Innovative Solutions and Support Inc (ISSC) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Elsa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Innovative Solutions and Support quarterly conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host Mr. Geoffrey Hedrick. Sir, you may begin.

Good morning. This is Geoff Hedrick. I'm Chairman and Chief Executive of Innovative Solutions and Support. As you might notice, I'm having some difficulty talking, and I'm joined here with Roman Ptakowski, our President, and Jim Reilly, our CFO. During our presentation, I will be available for comments, but will ask Jim and Roman to lead this meeting today.

I would like to turn this over to Jim for our Safe Harbor message now. Thank you.

Yes. Thanks, Geoff, and good morning, everybody. Certain matters discussed in this conference call including operational and financial results for future results 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 10-K on file with the SEC.

Geoff, back to you.

Jim, would you go through the numbers for us? (multiple speakers)

Yes, very quickly, as you all remember, we had a prerelease of our numbers on October 14. These numbers have remained essentially unchanged after the audit by our outside auditors, Deloitte & Touche, that has been successfully completed, and the revenues, gross margins and -- are essentially the same. Our net income was up a little bit from what we preannounced, as well as the earnings per share. Cash flow, of course, was a record year as well. The balance sheet continues to be extremely strong.

Cash is a little over $83 million, about $4.5 a share. Assets are over $107 million. Our shareholder equity is up over 30% year-over-year, and it is now just under $100 million. Looking forward we anticipate that our balance sheet will continue to be strong and protect (technical difficulty)-- for the future.

What we would like to talk about real quickly here is the fact that the financial results are very similar to what we indicated in our preliminary announcement. We did have weakness in the fourth quarter that we talked about in October, and despite this weakness, we have remained very confident for a successful year going forward, and we are very pleased with the results for the year itself, which were record results virtually all around. This places us in a very strong position to implement our strategy, and we're going to have Roman talk about that.

That is also helping Geoff save his voice. Let me comment on how we see 2006 shaping up. We believe we are in a strong position to implement our strategy to expand our presence on aircraft flight decks by heavily investing in research and development to develop the flat-panel and other technologies into a much more comprehensive Cockpit Information Portal.

We have already completed the first phase of our long-term strategy, the introduction of the Cockpit/IP into the marketplace. The growth in our flat-panel display business has been reassuring with revenues increasing from less than $.5 million in the fourth quarter of 2004 to more than $3 million in the fourth quarter of 2005, and that momentum has been maintained with a booking of over $11 million in flat-panel orders in just the past four months. There are --

5 million in the last 30 days.

And 5 million of that in the last 30 days. There are compelling advantages to our flat-panel technology for the aircraft operators, including reduced weight and better use of cockpit real estate. We've got a price point that creates a market for the use of flat-panel technology.

Due to its versatility, flat-panels could represent as much as $2 billion market segment for us. Over the longer term, this is going to be a big part of our future, especially later this decade when we expect new FAA mandates that will precipitate a more rapid adoption of flat-panel technology, and we believe we are well positioned to take advantage of that.

In the near-term, the structure of the aviation market and the challenges facing the commercial airline industry have created some disruption, but this is -- we will overcome that. In the short-term, the market's more measured approach of flat-panel adoption is what we see is a growth in backlog before we see the corresponding following growth in revenues.

In the meantime, we have an excellent opportunity to widen our flat-panel technological leadership by exploring additional opportunities that leverage our flat-panel expertise. One example of these new growth opportunities is the recently announced turnkey installation agreement between IS&S and ABX Air. We believe our flat-panel expertise provides a competitive advantage on a number of fronts that can lead to similar opportunities and a host of other applications.

Now that we have effectively digitized cockpit information we have created a portal for a vast array of new applications that can improve the efficiency and effectiveness on the flight deck. We believe it is an opportunity for us to really demonstrate the innovative solutions part of IS&S.

Another step in converting this vision into reality was the award of the Supplemental Type Certificate from the Federal Aviation Administration for the Boeing 767. This illustrates our ability to clear major hurdles through bigger share of aircraft real estate by not only developing new technology, but successfully navigating it through the FAA certification process. We are confident we have chosen a direction and are achieving objectives that will enable us to maintain our outstanding record of double-digit growth over the long-term. This long-term vision allows us to put current industry conditions into the proper context. About 30% of all aircraft have yet to implement RVSM technology. The timing or certainty of these upgrades remains somewhat elusive.

