Innovative Solutions and Support Inc (ISSC) 2005 Q1 法說會逐字稿

Good morning and welcome to the Innovative Solutions and Support first-quarter conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. At this time it is my pleasure to introduce Geoffrey Hedrick, Chairman and Chief Executive Officer. Mr. Hedrick, the floor is yours.

Good morning, welcome to our first-quarter FY '05 conference call. Joining me here today at our headquarters are Jim Reilly, our Chief Financial Officer and Roman Ptakowski, our President. Before we get started, I would like Jim to read our Safe Harbor message. Jim?

Thanks Geoff and thank you all for being on the call this morning. Certain matters discussed in this conference call including operating and financial results for future periods are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially either better or worse from those discussed, including other risks and uncertainties reflected in the Company's prospectus and Form 10-K on file with the SEC. Geoff, back to you.

We had a terrific quarter as you can see by the numbers. Record sales of almost 19 million compared to 10.5; gross margins were very high and we will talk about that in some detail. Record net income of 6 million plus compared to 4.6 last year and fully diluted earnings per share of 51 cents. That gives us a trailing 12 of earnings of about $1.37 and at present rate, less than 23 times PE, we've got record amounts -- $7.5 million worth of cash, 62 since fully diluted. Giving us over $6.00 a share in cash and a record backlog of 36.2 million.

The backlog as we describe it and I talked about it last conference call, we are speaking only to the diluted -- the fully released backlog. In the past we had separated released and unreleased backlog and that was appropriate if we have a large program which has a significant amount of unreleased backlog. To preclude any misunderstanding, we speak now only about fully released, that is a schedule for our backlog, and that 36.2, it is a record.

So the performance I am especially pleased with, not only have we broken all of these records but it illustrates that we have been able to properly exploit the opportunities and grow to meet the demand servicing that demand.

Talking a little bit further and foreword, our next quarter we have significant backlog in place for the next quarter. We have said in the past conference calls and again we will reiterate in this conference call, we believe that there is a significant demand for RVSM equipment yet to be delivered and installed. We see that today is the day of mandatory implementation; in fact, the FAA I understand has essentially said that nobody can check or certify any equipment for the next four days until the air traffic control system accommodates the new requirements. There are according to Aviation Week, a significant number of aircraft yet to be modified and we see significant orders continuing to come in in the next several quarters of our operation.

Finally, our flat-panel program continues to go well. We see it very much on track. We had very -- with the TSO and various other discussions with the FAA, we have a very promising product with the FAA. So we expect that our estimates of flat-panel sales to be pretty much on target near the end of this year. We will continue the growth of the business.

As we look forward and look back we continue to look at the analysts estimates and are very comfortable with the analysts' estimates. Last quarter I gave guidance because there was a dramatic difference between historical performance -- that was quarter-over-quarter performance -- and what we actually realized and I provided guidance. In this case I think that our analysts have very much a good sense and a good perspective on our business and I will not be providing guidance any more. And we are depending on them to provide that guidance to you.

So, I will turn over to questions.

(OPERATOR INSTRUCTIONS) Chris Versace, FBR.

Congratulations gentlemen on the good quarter. Just a couple of questions. Geoff, just to start the ball rolling, I know you said you're going to abandon giving guidance like you did last quarter, but if I look at the first call consensus numbers, it looks for a sequentially down quarter based on what we were looking for. Yet you are talking about very strong backlog for the March quarter. Are we missing something here?

No, I think if you remember comments I before that we saw -- when I provided guidance before -- I said that the quarter would be very strong and in order to meet the year-end estimates and discussing a more flat performance over the first half, I think I suggested that the first half would be strong and I think everybody has talked to that. We don't see it down at all. I think my at best understanding from your estimates and everybody else's, it looks relatively flat.

Okay. I noticed that one of the areas they gave you operating margin strength in the quarter was the SG&A line and it looked like it was at least a little lower than what I was looking for. Can you talk about the trends that are going on there and what is keeping it contained?

I do want to talk about that. As it turns out that -- the growth in the business has been quarter-over-quarter as you can see has been dramatic and we have two areas we've been hiring, engineer people and salespeople and can't hire them as fast as we have been able to ship. We see engineering falling below the traditional 11, 12 percent of sales not because it isn't -- it's about 25 percent greater than it was a year ago but the sales have grown so quickly that as a percent of sales they are lower and SG&A is a similar situation.

If you can, help us to understand, Geoff or Jim, the burn on a backlog that you guys posted which was a nice sequential increase. How does that look over the next 2 or 3 quarters?

