Innovative Solutions and Support Inc (ISSC) 2006 Q1 法說會逐字稿

Good morning ladies and gentlemen. My name is Stacey, and I will have your conference facilitator today. At this time I would like to welcome everyone to the Innovative Solutions and Support continue triens call to discuss first quarter 2006 results. [OPERATOR INSTRUCTIONS] It It is now my pleasure to turn the floor over to your host, Mr. Geoffrey Hedrick, Chairman and CEO of Innovative Solutions and Support. Sir, you may begin.

Good morning. I welcome you to our conference call this morning, where in a few minutes we will discuss the results of our first quarter ended December 31st, 2005, current business activity and climate, and our business outlook strategy and plans. Joining me on this call today in or corporate office is [next] Roman Ptakowski, our President and Jim Reilly our CFO. Now I will turn it over to Jim Reilly.

Thank you Geoff. And, thank you all for being on the call this morning. First, let me read our safe harbor message into the call. Certain matters discussed in this conference call, including operational and financial results for future periods are forward looking state 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 10 K on file with the SEC.

At this point, I will briefly discuss our financial performance for the quarter. As you've all seen from if press release last night, the quarter was consistent with our expectations and movement in our business from one driven primarily by air data market to increasingly flat panel product systems. We achieved extremely strong performance in the first quarter; flat panel revenues were $3.1 million. This was more than a tenfold increase from the first quarter of 2005. Because the flat panel is are relatively new business, in the near term we have been focussed on generating orders and building backlog, revenues are sure to follow.

In the first quarter we had promised some success, bookings were over $9 million in new flat panel orders in the period. Total books in the quarter were about 10.6 million. In contrast the first quarter last year we had booked only $600,000 of flat panel business. In the September quarter, to put things in a little perspective, flat panel orders were $6 million. So, sequentially September quarter versus December quarter flat panel orders were up in the orderhood of 50 %. So we are seeing strong growth from year to year and a very favorable sequential trend, as well.

Based on these strong sales, our flat panel backlog at December 31st, 2005 was an all time high of about $12.1 million, an increase of over $6 million from the back log just three months ago. Total backlog at the end of December was $18.2 million. Revenues were $5.4 million in the first quarter, that's down from 19 million a year ago, but as you all know the 19 million a year ago was driving a heavy demand in RVSM mandates. Despite the decrease, we managed the business to a modest profit this quarter, which has been the hallmark of IS&S through out its history. Even at these reduced volumes we still were able to achieve a 50% gross margin reflecting the high productive manufacturing process and discipline that's inbred in the Company.

We achieved these results also despite spending R&D at record levels. We spent about $1.5 million in the first quarter, or 28 % of revenue. This was up about 25 % from a year ago. This spending reflects our enthusiasm for what lies ahead.

Bottom line income, net income and earnings per share were essentially break even this quarter, as expected and as we discussed back in our fourth quarter conference call. This compared to the $6.2 million or $0.34 per fully diluted share a year ago. The Company continues to have a very solid balance sheet. Cash remains above $82 million at about $4.52 a share. Assets over 106 million. Shareholders' equity in excess of $98 million.

At this point, I would like to turn the call over to Roman Ptakowski, our President, to talk a little more detail about our business. Roman?

Thank you, Jim. There is growing interest throughout the aviation market in our flat panel products. The total market opportunity over time is estimated to exceed $5 billion. While it will take some time for this market to evolve and mature there is still a considerable near term opportunity. Therefore our marketing strategy is relatively straightforward. Our goal is to expand the market by getting our product certified for an increasing variety of aircraft. By continuing to drive down price and putting our cockpit information portable technology within the reach of more operators, and by developing partnerships and other alliances that provide access to more market segments.

As you know from our our previous announcements, our flat panel technology has already been certified on the Boeing 767 aircraft. In the military segment we have announced implementations on the [KC10] and the C 130. Our new certification efforts are focussed on aircraft types where there are other large fleets. For instance, we are working on the 737 and 747 where this is a potential market estimated at more than 3800 aircrafts worldwide. We are already under contract with Colida Air to deploy flat panel to technology on their 747 aircraft. We are also working on genera aviation business jet platforms, again a market segment with many aircraft.

We are employing new strategies to meet the needs of the various market segments. For instance, we have recently started to offer a combined RVSM flat panel upgrade for general aviation. This allow it is operator to generate a much better return on his investment by enjoying an upgrade with immediate tangible benefits, RVSM, at a cost that is not much more than a basic flat panel display installation. Our contract with the Marshall Aerospace of the United Kingdom is an example of our strategy to open new markets through alliances, joint ventures, and other partnerships. By working with this one integrator, we gain access to a large number of European military fleets.

Another strategy is teaming with installers to develop an offering that minimizes down time. Operators only want to take their aircraft out of service when it is absolutely necessary. If operators believe they are looking at significant down time to take a plane out of service, for an upgrade, this has an effect of their willingness to undertake that upgrade. We believe the market for flat panel upgrade increases as we decrease the time --- the length of time a plane is out of service. Ultimately, if we can get this down to a weekend, such as in a fly-in-fly-out strategy, the business case justification improves, because there is not a loss of revenue associated with a grounded aircraft.