We are continually being challenged by operators to make the business case for our flat-panel product. We have a unique opportunity here to now provide flat-panel display systems and RVSM at the same time at a price point that is not significantly more than RVSM alone. This gives us a strong competitive advantage. The continued strength in our flat-panel bookings is an important metric to monitor as it is the clearest indicator of the evolving demand for our technology.

5 million in bookings in the last 30 days for flat-panel.

I'm sorry. I picked up a voice there.

Calibration.

Right. Consequently the present -- excuse me -- consequently presently payors that sell this quarter will be in the $5 million plus range, and that will be in a breakeven position. We have already taken actions to reduce cost and have reduced headcount by approximately 10% this quarter. This will save us about .75 million on an annual run-rate.

Fortunately the Company has the financial resources to maintain the momentum behind our technological leadership by absorbing any short-term softness without compromising the strength of the organization and in particular our extremely talented engineering professionals. We expect product development spending to equal $1.5 million in quarter one or about 30% of revenues. This compares very favorably to the run-rate we had in October -- excuse me -- in the past quarter where our R&D had reached its highest level, which is over 1.7 million at that time. Therefore, we do not believe there will be a need for any additional significant cost-cutting in the immediate future. For the year, we anticipate continued progress, strong double-digit growth.

This is an exciting time at Innovative Solutions and Support, and we are extremely confident that our technological leadership has firmly established us at the forefront of a revolution that is transforming cockpit information and creating a growth opportunity for IS&S and its shareholders.

Operator, we would now like to open the call for questions. (multiple speakers) Excuse me, before we do that, Geoff would like to make a comment.

I have got a couple of comments. The first is that there were no reductions in engineering. We have reduced the overtime premiums that we had placed in the engineering department to support the STC program, and the reductions were principally in manufacturing personnel that were significantly in excess of demand.

What is notable is that we have the organization operating strongly and a breakeven point significantly below a $20 million annual revenue, which allows us to aggressively support product development and new product introductions and assures that we are going to maintain a positive cash flow and profitability. So the future is strong, and I will turn the questions over. I'm sorry, go ahead.

Operator, we will open the floor now to questions.

(OPERATOR INSTRUCTIONS). Robert McDowell (ph), Lincoln Financial.

Good morning. First of all, congratulations on a great company and great recent fiscal 2005 results.

I have two questions. I noticed that our backlog is one-third of what it was one year ago. I would like you to comment on that. And secondly, our sales organization, do we sell through manufacturers reps, or do we have our own sales organization or what? And are you satisfied with our sales organization?

Thanks for the kind comments. First, the backlog is lower, but as you may recall, the backlog was inordinately high in preparation for the deadline for RVSM at the beginning of this year. So there was a huge number of orders in anticipation of supporting a very high peak demand for product, which will peak at the end of January of 2005. That was not typically representative of the Company profile, and if you go back historically, you'll notice that the backlog in the beginning of the year was characteristically much lower percentagewise. So this is -- our backlog now is more representative of what we would anticipate in a growth kind of year.

Secondly, we sell directly to the customer in some cases. With RVSM we sold through FPOs. We sell directly to airlines and air transport operators and directly to the military, and we are expanding our sales staff as we speak. By its very nature, we are not content with what we have, and we need to grow the staff. I hope that answers the question.

David Campbell, Thompson Davis & Co.

I just wanted to get a little bit more information about the trends. If I recall, you had roughly 4 or $5 million of revenue in September. You are talking about 5 million for the whole quarter -- the December quarter. So it seems like there has been a significant slowdown in business activity, and yet you seem very positive about seeing double-digit growth for the year. I assume you mean double-digit growth in revenues.

But I don't understand that there seems to be a disconnect there between the optimism for the year and the business activity since September. Is it because of this FAA requirement? You implied something about a more rapid use of flat-panels. Maybe you could explain that, too. Thank you.

Okay. Just briefly, remember that quarter-over-quarter, it was an $8 million quarter, although it was a fair amount of revenue in the final month. The total quarter was about 8 million. In this case, it is a transition from too early RVSM to new flat-panel. We are getting a lot of orders in, but we're not going to deliver those until the second and third quarters of the year.

What we will actually see and we anticipate is a reversal of last year. Last year the first and second quarters were huge, and they tapered off from a peak demand for RVSM. We expect a more traditional growth in which the front-end of the year tends to be lighter than the back-end, and we see heavy loading based on the order demand for our flat-panels.