When you say burn I think we have a very high backlog now as you can see it is roughly a half-year backlog kind of thing and that is substantially because we've had an enormous influx of orders recently for RVSM. We would expect to burn some of that off, but we will probably return back to a more previous year's backlog to sales spaces that we saw a year or two ago, last year and the year before. Jim, do you have a comment?

In terms of backlog, which is a great backlog, we probably will burn 40 to 50 percent of that in the next quarter and then the balance in the following 2 quarters.

We are going to replenish the backlog. Right now we are sitting on roughly 2 quarters of backlog. The equivalent of 2 quarters of backlog as a burn rate. If we stay at our present burn rate, we are obviously not going to -- we're going to exceed your estimates by more than we believe than we actually are suggesting we will. We believe that the revenue estimates and the profit estimates by the consensus is a reasonably accurate perspective of the business.

Great, I'll turn it over to somebody else. Thank you.

Mark Rosa of Thomson, Davis.

Since we are talking about backlog I was wondering if you could tell us a little bit more about flat panels and what type of orders are in the backlog with the military?

We have backlog in the military backlog. I don't want to talk about it right now for competitive reasons. We can discuss that shortly but we will be coming out with an announcement on that in the next 6 weeks roughly. There are a couple of programs that are still being sized, initial releases have been done and the balance of releases are being made and I would prefer not to talk about them. But we indeed have some military business and we have significant -- we are seeing significant opportunities in business and general aviation retrofit.

It is probably appropriate if you don't mind discussing that as well; we have heard a fair amount of discussion recently abounds cutting military spending and that there will be defense cuts. And as we see principal cuts are going to be made in new weapon system production. Cuts in new weapon system production require investment in the existing fleets and this expands what we believe is our market substantially. So we see it as a very positive outlook because we believe significant amount of monies will be redirected in toward retrofits to maintain the performance of the fleet and that includes things like C-130 where we already have released production orders.

That was actually my next question. Also could you say in addition to the backlog if you have had any new quarter so far in January?

Yes, we have.

We have.

Could you just tell me what CapEx was for the quarter?

$111,000.

Okay. Thanks a lot.

You're very welcome.

David Shecktor of Prospective Capital.

Congratulations also from my end. My question has to do with who is doing all of this RVSM work? One of the analysts who was just on has done a chart using an average of $60,000 per RVSM plane or upgrade which, going all the way back through fiscal 2002 and including this quarter just reported leaves less than 1000 planes having been done with your equipment. Who is doing all those planes? Whose equipment is being used? Is the 60,000 the wrong number or what is wrong with that analysis?

That is a very wrong number. We did revenue last year was 44 million, roughly 40 of that was related to RVSM. So 1000 airplanes at 60,000 apiece and that is probably not -- more accurately, maybe its 50 would suggest it would be $50 million. We have done about 100, probably $150 million in RVSM revenue, maybe 200 million in the last 4 years including the KC-135 program. We know we have installed 2200 installations plus KC-135 which was another 600. We have almost 3000 installations flying right now.

So 2200 would apply to -- that Aviation Week article was talking about effectively business jets, they weren't talking about military stuff.

Or commercial air transport. (multiple speakers) As an example we did the RVSM for the Northwest Airlines. We did the RVSM for FedEx's 727 fleet. We have done a fair amount of commercial air transport or airline retrofit as well. The combination, the military was substantially KC-135, the rest of it has just been business and general aviation.

How many planes with the quarter you have just reported represent, for instance?

I don't understand.

The RVSM revenue that you have just reported as part of the total revenue you've just reported, how many planes does that represent? How many planes would have been done?

I don't know. I don't know the exact number of systems. How many systems did we deliver in that quarter?

It's difficult. We can tell you how many systems -- (multiple speakers)

We don't have the number readily available.

But in addition to the RVSM, there's replacement Air Data systems that are being sold all of the time. They are being sold that have nothing to do with RVSM.

He's trying to figure out who else is doing them -- and we are doing them. (multiple speakers) That is why they say it is only 61 percent of the fleet has been done. A substantial portion of that fleet has either been retrofitted by us; some retrofits by Honeywell and a significant number are just recertification of existing aircraft.

I see.

So we have done, as I say, we know we have done 2200. Now, how many we have delivered this quarter, I'm not exactly sure.

The arithmetic says something like there are 4000 planes left. Is that wrong? (multiple speakers) It doesn't seem as if there should be any let up, if anything it seems as if there should be some continuing expansion of your backlog?

