AeroVironment Inc. (NASDAQ: AVAV) reported second-quarter fiscal 2017 results after markets closed on Tuesday. The maker of unmanned aircraft systems (drones) and electric vehicle charging and testing stations posted a net loss per share of $0.18 on $50.1 million in sales. In the same period a year ago, the company reported earnings per share (EPS) of $0.19 on sales of $64.7 million. Second-quarter results also compare to consensus estimates for a net loss of $0.01 and $52.2 million in revenue.

The company attributed the decrease in revenue lower sales in the Unmanned Aircraft Systems (UAS) segment of $15.8 million, partially offset by an increase in sales in our Efficient Energy Systems (EES) segment of $1.1 million.

As a percentage of revenue, gross margin dropped from 49% to 35%. This decrease was primarily due to the reserve reversal of $3.5 million for the settlement of prior year government incurred cost audits recorded in the second quarter of fiscal 2016; a decrease in product sales volume, which resulted in an increase in the per unit fixed manufacturing and engineering overhead support cost; and an increase of $1.3 million in sustaining engineering activities to support existing products.

CEO Wahid Nawabi said:

Our business remains strong and we expect robust demand for small unmanned aircraft systems and support services from international customers across the globe. Our family of Tactical Missile Systems continues to provide uniquely valuable force protection capabilities to United States troops in a growing number of ways. Leveraging our demonstrated and successful UAS expertise into commercial markets, which represents a large opportunity for our business, remains an important priority for us. …  As we move into the second half of fiscal 2017, we anticipate an increase in work across our portfolio and remain committed to achieving our financial and strategic objectives and delivering value to our shareholders.

The company’s funded backlog at the end of the second quarter totaled $119.6 million, up from $65.8 million at the end of the prior quarter.

AeroVironment said it expects third-quarter revenues in a range of $50 million to $52 million and a net loss of $0.34 to $0.38 per share. For the full 2017 fiscal year, the company expects revenues between $260 million and $280 million and EPS of $0.20 to $0.35.

Analysts were looking for third-quarter EPS of $0.24 on sales of $75.65 million. For the fiscal year, analysts had estimated EPS of $0.22 and sales of $263.51 million.

Investors are cautious, however. In order for the company to post full-year EPS of $0.22, AeroVironment needs to overcome a loss of $0.17 in the first quarter, $0.18 in the second quarter and an expected loss of $0.34 in the third quarter. That means fourth-quarter EPS would need to be at least $0.90 per share. Not impossible, but it does seem a stretch.

The stock traded down about 10% in the first hour of Wednesday’s trading, at $26.40 in a 52-week range of $22.16 to $32.44. The consensus 12-month price target was $30.00 before Tuesday’s report.

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