In addition, we expect to see a resurgence in RVSM, and I will speak to that just briefly. When there was a mandate to deadline, there was a great premium on installer time to install our equipment and other people's equipment. And, therefore, premiums paid for the installed cost of our equipment in some cases three times the cost of our equipment. That demand has obviously subsided, and we now see an opportunity and have actually received an order already for a combined installation of flat-panel upgrade and RVSM at marginally more expensive and the basic installed cost of RVSM. We believe that the attractiveness of a cockpit upgrade and an ability to meet the RVSM requirements (a), puts us in a unique situation. We will be the only supplier of RVSM that can provide this flat-panel upgrade with RVSM at a competitive price that is roughly the same as what people had been paying during the peak demand for our RVSM.

So we see a significant resurgence in demand for that RVSM. People who postponed it because they were apprehensive about spending the premiums prior to the mandatory deadline will now see an incentive to combine a real cockpit upgrade and the RVSM. So we see that as both positive features, and we see the demand, as we say, we are seeing a tremendous amount of flat-panel activity.

I mentioned in our -- in the preconference call that we wanted to assess the demand because we saw a short blip. We see now a strong ongoing demand. We have bids out for another $15 million worth of near-term orders. So we see a very strong market for our product developing.

Okay. And what is the percentage of your backlogs in flat-panels now?

Well, let's talk about the (multiple speakers) yes, about 50%.

Over 50% of our existing backlog is in flat-panel.

Okay, I will let someone else have it.

David Murscero (ph), Fulburn & Murita (ph).

Good morning from San Diego, gentlemen. (multiple speakers) I want to congratulate you first on your inclusion in the Forbes 200 Best Growth Companies. I have a three-part question for you.

Number one, you alluded to the issue of double-digit. Can you give all us out here some guidance as to an earnings per share figure for the coming year with respect to that "double-digit"?

Number two, is there the possibility of using this product on an OEM basis due to your competitive advantage with pricing?

And number three, could you address the short position in your stock? I know it is quite huge. Is management aware of this, and is there anything you intend to do about it? Perhaps a move to an exchange? Would it be of help or perhaps not of help? Thank you.

Let me address the first question. When we talk about our double-digit growth that we are looking over, as we always have over the long-term, we have shown tremendous compound annual growth rates. So by definition, you have some up periods, some down periods. But when we talk about this, again, we look at it over the long-term. You're going to see some flattening in the short run, and then the step-up you will see the growth first, and as our backlog grows, that is the leading indicator.

The second question, can the product be used as an OEM platform? Absolutely. We have as our technology gets more widely adapted and understood, it is very attractive for the OEM platforms, as well as in the retrofit because of the type of price points that we are able to demonstrate in the marketplace.

The comment on the short position, I will turn that over to Jim, to our CFO. Jim?

Good morning and thanks again for being on the call and thanks for the kind words. We are very aware of the short position. Obviously when people go short, they all go short for different reasons. What we believe has happened here is the Company is in a transition period where we are moving from our conventional Air Data product, which has dominated our sales and profits for the last number of years, into a flat-panel system product line where we do more systems integration work. And I think a lot of people are not necessarily betting against us in the long-term, but they are betting against this transition happening smoothly in the short run. And, as a result of that, I think that has caused the short position to grow over the last three quarters or so up to a point where it is probably a measurable number now, maybe 25% of our float.

But we are aware of it. We are not -- we would like the short position obviously to be smaller because I think it impacts the investment, the community detrimentally more than it helps. Some people might benefit from it, but on the whole, it is more detrimental than beneficial in my mind. We believe, though, that if we execute our business plan and we believe we are, this is going to turn itself around in a very strong and very positive way.

Keep in mind that the Company a couple of years ago when we were going through the process of transforming ourselves from a predominantly military supplier of Air Data equipment where the military was absorbing over 90% of our capacity. When we're going through that transition period, the stock fell precipitously down to probably as low as $5 a share. The Company at that point in time took the initiative to buy back about 1.6 million shares at a cost of about $10 million. We retired that treasury stock a couple of years later, and when we retired it, it had a value of $50 million. We would like the investors to stick with us and be patient because we believe that the same transition is probably likely to take place. We think the stock has a tremendous upside potential on a go-forward basis, and we are all here working hard everyday to make sure that happens.