We say there would be a let up, but we --

But you have sort of blessed the analysts' estimates which as the first caller mentioned is looking for a noticeable decline. You say flat but it is a somewhat noticeable decline in at least the revenue estimates from the December to the March quarter and then more declines in June and September.

I'm not aware of that. That is not what we see. I don't believe that the estimates -- I'm not aware that the estimates indicate that.

That is what -- they basically have a trade-off between flat-panel and RVSM; RVSM declining fairly substantially and flat-panel picking up a little.

Flat panels represent a very small, relatively small percentage of our revenue for the year. I think the analysts have it around 10 million out of almost 70 million, 65, 70 million. Relatively small. It is going to require us to deliver a substantial amount of RVSM. In addition as you know, we have a $36 million backlog right now of RVSM, substantially RVSM systems.

At least one analyst has got of the 67 million in revenue -- he's got 24 of it coming from flat-panel. I think that will require some juggling. Thank you so much.

You'll have to talk to the analyst about that.

I'm sorry. It is difficult as you know -- I have avoided -- the flat-panel programs are moving in and as we have long discussed, we expect that to pick up as the Army SM tails off. In previous discussions and I will reiterate it, the flat-panel business and our release talks about it as well, we see substantially flat sales for the next quarter and we see a strong backlog. I am not prepared to provide guidance from a profit standpoint because I think the analysts have a good grasp on what we're doing.

I just beg you to have a good grasp of what they are doing.

You know, we can't control. Yes, I appreciate that.

If you're going to quote them you ought to know what they are saying.

It is very hard to control that these days.

Thank you so much.

David Campbell of Thompson, David & Co.

Just wanted to ask you since you have restated -- not restated -- but you are releasing your fully released backlog, you said its different than what you've released in the past when you included I guess so called unreleased orders in the backlog?

No, we never did. We never do. We always clearly defined released and unreleased. We are simply not talking about unreleased backlog anymore and I discussed that last quarter. That is so that there isn't any confusion. We are going to talk about one number because one of the things happened as the business got bigger and we got a broader distribution we are constantly moving backlog from one pot to the next pot. So it would have required an awful lot of explanation. What we decided so there is no mistake, the backlog we talk about is true backlog which is released, that has a delivery schedule.

So the $35.4 million backlog in September, that included -- that was all true released backlog as well?

Yes, correct.

But you did talk in addition to that, you talked about unreleased orders but you never really quantified those did you?

We did but we are not doing it anymore. Unreleased orders -- the problem with unreleased orders is they can be canceled, they cannot go through and rather than having a long-term discussion on business that was never a contractual obligation, we don't even discuss it anymore.

So the 36 that you have now is comparable to the 35 before.

Exactly.

No. Sorry. Please let me clarify that. What we had said back then is that we had a record 35.4 million, I'm sorry, that is correct. We didn't include that. I am reading something different.

That is exactly the same.

35.4 compared to 36.5.

The 36 million, Geoff, does not include the military programs you said that were currently being signed?

That is true.

Does not include those?

And the way we define the backlog now is hard contractual backlog. So we don't discuss business that is options, we don't discuss any of that. It is only released backlog.

Can you disclose what percentage of the backlog is military, what percentage is commercial? Roughly?

Roughly 25 percent military.

Okay, that is helpful. So basically what you are saying about future revenues is that they are the second quarter looks strong and you really don't have a lot to say about the revenues the rest of the year. Is that a good way to read into what you're saying?

I think what I am saying is that we have a strong second-quarter. We are comparable with it. We think we are going to see good performance next quarter and we will meet the revenue expectations or close to it of the analysts, which sort of spread over a fairly reasonable number. Again I am going to reiterate, we focus at the earnings per share line, no so much the revenue line. But they tend to go together so we are comparable with that direction. There are obviously variables. I remind you we have 3 quarters in which to book business. We have a record backlog again. So we're in a good, strong position to continue to grow for the business.

As we talked about, our target was 25 percent compound growth rate. This year it is going to be much stronger than that but on average we expect 25 percent compound growth rate. And as I told you, I looked back at the numbers and if you go back 15 years, we have had a compound growth rate of about 30 percent.

Right. And one last question and that is when the flat-panels become a larger component of a percentage of your revenues which I assume they will be, would that means that your R&D costs would go up as a percentage of revenues?

