AeroVironment (AVAV) is trading sharply higher today (+31%) after reporting a much better than expected 2Q18 (Oct) earnings report last night. In case you're not familiar with AVAV, a little background would help. AVAV 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 86% of FY17 sales came from its UAS segment and 14% from its EES segment.
Turning to the OctQ results, AVAV reported a profit of $0.29 per share while the market was expecting a loss in the quarter, so it was a large beat. Revenue rose 47.3% year/year to $73.8 mln, which also was much better than market expectations. Finally, AVAV reaffirmed guidance for FY18, it continues to expect EPS of $0.45-0.65 and revenue of $280-300 mln.
Looking at revenue by segment, UAS revenue was $64 mln, an increase of 57% YoY. The increase was due to an increase in product deliveries of $23.1 mln and a small decrease in service revenue of $0.8 mln, partially offset by a decrease in customer-funded R&D work. EES revenue was $9.8 mln, a 6% YoY increase.
On the call last night, AVAV said robust demand in the US and abroad drove funded backlog up to $127 mln, which equates to a 49% increase from the end of JulQ. This backlog significantly increased AVAV's revenue visibility for the current fiscal year. Across the board, AVAV produced solid results in the quarter.
In its core small UAS business, AVAV increased its footprint in domestic and international markets. Its recently announced Puma 3 AE system with its Mantis i45 sensor suite generated strong demand from US and foreign military customers. Puma 3 AE is AVAV's third-generation Puma system and it includes many important enhancements.
Regarding its Tactical Missile Systems, or TMS, business, AVAV says it continues to make significant progress in providing a better way to protect our military forces in very dangerous environments, while also greatly reducing collateral damage. AVAV has achieved important results in positioning Switchblade for new opportunities within the U.S. DoD, and continued strong customer funding for the development of multiple TMS variants reflects strong customer engagement.
Finally, regarding its EES segment, AVAV offers a comprehensive set of products for battery and electric vehicle development, industrial EV charging, and Level 1 and Level 2 charging systems for passenger EVs. Its EV test systems are used by battery developers and manufacturers, advanced battery chemistry researchers, universities, and battery testing facilities around the world. Its passenger EV charging systems have been chosen by nine global automakers as the solution of choice for their plug-in vehicles.
In sum, investors are quite pleased with the OctQ results. The company has now reported three large beats in a row, including a huge 4Q17 (Apr) earnings beat in late June which was followed up with a big EPS beat in 1Q18 (Jul). And now they reported a large OctQ profit when a loss was expected. The global threat environment remains very dynamic, requiring highly capable small military teams that can operate flexibly in a wide variety of theaters around the globe.
Intelligence, surveillance and precision-strike offerings like AVAV's small UAS and TMS offer what the company sees as game-changing capabilities that help troops obtain actionable intelligence. It's not just the US Defense Dept, demand from US allies remains strong as well. Also, AVAV sees good opportunity for its expanding commercial business as AVAV sees a global market valued in the billions of dollars for drone-based commercial systems.