I have no disagreement with that. Can you go back just to the first part, and I hate to put you on the spot, and when you go through a product transition, I understand that there is fuzziness out on the horizon. But, of course, unfortunately Wall Street operates on a visionary track and likes to seek guidance. When do you feel strong enough that you can give the street guidance numbers going forward?

I will try to answer that. We believe over the next several months two or three months we're going to see a very strong response to our product line, and that addresses really two areas. It addresses the area to get a more firm look at the future. We believe that we are positioned for a continuation of our historical growth pattern.

Now it does go up and down. As you noted last year, this past year was 50% growth over the previous year, which was almost a 60% growth over that previous year. So you see two consecutive years of very high growth rate on an average that is going to level out a little bit, especially during this transitionary period. But we are on target to maintain that longer-term growth, not perhaps this year-over-year recognizing that we are coming off of a rather high spike, but we see an extremely rapid growth in our new product line. These our products that we know and are sure of the margins, so we know our profitability on these products.

And to answer your other question about OEMs, we are meeting this month with a major OEM to discuss exactly the kinds of things you're talking about. They have recognized our accomplishment on this STC and are interested in just further discussions. And so we see an OEM opportunity as well.

I'm sorry, go ahead. Does that answer your question? I'm sorry.

It does, Geoff. Thank you very much, and it sounds exciting, and I look forward to a good year for you guys.

I might add I'm personally betting on it to the tune of 4 million shares, so I believe in it as well.

Very good, thank you.

Mark Degenhart, Oppenheimer Capital.

I have several questions. I will go through them one at a time. You mentioned expansion of sales force. Going from what to what, and have there been any turnover issues there?

I will address that. No, we don't have turnover issues. Obviously the transition of product life is we have got good people that we have continued to train and show them the features and the benefits of the new product, and they have responded to the challenge.

We have expanded the sales force. We continue to look for additional direct people, but we have also to take advantage of the position we have put ourselves in have increased the number of manufacturers' reps. We have also added another distributor arrangement --

Could you put numbers on things?

I'm sorry?

Could you put numbers on your comments?

The numbers of personnel?

Yes.

We don'ts could discuss that specifically, no.

Okay. The second question --

The sales force is geared to really go after the three major segments. That is the military, the commercial air transport and business and general aviation. In addition to obviously people who are compensated by us, our well-established partners in RVSM see this as an opportunity for themselves also. So the space operators also promote our products, so we get an expansion of our marketing efforts by our relationships with the FPOs.

Okay. The second question is, you are selling components to what extent are you disadvantaged by the fact that some of your larger competitors might be selling an entire system? That is the first question. And then sort of an add-on to that would be, when you mention an OEM relationship that you are working on, is it more an instrument panel OEM type of company, or is it the entire aircraft as an OEM?

Well, the OEM we talk about is an aircraft manufacturer. And we are -- there, as an example, we are doing a number of programs, some with Boeing and some with Marshall's in which we provide the flat-panel system, which includes by the way when you talk about a whole cockpit. We can provide fuel gauging systems, engine instrument systems and Air Data systems. And I might add that our major flat-panel competitors, Honeywell and Collins, do not provide fuel systems. And we do engine systems. So we are not disadvantaged in that area. And we team with people to provide a flight management system.

So there is two -- three primary suppliers to flight management systems, and we have teamed with them to provide a complete cockpit. So we are really not disadvantaged, and we have chosen to effectively team as an example with people like CMC who we have done two or three successful programs already and can provide a full flight deck capability.

And --

The other thing I might comment on is that, in fact, we don't view it as a disadvantage. It is an advantage of being able to put different pieces together. Instead, you remember from prior calls, we talk about that the retrofit market has a much larger installed base than the annual production of the OEMs so that we can address both segments because we can partition the product. Some of these competitors who have a very integrated system have a much more difficult time doing that. And again this is what has helped us to establish the kind of price point that helps create a market particularly in the retrofit area that gives us our growth opportunities.

Okay. My last question is obviously both on the RVSM opportunity and on the flat-panel side, things are not ramping -- well, the RVSM is sort of largely in the past with 30% of that market still to be retrofitted. So in both markets, can you give us a sense as to what is causing the delays? The 30% of the RVSM market that has not upgraded, why haven't they upgraded? Why are they still allowed to operate? What will shake them out?

And then on the $2 billion opportunity for flat-panels, if you could give us one or two anecdotal cases, maybe without naming a customer name as to why things are not happening more quickly there. You know, it is a $2 billion opportunity and you talk about $15 million in outstanding bids right now.