Our R&D costs right now are very low especially this quarter and that is because as I mentioned the revenue went up quarter-over-quarter by over 25, almost 30 percent and on an annualized basis more like 50 percent. We didn't hire engineering people and incur expenses as quickly as the revenue grew so that as a percent of revenue, engineering is inappropriately low, around 6.5 percent.

As you know, our target is to maintain an engineering investment, R&D investment or product development investment of around 12 percent. So what you would see is on an average higher engineering costs as a percent of sales. And that we believe is necessary to continue the kind of growth we have been talking about.

Okay, thank you.

It will be about 12 percent ongoing.

In the long run.

In fact, the product development demand, we tend to identify around 12 percent and it obviously varies if we have specific programs and that seems to be a nearly optimum number for this business. To provide a very high growth much over that is diminishing return.

Okay, thank you.

Selman Akyol of Stifel Nicolaus.

A couple of quick questions if I may. First of all, your gross margins. You have any comment on that because they declined I guess from the prior quarter despite higher volumes or higher revenues?

Hang on a second. Okay. We will give you the breakdown. And Jim will talk to it in some detail. We did some adjustments in our accounting where we assigned certain costs associated with the business in various portions of the overheads; and the second is we had a very large volume program that had lower margins.

So what we essentially did is the business has been so strong that we have taken and we have lowered the overhead absorption rate on a go-forward basis. Based on our accounting, when we lowered on a go-forward basis, we have to take what is already in inventory and make a similar adjustment. So we reduced inventory by about $350,000 to accommodate this reduced overhead rate and that reduction went right to cost of goods sold. Had we not done that, the gross margin in the quarter would have been up a little bit.

Got you. Next question, on the tax rate it was a little bit lower than what I was looking for. Is this 36 percent a good number on a go-forward basis?

Yes, we think it is a good number on a go-forward basis, Selman.

Okay. And if I can just revisit the backlog issue just for one more moment. In some earlier comments you said that that was roughly I guess, Geoff, you said 40 to 50 percent for next quarter and then I guess Jim said roughly 2 quarters worth of backlog which sort of implies I guess anywhere on that just 15 million on up to $18 million sort of going out for the next couple of quarters. Am I reading into that correctly?

I am sorry. I am being intentionally vague because I want to try to avoid giving a guidance. Again I want to give guidance when we see a significant change in the normal business model. If our revenue and/or profits are going to be significantly higher or significantly lower. In this case that is not the case. It is reasonable to look at revenues of what we have just done and we are saying again, flat.

Remember that the year as we have talked about when we started was front-end loaded so to get to your numbers and front-end load, it means that we've probably are going to be roughly what we did this past quarter again and then in the end, that's the transition period where we are going to go back to stable air data products and hopefully some flat-panel.

By the way we are seeing a lot of business, not just flat-panel but in a broader range, systems business for retrofit. We are seeing a real strong view for the retrofit both in the military and the commercial because it is a very cost-effective way to meet the new compliance requirements. Not just RVSM but things like (indiscernible) warnings and many others systems, we are seeing an increasing demand. Very positive.

Okay. Earlier one of the questions I guess coming up to the 62 percent that had already been done on RVSM, I guess you said it was resources -- or you had mentioned Honeywell; you had mentioned recertification; and then you had mentioned some retrofit. Is recertification a stop gap measure or is that -- is that really once you get recertified you are good to go and you don't ever need to replace the equipment?

I think the majority of it will be a short-term solution and it will consist of in some cases recalibration of old equipment to meet short-term compliance for the next year or two. That equipment is going to have to be replaced because it is not sustainable, it is not supportable. Parts in it are not even available. It would require significant redesign and modification.

So in fact as we have discussed before, there is not a significant opportunity over the next 4 or 5 years to replace that 20-year-old, 30-year-old aging equipment with new higher performance equipment like we make right now. That is an opportunity which we think will be a sustained opportunity, an RVSM opportunity that continues for many years.

In addition of that, what we call retrofit that is the area that we think we are the strongest in. I think we get from putting equipment on the airplane -- we believe have a majority of that business.

The only place I was going with this is of the 6100 business jets that has been done according to Aviation Week & Space Technology, some of that will have to come back and be replaced?

Absolutely. That is where we see sustainable business.

The last point -- I know nothing has happened but anything going on with acquisitions?

We are actually getting closer. We have got a couple of opportunities that look like good matches. We are working on it. Clearly we are sitting -- it's a fairly reasonable perspective. Yes, we are. We have a very nice war chest of deals. We expect to have that to continue to grow. We intend to take that cash and use it for an acquisition. We are talking to a couple of people now and the good news is that we see a way that we can leverage our technology into the acquisition so that everything that we have looked at will be strongly accretive.

