's breakeven run rate. Second, similar to Q1 (Jul) and Q2 (Oct), planned increases in sustaining engineering reduced gross margin. The loss was smaller than AVAV had expected mainly due to a higher than expected revenue, favorable revenue mix and lower spending. The decrease in revenue resulted from a decrease in sales in its UAS, partially offset by an increase in sales in its EES segment. Gross margin decreased from 39% to 36%, primarily due to an increase in sustaining engineering activities in support of its existing products.
On the call, management noted that, importantly, continued strength in bookings, an indicator of robust customer demand, produced AVAV's third highest quarter funded backlog ever at $128 mln. This backlog, combined with year-to-date revenue and bookings this quarter provides AVAV with 94% visibility into the mid-point of its full-year guidance.
Also on the call, AVAV talked about how its core business with the U.S. Dept of Defense for Group 1 UAS remains strong with the largest unit share by far of the total unmanned aircraft fleet and a successful track record of winning more than 90% of the competitive task order dollars issued under the army's latest small UAS program since inception in 2012. Its i45 sensor suite significantly improved situational awareness through superior optical capabilities. The i45 is an upgrade to AVAV's Puma AE system that represents a healthy opportunity for the company. AVAV also continues to work with the U.S. Navy to pursue the deployment of Puma AE systems on a larger number of their vessels.
In addition to defense customers, another area of strategic investment is its commercial business. AVAV sees a global market valued in the billions of dollars for drone based commercial systems. AVAV offers three differentiated platforms to commercial customers. First, its Quantix Drone enables customers to automatically map and scan more than 400 acres in 45 minutes using both color and multi-spectral sensors all at the push of a button. Second, its decision support system processes scanned imagery and automatically produces descriptive analytics and historical comparisons. And third, its turnkey flight services support customers who choose not to own or operate drones.
Part of what differentiates AVAV's commercial offering is its ease-of-use, high degree of integration and its professional grade design. For example, if a customer knows how to use a tablet device then they can operate a Quantix Drone which plans its own flight path based on a user-defined mapping area, then launches, scans the area and lands itself right where it launched from. The AV DSS processes the data from Quantix and then performs a number of automated operations that include anomaly detection and canopy coverage analysis for growers. AVAV continues to work with early adopter customers in agriculture, energy, utilities and transportation to test and validate its platform. This process is generating strong interest as AVAV prepares for production and delivery later this calendar year.
In its EES segment, which consists of EV test systems, EV Solutions and industrial EV charging systems, quarterly revenue increased by 74% YoY to $11.3 mln. AVAV experienced strong demand for EV test systems from global automakers and battery manufacturers in North America and Asia.
In sum, investors are pleased with the JanQ results, which were down YoY but came in better than the company and the market expected, especially in terms of EPS. AVAV saw strong order flow, which produced its third highest funded backlog ever, significantly increasing the company's full year visibility. Its military business seems to be improving and the commercial opportunity seems like a long term tailwind for AVAV.