Well, to answer the first one, the people are not being allowed to operate in the RVSM space. So they fly at lower altitudes, and they do that because -- and burn more fuel to avoid the premiums that were paid during the rush to meet compliance. So we believe that by providing them some more tangible value in the modification that the coupling with flat-panel will cut that or break that market lose because the people were looking at spending $150,000 for an airplane and getting a couple of altimeters in compliance to RVSM. We believe that we are going to be able to provide a system that will give them a cockpit upgrade, getting rid of a lot of equipment and weight and maintenance costs, and allow them to comply with new regulations and RVSM.

So we expect that that will strengthen the demand for RVSM, and the demand for RVSM waned because there was a huge peak. A lot of their suppliers had significant inventories which they are now depleting. So we see this recovery. The demand is different than it was for the deadline, so it is not quite as urgent, and it will be -- we expect it to be satisfied over the next couple of years.

The second is anecdotally I think is what you said on the demand. You may recall that we just recently obtained an STC that was last month actually -- October, yes -- for the 767. Since then we have gotten orders for 767, 747 and, in the case of Kalitta Air, within less than a month of that period of time. And we have a couple of pending orders that just we are not prepared to announce, but we have already explained that we have cut those orders for units. And that is all a result of this, the 767 STC.

Let me comment on that. Until recently we have had comments that although people admire our products and are attracted by the price point, they bluntly could not imagine that we could actually field a unit at that price point with that performance criteria that was certifiable. The certification has essentially told those people, yes, indeed, and now we're seeing a real flurry of activity.

So it was all based on our ability to successfully get total FAA approval on an installation, and that I think was a major milestone. The market is there, and we assess it by the total number of aircraft that we believe are out there. And we took approximately 50% of the available military, commercial and business and general aviation aircraft -- I'm talking about Bizjet kind of aircraft -- and looked at our installed cost, and that is how we came up with that market. And that market is very conservative.

We see that developing as we field equipment that is directly installable, and that requires an STC, which means that we actually install the equipment on an aircraft and flight test it. Those will happen far more easily having already fielded the same piece of equipment on another aircraft. As we accomplish each one of these, each one of these will open up individual markets for 300, 400, 500 kinds of aircraft. And you will see a growing demand.

Right now we have an available market based on our STC of about 900 aircraft. We expect by the end of next year to have a market for about 9000 aircraft. In other words, our ability to install upwards to 9000 aircraft. So we see a huge demand in the market and an awareness of the market which is brand new. Basically we started a month and a half ago.

I'm sorry to tie up the line, but one last question based on your last comments there. So those last comments beg the question of when will the next STCs be coming on other airplane platforms?

We're planning for one at the beginning of next year, maybe January, and we are going to try to step them. Once you do one, subsequent ones are probably less than 20% of the initial effort. The initial effort was significant. Although we accomplished that -- I just note this -- we got the airplane, and in less than 60 days, we got an STC issued. That is maybe a record of all time.

I would note that one of our major competitors, a $5 billion company, took five years to do it on a 747. We did it in 60 days.

We think that right now the only thing that really is holding us up is the backlog in the FAA. But we have -- our engineering investment is still there to configure airplanes -- configure our system for a variety of airplanes. Again, we expect that the beginning January and February of next year that we are going to try to get one a month if we can.

So that is what we're looking at doing. In order to expand it, there are a couple of major fleets where there is 3000 aircraft which we would like to do in the next few months. But that is generally the profile, and we can keep you updated as we get these STCs.

Craig Luken (ph), Rumeld Asset Management (ph).

I am somewhat new to the story. My first question is just for my understanding. Your Flat Panel Systems uses the existing gear in the plane and just reorganizes it, and you are able in your opinion to compete with, say, the Honeywells of this world because you can use the existing equipment that is in place and then do one-offs if possible at a very attractive price point, meaning a lower price point? Is that correct?

It is a little bit more than that. But basically we designed a system that will interface with the existing aircraft systems and don't require tearing the entire airplane apart. If you massively modify an airplane, the FAA requires you to retest the aircraft to the latest performance standards, which are so severe that most existing aircraft won't meet them. So if you do major modifications, if your aircraft requires massive rewiring, there is a high probability that it will no longer be certifiable.