Very good, thanks a lot.

William Jordan (ph).

Do you anticipate that the sales for the quarter ended March and June if you could give an indication, could they match December's sales of 19 million?

I can't comment on that. I think what I tried to say is that the estimates that the analysts have come up with would require us to do something like that if we are to meet their estimates.

Okay, thank you very much.

You are very welcome.

Jason Allen (ph) of Atlanta Equity (ph).

A question about the Boeing 767 tanker program. They put out a press release about a week or so ago that said they are still committed to the program but I think it is going to have to be re-competed, I guess is the word they used. Just wondering what your take is on that and how you see that playing out? Does that have any impact on your expectations for flat-panel sales for that program?

No, in fact the only business that we show for the tanker program is released business from Boeing that we are getting paid for and that is for the Italian and Japanese tankers. The good news is that the equipment that we are developing and the equipment that we have and the equipment we have already installed on the KC-135 would have applicability for retrofit in those programs. We see the 767 tanker program as a program and Boeing has strongly said that they will continue to invest their own money. We see that as a continued opportunity for Boeing. Domestically, I don't know what other airplane they could put in there. I am fairly confident they would not purchase a foreign aircraft for that program. It wouldn't make a great deal of sense to do that.

So from our standpoint, we are in the program. We don't think it has a negative -- it certainly -- our internal planning, it does not have a negative impact on our growth of our flat-panel program. And it has actually the potential of expanding our flat-panel program.

Yes. That's what I was getting at. If the domestic tanker program moves forward, that could be a source of nice flat-panel business for you in the future. Is that correct?

That and the maintenance of the existing fleet of aircraft. We are looking at other tanker programs. Just to give you some idea, we have bids on significant modification to foreign tankers which are identical to Air Force tankers which would provide us opportunities for retrofit on some of the other -- there is a 767, KC-10 and KC-135 are all tankers. The interesting thing about the business we're in, again, the retrofit business is when you slow down any new weapon system program, you inevitably have to fix the airplanes you have and that increases our opportunities.

The second question is I think earlier in the call you said that maybe in the next 6 weeks or so you guys would give some more color on some of the military orders. I thought you said that they were still being sized. Is I correct?

I'm sorry I said that, by the way. But, I hate to project when the order gets signed. They never get signed on time but the good news is they always ultimately so far have been signed. I guess what I am saying is we have got typically you will take a program, you will deliver initial quantities for flight tests, etc., and then you'll get production programs. We don't want to talk about those kinds of programs until we've signed the entire production program. It is a competitive problem rather than some sort of financial or revenue issue. I just don't want to talk about our business opportunities publicly to maintain our competitive posture.

Sure, so for example when you put out the press release about the C-130 program, maybe at the point in time you didn't have an exact, precise number of what the program would amount to but as the tests go forward and then they put together a package then you can give more detail on it later?

As an example, the C-130 that we released was an actual hard order that we got. We may get additional orders. There may be follow-on orders. There could be orders with other people and I am sorry to be vague but I'm trying to be.

I understand.

Basically I am reluctant to talk about orders that we might get. Like they say you don't talk about it until the check clears the bank kind of attitude.

Right, right. Okay, thanks a lot.

Ashaka Juja (ph) of ICore (ph).

I mainly just wanted to congratulate you guys again, great job. Quick question on the acquisition front. You mentioned you are getting closer. You mentioned that you would probably do something for technology and that would be accretive. Could you give us some idea in terms of what size range you might be looking at?

We have always said whatever business we would require one of the conditions for acquisition would be that it would have to be accretive financially. But the size of the acquisition, I guess we don't have any absolute minimums, but general guidance is, we used to have a form of 20 to 60 million in revenue kind of acquisition. Now as our cash improves, we have raised that upper number. The lower number probably won't go any lower because except in a very unique case. It would be not efficient to our management team to get much of a smaller acquisition.

So you wouldn't be looking for something just for technology? You want somebody with some kind of market position?

To be accurate, my position is if I got the right technology and the right thing I'd acquire it even if it was very small. But as general practice if we are trying to acquire a company we would look for a business that we could take and provide some of the advancements in technology that we have developed into their products to increase their margins and make the business more valuable. That would be the ideal acquisition.

Thank you, great job again.

Thank you very much. We are trying and we are delighted. We see a very strong future.

Thank you.

Kevin Richardson (ph), Prides Capital (ph).