The versatility and programability of the IS&S cockpit information portal has even been featured on the Today Show. In a December segment we were able to demonstrate the advantages of flat panel technology in accommodating new FAA regulations. That piece described the potential new regulations requiring video surveillance of aircraft cabin. If an operator already has an IS&S flat panel display in their cockpit, we can easily and inexpensively integrate cabin video surveillance.

Another big driver that we believe will help stimulate demand for flat panels are future new regulations requiring even more cockpit data for the pilot. Already airports with overcrowded airspace, such as Amsterdam and the Netherlands, are requiring aircraft to be equipped with the latest instrumentation that allows them to safely reduce the spacing between aircraft so that the airport can accommodate the growing traffic volume. Aircraft are going to need to be retrofitted with new instrumentation to meet these requirement. Requirements, incidentally that we believe will be fazed in for all airports some time later this decade. We can quickly integrate any new instruments needed to meet these new higher standards using our flat panel technology. As you can see there are a number of forces at work that are driving the need for more flat panel technology in the cockpit. We believe we are in a tremendous position to address those growing needs.

Operator, at this time we would like to open the call for questions. Thank you.

[OPERATOR INSTRUCTIONS] Our first question is coming from Steve Rico from Landmark Capital.

Hi, guys. I'm new to your story. Could you tell help me understand a little about your backlog? I'm trying to figure out how much time it actually takes, on average, to divert backlog into actual sales for both flat panel and for your air data business?

Yes. Good morning. This is Jim Reilly. Usually the backlog for the air data equipment delivers much quicker for a couple reasons. Number one, the air data equipment is pretty such standardized here for us an our own standard product and we can deliver it quicker than we can for something that is more custom made. For example a flat panel system for a particular airplane that requires a certain amount of engineering up front. So on average, I would say that the flat panel is probably -- go out -- no, maybe 3 to 12 months in terms of the order date. Roman? Comment on that?

Steve, let me comment a little more on that. If you look at basic materials that are used in the two different market segments, air data versus flat panel. Actually, air data equipment has longer lease times. But with our approach to the marketplace, we factor that in with our supply chain and so on. In flat panel technology, once an aircraft type is certified, something is quick for us to turn, because we use a very common approach with our cockpit information portal for the different aircraft types. Again, with with our design approaches and so on, we are set up to turn any kind of sales opportunities as quickly as possible.

Okay, so let me just make sure I understand. So for flat panels, from the time you actually book an order to backlog to the time you actually realize a sale, it could be be anywhere from 3 to 12 months, is that right?

For deliveries, once aircraft are certified it could be four to eight -- the process is getting those first aircraft certified. The FAA has to -- the civil world has to certify that. In the military segment we run through environmental qualifications. Once all that is behind hind us, and it's very -- in a four to eight week period, basically we can accommodate all orders.

Four to eight weeks, beautiful. One other question: you recently announced $7.4 million DOD order, I guess, for air data equipment, that I would assume is going to be--or is not in our year-end backlog?

That's correct. That was not included in the December quarter end backlog.

Okay. One of other question regarding your non-flat panel business. You made a statement in the press release saying you are basically confident the demand is going to start to rebound somewhat from the last couple quarters. Could you kind of give me an idea as to why you expect that to happen?

Well, just to give you an example, the backlog is growing [inaudible] compliance take for RVSM. So there was a huge backlog; [order] book to cover that--what was anticipated and realize it is a large demand. What we are seeing now is a real growth in our backlog of our new business. Just to give you some update, in addition to the 7 and a half--7.4 million and 18 million backlog that will we talked about earlier, the backlog, as of today, which includes an additional three weeks is over 27 million.

Just to give you some update, in addition to the 7.5 --- 7.4 million and $18 million backlog that we talked about earlier, the backlog, as of today, which includes an additional three weeks is over $27 million. We booked in, even in the first month something close to $10 million. We're seeing a very large growth in--a very high demand in our product. Again, we only have a single certification. Well, two, but a single certification. We are seeing demands in commercial, military and general aviation for the flat panel system. We have just tapped the surface at this point.

So, the increase in demand and the booking rates are probably faster than anything in our history, with the exception of the orders just prior to the RVSM demand. At the rate, actually, I'm not even sure that the rate was that fast. Because that very large backlog---and we are getting close to our peak backlog, in history, by the way. That was built up over a one year period. We're seeing an exceptional accelerated rate now. And, in part, it is because it is a new product.

What was our backlog before? $8 million?

[overlapping speakers] $12 million at the fiscal year-end September, so it's gone from 12 to 18, and we anticipate it's going to go up in the March quarter.

Again, as I said, close to $27 million now. [overlapping speakers] It is real. It isn't--- and those orders in some cases--that $7.4 million order goes over two years. That is the good news, too. The last thing you want are a massive, short term bunch of orders that you have to accommodate with very little visibility out in the future. We'd like to have a broader backlog. The backlog for RVSM was very large but it was all centered around the few quarters--

--a very compressed time period.