So the art is to build a system that is able to utilize substantially the existing aircraft proven wiring system and implement a new cockpit display system. That is what we do, and we have developed a very unique and patented approach that has a significantly lower manufacturing cost them than our competitors and performance at the highest level of integrity. I will call it Part 25 for air transport quality equipment.

So the fact is that our competitors typically will have an installed cost of anywhere from two to six times as high, and you say, well, okay that gives you a competitive advantage. The significance in that is not so much that our price is that much lower than our competitor, but more importantly, its absolute cost is much lower. People will -- existing owners of existing aircraft are unwilling to invest -- the existing huge costs to modify an aircraft. It would be so that the existing price point had been so high that it impractical to modify aircraft and update them, in fact, and more often unjustifiable.

By reducing the price point as much as we have, it has opened up a huge market that truly never existed for flat-panel upgrades before because the price was so high. So that is why we see a very very large market, and our competitiveness is there. But, most importantly, the market has expanded by an order of magnitude with this new lower price.

Okay. Thank you. Just secondly, I believe back in October you had mentioned that you might use some of that cash on the balance sheet for acquisitions. When you go out there and look at acquisitions, is there any particular metrics you look at, and is there any range that you typically see use favorable?

You mean range --

In terms of some kind of multiple. You know, do you look at EBITDA? Do you look at profits?

We clearly look at EBITDA. I think the EBITDA range varies anywhere from six times EBITDA to eight or nine and even as high as 10 EBITDA. That depends on the strategic fit, and I can speak to that briefly.

As you are aware, we have a very unique and patented approach to flat-panel technology. That flat-panel technology has the ability to significantly reduce the manufacturing cost of a potential acquisition's existing backlog and, therefore, provide some enormous synergy, and in the symbiosis, this applying the technology to existing backlog could yield much higher profits. And, therefore, the EBITDA, you can afford to pay a higher EBITDA for that company. And the range of companies is -- I think our lower-end range has tried to make a fairly mature company in the 30 to $50 million low-end upwards to 150 to 200 million in the upper end. So that is the kind of range we're talking about.

Okay. Thank you. And just finally, just a quick clarification on the release. When you said the cash flow for the year was 17. -- that's like cash flow from operations, and then you have roughly 700,000 in depreciation and amortization will bring you free cash flow of about 16.5?

That is about right. Actually the cash flow from operations is probably closer to 16 million. We also generated during the year about $1.5 million plus from the exercise of stock options. That got us up to where we are. But operational cash flow in and by itself was about 16 million.

And the depreciation about 700?

For the year, roughly about 750,000.

Ashok Ahuja, ICOR.

Geoff, what impact is the weakness in the revenues and stockprice having on your work in the acquisition area if any?

It does not, except to the fact that we focused on getting our flat-panel program off and running quickly and have probably backed away from our acquisition activities a little bit, but not significantly. We had always intended to purchase in cash anyway because we always believed in the intrinsic value of the stock. So the fact that we generated another 16 or $17 million only strengthens our ability to make acquisitions.

Thank you. All the best.

Thank you. I'm sorry for the cold. It has been tough. Go ahead.

David Campbell, Thompson Davis & Co.

Jim, there was a lot of prepaid expenses on the balance sheet on September 30 and, therefore, less cash than there was in June. Can you explain all that, and what is the current cash balance?

Yes, there prepaids, David, were up essentially because we had prepaid income tax thinking that income was going to be much higher in the fourth quarter. And the cash on the balance sheet right now we really don't discuss mid-quarter stuff, but the cash has not changed much from where was at the end of the year.

You're not going to get the income taxes back. That is for sure.

Well, we won't have to pay them either, David.

Right, right, right. You mentioned buying stock back a couple of years ago, and you had much less cash then than you have now. Why not buying it -- why aren't you buying it back now?

Well, the Board has discussed this with Geoff, and I believe the Board has given Geoff some latitude to do that at the right strike price. But the right strike price, David, is something that is a closely guarded secret here.

Well, we are obviously capable of doing it. We're looking we believe that there are acquisitions. We would like to have adequate cash, as I have noted, especially when our stock price is down a little bit, to have an ability to buy purely in cash. And, therefore, we have kept it.

That does not mean that we are not constantly looking at a repurchase. We just want don't want to compromise our ability to make acquisitions. So that is what we weigh back and fourth less than (technical difficulty)-- specific price and has more to do with whether we are keeping the fund available for acquisitions.