I was just wondering if you could just talk about analyst's estimates and comfort and good grasp and so forth, what specific estimates you were referring to for the next 2 quarters so that we can at least gauge what numbers so that we can get rid of some of the confusion here? What is the revenue numbering you are pointing to and EPS number for the next 2 quarters?

As I understand the consensus, the year-end numbers are around 155 to 160. Is that correct? (multiple speakers) That is what we understand the consensus to be. So earnings per share of $1.55 to $1.60 is what we understand them to be. And revenue numbers in the 60 million, mid $60 million revenue numbers. Those are the general guidance that we agree with.

So there is no quarterly guidance that you would agree with right now, just the year-end stuff?

No.

Thank you.

David Shecktor with Prospective Capital.

Given the fact that you guys are generating a huge amount of cash and even though I know we just talked about acquisition opportunities, is there a possibility you are going to begin a dividend program?

As an owner of about a little over 2.5 million shares obviously it is attractive to me, but probably in our judgment not the best application of the funds. We think we can reinvest those things, add cash into acquisitions and return -- a major returns on the --. If you take a look at our earnings per share -- our profitability, it is close to 25 percent net after-tax. I think most people would prefer to get 25 percent return on their capital. So, no we don't plan although at virtually every Board meeting we discuss the dividends because it is appropriate to do that with that amount of cash on board. So your observation is more than reasonable but at this point we see no opportunity to provide a dividend out.

In terms of the acquisition strategy, you'd expect something would happen before the end of the year?

Yes, I don't know when it is going to happen but we are working hard at it. We would love that to happen but we're not going to put a timescale on it because I think that would put risk -- if we simply said we've got to do one by the end of the year I think we would then do potentially do an acquisition inappropriately.

Just going back on the dividends again, the reason we don't provide a dividend because from supporting the stock value, we think we believe -- we looked at funds that would only hold the stock if it produced a dividend. We would understand that would open up or expand the market for it. But we believe certainly the consensus and the Board says that it would have a minimal effect on the market price of the stock. And therefore we believe it is better invested into acquisitions that have a much stronger effect on the value -- price of the stock and that is why we are doing it the way we do. That is why we are doing what we're doing right now.

Thanks again.

(OPERATOR INSTRUCTIONS) Todd Hawthorne (ph) of RS Investments (ph).

Congratulations on a great quarter. I was just wondering if you could give us some guidance as to the breakdown of revenues between RVSM, Air Data and flat-panels for the quarter?

RVSM is Air Data. It is simply Air Data systems that are being sold to upgrade aircraft to the reduced vertical separation minimum standards. It became active today. In our case, we are doing -- any Air Data system we sell potentially is an RVSM system. We only sell systems with sufficient accuracy to meet that requirement. It may or may not be necessary. As an example, we are retrofitting all of the 810 Thunderbolts with Air Data computers. In fact I think we are going to be -- we started shipping this quarter we will be shipping 100 or 200 of them this quarter.

They are not specifically RVSM equipment but they are Air Data systems. This year we expect about 85 percent of our revenue, 80, 85 percent of our revenue will be Air Data related principally in the RVSM direct application. But a substantial amount that isn't, that is just purely Air Data systems, systems that are being sold to replace aging unsupportable equipment and military and commercial applications. We're seeing a lot of that. Again about 80 percent Air Data related and 20 percent flat-panel, so called flat-panel related.

Is that going to being pretty consistent quarter-over-quarter for the rest of the year? Is that what you anticipate?

No, flat-panel will start getting stronger near the last quarter. That will be the strongest and we have always talk about Air Data sort of -- it's flattened out and it will probably in the third quarter reduce somewhat and we expect as a percentage that flat panels will be a higher percentage of revenue in the third and fourth quarters.

So you think the flat-panel will actually be a larger percentage of revenue in Q3 and Q4 of this year than RVSM?

No, it will be a larger percentage of revenue than it is in this quarter and the next quarter. In other words, over the year we expect it to be about 80 -- about 20 percent of our revenue will be flat-panel related but most of that revenue will occur in the third and fourth quarters of this year.

I see. And then another question looking further out. When do you think the flat-panel revenue will actually be a larger percentage of revenue than RVSM? When do you anticipate that cross over period to be?

I don't know that exact number but it would be, certainly I would expect it to be sometime next year, next fiscal year.

First half, second half?

