Drone Volt released a rather good Q3 trading update, more than doubling its top line and posting a significant improvement in gross margins, despite being affected by a more unfavourable product mix. The outlook remains unchanged for 2024 and 2025, despite the desire to reduce the distribution share in the revenue mix going forward, marking confidence in the new activities. We thus reiterate our positive stance on the stock.
Sales grew by 139% compared to last year, from €3.1m to €7.3m.
DRONE VOLT FACTORY, SERVICES & ACADEMY was very dynamic with a 163% increase yoy, from €0.51m to €1.35m.
Distribution increased by 134% from €2.5m to €5.9m.
The gross margin only increased by 53% from €0.71m to €1.1m, implying a 15% gross margin (Q3 23: 23%).
The company reaffirmed its outlook for 2024 and 2025.
Favourable base effect for revenues
The high growth figure was notably due to a favourable base as well as dynamic commercial traction in all the divisions. Indeed, in the Q3 23, Drone Volt experienced a 23% decline in sales, suffering from geopolitical side effects with Chinese restrictions on commercial drone selling to Europe. This was not the case this year with a huge contract for an important European customer.
Product mix unfavourable for margins
However, the gross margin slide was notably due to an unfavourable product mix leading to a rather disappointing 11pp decrease in the Drone Volt Factory, Services & Academy gross margin to €665k (Q3 23: €313k).
The group communicated more granularly on this division which was very welcome and we thus know that the fall in margins is linked to the commercial success of the Hercules 20 notably (42 units sold) following a significant order (40 units) in July 2024. This resulted in the high-margin services representing only 1/3 of the division’s sales but still half of gross profits, which were in addition suffering from a seasonal effect with a usual drop in activity in sacred August.
Still on track for positive EBITDA generation
Against this decent backdrop, the company reaffirmed its objective of markedly increasing its gross margin for 2024 (which is already higher than the 2023 level) and to be EBITDA positive in 2025. However, the company mentioned that its distribution activity should slow starting in the Q4 24 due to the focus on high-margin business, which should thus not be interpreted as negative in our view and instead translate the management’s confidence. It is underpinned by the success of a new type of contracts wherein Drone Volt personalizes existing drones for demanding customers and effectively outsources the R&D, as witnessed by a new Linedrone contract in October 2024. The desire to initiate a new phase was also visible this morning with the announcement of a reverse split (100 old shares for 1 new) that will be effective at the beginning of December 2024.
We will integrate the new figures into our model as well as the lower revenue stemming from distribution going forward, which will probably reduce our target price but should not change our positive recommendation on the stock due to the seemingly successful development of new revenue streams.