And I still go back to earlier Roman mentioned the FAA requiring a more rapid deployment of flat-panels. Did I hear that right, or can you explain that?

The comment I made not specifically to the FAA but regulatory agencies worldwide. There are technologies, things like area navigation that in the more densely crowded skies that are forecast, more information is being put into the cockpits. Again, real estate is at a premium, so this drives flat-panel technology. We will see this thing solidify first in Europe as RVSM did before you see it in this country. This is under some of these different acronyms for that or things like CNS, ATM -- Communication Navigation Surveillance, Air Traffic Management -- we like a lot of acronyms in this business.

But these are the types of issues that come first at densely populated airports. The sky is approaching these densely populated air traffic routes. So already a lot of the thinking in this industry is, how do we meet those requirements, and flat-panels are uniquely positioned to accomplish the operational needs that the operators have.

Okay and you have --

These are -- the way they are talking about it, the discussions are taking place now. Formal implementation starts that we gave guidance in the industry first and then the actual implementation follows. So this is something that will occur during this decade.

The normal seasonal trend is for the Company to have the lowest quarter in December in terms of revenue business activity. Is that likely to be the trend again this year?

Exactly. In fact, you're right. That is exactly what the normal trend was. Last year was a unique one because we had this huge demand for RVSM. We see a growing and rapidly growing demand for the flat-panel activities. To give you some sense, there are people now that we were talking about this demand, FAA demand, to operate in and out of Schiphol Airport in Amsterdam that require RNP out of navigation system to make that approach. That is mandatory to get in and out of Amsterdam, and that will require a large number of aircraft that will potentially operate out of there to have flat-panel display systems that don't presently have them.

Just to get in perspective, 737s, there is probably 3000 or 4000 737s that have no flat-panels in them, and all of the early 747s 100 to 200s and I even think some of the 300s, although it's probably 200, don't have flat-panels in them either. So we see huge opportunities in all of those areas, and they have to put in time management systems and provide the guidance in display systems that will work with that flat-panel.

So that is where we see this kind of thing being also spurned on by mandatory requirements that will grow, and the costs and operations are compelling. As you might have known, at the ABX Air, we saved 272 pounds. That is a huge weight savings by trading out the old equipment and putting our new equipment into the 767. And the 767 was a modern aircraft. So there is a compelling reason, and at the price point we are at, we see a huge market developing.

And, Geoff, you have obviously reduced your R&D cost. Will they go up commensurate with the increase in revenues as business activity improves?

Well, we have traditionally run roughly 12%. It varies a lot, but 12% of revenues in product development. Our product development -- the product development expense went down over last quarter, but that is because last quarter we were getting the STC and we were running contract people and massive over time. So we have cut back to contract people, and we are back on normal operating hours. So you are seeing roughly what the operating run is going to be like. It may grow, but we believe we can support impending STCs well with that staff.

Vincent Donovan (ph), private investor.

My question is, in the engineering area, are we or are we thinking about offshoring some of our costs, say, to India?

The answer is no, and the reason is that we did that analysis and, in fact, find that we can more effectively do P&V in-house than we can do out of house. We have evaluated a whole bunch of metrics, including cost per certified line, etc. And our software development productivity is virtually double what our competitors are and we use offshore.

Now we have in the past done a small amount of it only to find out that it has not been effective, and let me tell you why. Our systems allow us to closely link the components which we would do offshore development with with our design group, and that close linking makes us far more efficient.

In the Aerospace industry, you typically do your product development onshore and verification and validation and verification offshore. In our case, we have been able to do it more efficiently, and we constantly look at the metrics and look at how we can do it offshore, but we find it is more effective to do it onshore. And our cost per certified line is again half of what competitive bids have been.

Well, I'm just looking and you know I read about Boeing and other companies today taking their products and their ingenuity and with their software and putting it offshore. But that made the case. In the acquisition area, what kind of acquisitions would you be looking at?

We would look at companies that are in two areas. Distribution can provide us expansion of our sales arm out broadly specifically to open up opportunities in the Far East and with similar technologies that would be people that would provide as an example radio, flight management, radio tuning, things that would augment our existing product line, and people that had existing product lines of flat-panel displays where we could significantly reduce their manufacturing cost implementing our patented technology. So those are the two areas.

And as far as keeping the short sellers away from us here, I'm an old-timer here, so I kind of think that one of the great reasons to keep short sellers is putting out good information and constantly putting it out. Telling what do you have and what you know upfront and being honest about it I think does help keep the short sellers away, or else it scares them and gets them to run a little bit. That is just my comment. Thank you.