Can't tell you right now. We are seeing inordinately high demand for RVSM equipment. One of the analysts, I believe it was Selman was specifically was asking about whether we could continue to retrofit RVSM systems, existing certified RVSM systems and we are seeing that kind of opportunity. We think it is going to be material. That crossover point is not precise. Our interest is not when that is going to happen but to do whatever it takes to try to keep the growth, revenue and profit growth going.

Great and one last quick question. I believe in the last conference call or at some point in time, you made reference to a potential commercial deal for the flat-panels? Could you give us any color on that at all? Because it seems like everything is focused on the military at the current time.

I can't. I don't want to comment on that and in part -- I think an earlier caller wanted some more detail and said I am just not prepared to discuss any opportunity until we get an order. A hard order and we do not have a hard order as we speak. We think there are a lot of commercial opportunities. That is where we think there is a huge growth opportunity. Certainly it is aggressive and maybe more aggressive than the military, whether it is as big, I don't know. But yes, we expect significant commercial opportunities in both business and general aviation and commercial air transport. And opportunities to retrofit airlines and business jets.

Okay, thanks very much.

Scott Kirk (ph) of Tennet Capital (ph).

I apologize. I got to the call a little late so if you have already answered this I apologize for being redundant but I am wondering if you can just help me understand what percentage of the revenue has come from government and could this ramp up to the levels that you have seen historically which I believe was north of 50 percent of the total pie? Then I have a follow-on question.

Right now it's 25 percent and we may have discussed in the past, that 25 percent will go up and down -- it has gone up as high as 80 percent and it has gone as low as 10 or 15 percent in any given year. It is a good example of what makes this business unique. Our products that we billed are the same product is applicable and very competitive in all 3 identified marketplaces. So that we may sell the same product into the military and the same part number in the commercial, either business and general aviation or air transfer. What we are seeing now is 2, 3, 4 years ago we had RVSM for KC-135, that was 80 percent of our revenue. Now we are doing the commercial and business and general aviation so it is that same basic product is now representing that kind of number, 75 percent of our revenue in the commercial product area. It will move up and down. That is why we are able to grow as rapidly as we can compared to all of our competitors. We are growing at anywhere from 2 to 5 times any of our competitors.

Maybe the question is more along the lines of do you expect that government piece -- I understand your point that it is a similar product -- to ramp to a higher percentage of revenues?

It could, we expect that -- like most people if you have the ideal situation you'd identify three basic aerospace markets; that's military, commercial air transport airlines; and business jets. Those would be the 3 airborne. Most people would like to see a third, a third and a third. So you can expect that the military might go to 50 percent again or 70 percent depending -- . On any given period we may have a very large military program that would move our percentages up to 70 or 80 percent.

Okay.

I do expect it to vary a lot and I believe because they are talking about reducing or at least pushing out new weapons system procurement that there will be resurgence and a real strengthening of retrofit in the military.

Okay. On RVSM, can you give me a sense of when should I in my model be expecting that revenue to peak?

Now.

Right now? So in other words that should be a declining percentage in forward quarters?

It won't necessarily be declining. If you look at the numbers, there is still a significant number of aircraft that have not been modified. For a variety of reasons but principally because there was not sufficient capacity to modify the airplanes in the industry. Those people as of today will not be able to fly above 29,000 feet. That is going to be very, very difficult for those aircraft. Extremely difficult, not just from a punitive fuel burn which could be as high as a 50 percent penalty but the routing is going to be dreadful because the amount of traffic in the 20 to 30,000 foot range is going to be huge. (multiple speakers)

So if I understand correctly, that revenue is peaking now but maybe the peak is sustainable for longer?

That is a very good estimate.

Could you quantify that at all? Would be 2 quarters or would you care to put any kind of --?

I have avoided being specific as again I am trying to not give too much guidance but in general terms I said earlier in this call that we would expect sort of flat performance by implication roughly what we have done the previous quarter. So we are obviously confident there. In order to meet estimates in revenue and earnings per share, we are going to have to -- we would expect to have roughly the same revenue this coming quarter and then it tapering off potentially after that. Although we continue to see a very strong demand.

So how much it tapers off, I can't give you an estimate but it is clear that if you take a look at our backlogs of 36 million and what we already shipped it gives you some sense of what kind of revenues we are going to see for the balance of the year. And that gives you some estimates of what the third and fourth quarters are going to look like.

Thank you.

We have a follow-up question from Kevin Richardson of Prides Capital.

Just on the backlog, is that backlog that -- is the backlog fully recognized in the next 12 months? I am new to your business and want to understand that real quick.