Thank you.

Well, hopefully we have always been honest. I would hope that that is the case, and I hope our stockholders believe it. We try to get that information to flow as constant as we can. Unfortunately sometimes we cannot release pending information. But, as we get orders, we will continue to release the orders, and in the past, we have tried to do that. And yes, we all have a real interest in maintaining stability in the stock and have the stock price fairly reflect what we think is the value in the business.

So we appreciate your comments, and we are focused on it. I can take one more comment. We are sort of running out of time. Next caller, please.

Kevin Whenick (ph), Hollinis Capital Management (ph).

Good morning, Geoff. I'm sorry you apparently are not feeling as well as you might like to. But I do have a more general comment instead of a question. But in terms of keeping us aware of orders, I actually think the Company has done a great job of that. Because without sending out meaningless press releases, it sends out appropriate press releases when orders are received.

I think the big issue, though, is the orders in the near-term are not turning into revenues. So is there a more proactive way to keep the investment community apprised of what the likely revenue flows are from these orders and maybe even send out less press releases about the orders themselves, given that I think in some cases people may have looked at them as misleading because they are now surprised by the near-term revenue softness?

I'm pausing. I think based on our backlog in the last quarter, I think the revenues probably reflect our backlog from last quarter. So I think that is probably fairly consistent. I think you can look at our backlogs at the end of each quarter and try to project more reasonably what our revenues are going to be.

I think one of the things that has happened in the past, the backlog that we have had has always represented revenues that would be delivered or liquidated in more than one quarter. Sometimes three quarters and sometimes out to a year, although the number would fall off precipitously the further out you got.

One of the things that we have been talking about here is with the flat-panel business, which is a much more complicated product and much more time-consuming, we tie this in oftentimes to the customer's need for the product, which oftentimes is tied into his ability to take an airplane out of service and put it on the ground. He wants to get the order in for multiple airplanes, but he can only use that service one airplane at a time. So we are -- (multiple speakers)

The same thing as RVSM.

We're kind of tied to their demand for that product after they order it. And as a matter of speaking, that would normally be a little bit longer schedule than the RVSM business. However, if you're looking for barometers, the barometers to look for would be on a quarter to quarter basis what is happening with the backlog and with the STCs, and I think you will see that as we move forward, there will be an expansion of both of those elements and that what goes into backlog will ultimately end up in revenue and profitability. So those are the two big benchmarks to follow, and hopefully we will keep you appraised of those as they take place.

But one of the things that Geoff mentioned also and one of the things that is very concerning to us is we are a small company dealing with some real Goliaths here. And for proprietary reasons and competitive reasons and strategic reasons, we don't like to talk to a lot of -- about a lot of the good things that we're looking at out there, and we do see an awful lot of good things on the horizon. But we don't really articulate on them until we actually get the order in-house.

I think what you will see and especially over the next several months is a clear trend, a growing trend and a broad demand for the product. And as we build the backlog, that backlog will be reflected in the quarterly results.

One follow-up questions on this issue. As you do issue press releases about orders, at the time that the press release is issued, which is probably shortly after you foresee the order, how visible is the delivery time for those orders?

It depends on the order. Sometimes it is very close and very visible. Sometimes it is visible, but extended over a period of upwards to 12 months. And so I mean that is the answer.

I mean that is why I just asked because maybe it might be helpful to keep people better informed to also add that we believe this order will ship over the next three to six months, or we believe this order will ship over the next six to 12 months. Because I think that is where one of the mismatches is here. A lot of press releases go out about orders, and now we have had a near-term soft revenue period.

I appreciate that, and we will try to do that. I think historically a leadtime on orders in the industry is a year. We tend to be less than half of that for leadtimes in this business. So traditionally the orders start shipping about six months after receipt of order. In RVSM's case, because we have built backlog, we have built inventory in some cases, we were able to turn in three months. But we will remind people when we issue the order that that is traditionally not only an order, but the delivery is staged over some period of upwards to three months to as long as 12, which is pretty much the industry standard. But we take your point, and we will make sure that it is clear that that is the case.

Well, thanks for your comments, and I hope you feel better soon.

I feel all right. I just cannot talk. I'm sorry about that.

Thank you, operator. At this point, we would like to conclude the call.

Thank you very much, gentlemen. I appreciate your time.

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