The backlog could reasonably represent orders that go out as long as 3 years although I don't believe we have any orders like that. But you can have those. For instance, you may have an ongoing -- KC-135 was a program that ran for 3 or 4 years. That more recently is unusual. The backlog that we are talking about is substantially all for this fiscal year.

Great. As the last question asked and that is what will help support the RVSM revenue and what I'm trying to reconcile is if you are comfortable with the 65 million revenue in that kind of 15 to 20 percent and flat panel of revenue would imply 10 million in the back half. It would -- which means that RVSM really falls off and that is not what the backlog would indicate. Am I missing something here or are those truisms?

What we don't want to get into, Kevin, is helping you guys develop your model any more than we already have. I think Geoff has really covered a lot of the ground here.

I'm just trying to get a matter of consistency though. If the 36 million is recognized in the following years mostly RVSM and you have 10 million from flat and you are comfortable with the 65 million in revenue, something doesn't mesh here and I'm just trying to resolve where I am wrong.

Actually if you do do the estimates -- I'm just looking at it -- if you take 19 million and 35 million, it gives you 55 million and 10 million in flat panel gives you 65 million.

And so you would get no new orders for the rest of year? (multiple speakers)

I didn't say that. By the way some of the orders that we have may slide out. Right now we are operating the business and running and controlling our expenses with the assumption that we will hit the numbers that the street has announced. That is how we are running the business. That is, we are controlling our expenses to that line and in some cases as an example in the engineering, we are hiring engineers as fast as we can find them. (multiple speakers)

You are right, I would love more business to come in. Right now I don't know that $10 million worth of backlog in flat panel. I've got to generate it. I know everybody wants to know why I won't give guidance. I mentioned this last time. Again, I would love to give guidance when we make a significant -- if there is a significant change. But I can't think of a worse thing to do than to give you guys guidance and then miss my own guidance.

I don't blame you. How are you guys compensated? At the Board level do they base it on a revenue number, EPS, EBITDA? Is there a number or a return on capital?

No. At the board level?

I mean how do you guys get bonuses and options and how are you rewarded?

Basically the company, every member everybody in the company is a stockholder. Everybody gets options when they are hired or after they have been here 2 or 3 months they get options. And the reason we do that is they have exactly the same incentive that you all have and I have. Substantially the compensation is not by bonus. We gave bonuses this year. We gave everybody in the Company got the same bonus. I got the same bonus as the janitor. It was about $4400. It is a little different than normal but that is how it works.

I'm sitting in front of the management and we're all sitting here saying gee, we wish we got a bigger bonus. I think that bonus is coming and the fact that their stock has appreciated enormously and that is what I'd like the incentive to be. At the Board level, the directors get paid in stock and they are paid historically $25,000 a year in stock and $1000 of Board meeting and we have 6 a year.

Thank you.

Selman Akyol of Stifel Nicolaus.

You said you are going to start shipping on the A-10 and my question to you is do you expect them to be replacing all of the Air Data on all of the aircraft? And then second of all, do you know if any of those aircraft are sold to foreign military governments?

The answer to the first question is absolutely yes. We have an order for roughly 400 Air Data computers and we will be shipping somewhere around 50 a month. We are in production now. I see them out on the line and they are going well and the government came in for a PCA, a physical configuration audit and we passed that and we are full board and running.

I've got you, but let me just be a little more direct. I'm seeing that there were about 750 produced over the lifetime so far. Do you know if any of those went oversees or did those all go to the U.S. Government and therefore over time we would expect to do all of them?

I'm not aware there are 700 available. To my knowledge there is only about 420 aircraft. There may be more in some in foreign military but I don't know of more than about 400 airplanes.

Thanks.

I would add on one thing, that same Air Data computer is applicable to a broad range of other aircraft. We are going to be bidding on other military aircraft. Recognize that the Air Force and the military have a significant interest in commonality and we can offer huge commonality in Air Data.

(OPERATOR INSTRUCTIONS) There appear to be no other questions at this time.

Just summary, we have been fortunate to get a significant amount of business and happily surprised and I am delighted that the business was able to accommodate it and ship it and get the profitability that we expect. We see a strength looking forward which is better than we have ever had, more optimistically than we have had ever. The business is strong. The orderbook continues to grow and our productline has broadened out so that we see an ability to maintain or exceed that 20-odd percent growth rate that we have set as our goal.

We should have a very good and strong year and a very good and strong next quarter. I am sorry to be evasive. I don't mean to be evasive, but I think that our analysts have done their work and have a good perspective on our future. Have a good day, thanks for joining us. Bye-bye.

This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.