Exactly. And we're not satisfied--[overlapping speakers] If you look at the comparisons in backlog, it is another thing that is notable. If you take a look--historically we--the years have started out to be small backlogs, low shipments in the beginning and building up toward the end. Last fiscal year was an exemption; we all understood it, because there was a mandate--mandatory demand for product in January. So there was a huge backlog all for delivery out or before that mandated period. Then it fell off quickly. There was a lot of inventory.

What we are seeing now is a more traditional approach of growing backlog, at probably an unprecedented rate. And a totally new product, which is remarkable in itself. So, people say, well how come management is so optimistic? Well management tends to be optimistic because they see an accelerating rate of orders coming in. The backlog building to near record levels. And, IN a profile which is more traditional to our business.

That's all very positive stuff. And, I mean it looks like you guys have a pretty bright future here. Does that also mean that as your volume increases, your sales line increases throughout the year, as it sounds like it will, that your gross margins will rebound to that high 60% range?

We continue to talk to the gross margin issue. Yes, I'm sure they will go up again, as well. The gross margin on all the product we are selling today are absolutely consistent with the products that we have sold historically. There is no change in gross margins. I continue to address the fact that our desire is to look, again, for the maximum earning per share. The maximum earning per share may may that the gross margins are reduced, because we expand the market by providing more competitive pricing.

So, again, our exceptional gross margins are not something that we look to focus, it is earning per share and total growth of the business. But, you are correct in saying that the gross margins will probably expand from where they are today. I believe that we should, and this is again, what I have said before, rule of thumb, is that the gross margins in the 50 odd percent range, which are by the way double what the industry standard is. Double. [That they will--that will be a nearly optimum position] where we maximize our competitive posture and our end item product price. And maximize flow of profit to the bottom line.

Great. One last question then I will let someone else [ask a question here. Obviously it seems like, at least to me, that the question of flat panel adoption is not an if but when type scenario.] And, it seems like that is starting to ramp as we speak. What could possibly derail that ramp or slow it down?

I mean I--there is obviously earthquakes and things like that. But, I can't imagine--let me tell you what our strategy is and why it's quite different. First of all we picked a price point when we entered the market which is profoundly lower than anybody else in the marketplace. Because, we find that we can produce competitively at a reasonable price point. That price point in turn, actually created a market which was not there. People had been out there with flat panels and flat panel retrofit, but, guess what? For $1 million nobody in [a kingair] with $1.5 million [kingair] wants to put $1 million flat panel upgrade in. But, if you can do that upgrade for less than 200,000, all of the sudden there is a tremendous interest in the product.

Our approach was revolutionary in that we --- we recognized and had some major breakthroughs in technology, all of which we patented, which allow us to produce the product at a much lower cost. And we sell it, therefore for a much lower price, and it makes available that product to everybody and expands the market. Not unlike the idea of Ford producing a low cost automobile that addressed a hu -- that created a huge demand for automobiles in the United States. Same concept. When you can come up with a low cost product, like a person computer at a modest price, you create a market that really did not exist previously. We don't see anything that will derail it. I'm certainly betting on the [comp].

Thank you very much. Good job guys. Thank you.

You're welcome.

Thank you. Our next question is coming from David Campbell from Thompson Davis & Company.

Hey, Geoff, Roman and Jim. I just wanted to ask you--good morning, how are you?

Who is this again? What's your name? [Laughter]

I don't know if I want to be known, but anyway this is David Campbell. I just wanted to tell you that your backlog is great, but what we need is some revenues. What do we look like for revenues in the first calendar quarter of this year? Any thoughts on that? Usually you have some visibility for two or three months out.

We're still--we're still generating business. I don't expect---to see a significant upturn until the second half. And we're going to see it take off in the second half. I remind you, when we had huge revenues, incredible profits of 68% gross margins, everybody said, well that's great but what about your backlog? [Laughter]

Now we need both.

I would only tell you, David, that--that we made a fundamental business decision several years ago to pursue a marketplace and set up some ideas that said if we pursue a market with a very competitive price it will grow and expand, and we'll see this as a very significant long term future for the business. We are actually seeing all of that happen. And, we're not losing money; we're not--burning any real significant cash, and we are putting business on for the future. For me, that's a very positive statement. I'd love to tell you that I have shipments immediately, but we're growing into a growth in revenues. And that's principally all in new product; completely and substantially in new product, and that's the significance that we're seeing--and all the promises that we've made over the past couple of years are all coming true.

In terms of the RVSM product, do you have any guesses to what kind of revenues you'll get from that in fiscal '06?

Let me tell you again, there's still several thousand aircraft and--that have not equipped, and we're even seeing--some time ago I mentioned that the demand will occur not just from people that want to get back up into the--that want to get into this--the higher altitude airspace, but the demand is now coming from even people like--who own [PC12s] like we do are only capable of operating in the lowest end of that upper---that RVSM airspace.

And the reason there's desire for it is that, as expected, the RVSM and have moved down from 35,000 feet down to 25,000 feet. They're burning enormously more fuel. The price of fuel, if you listen to [Dibou Pickens] he would tell you the price of fuel ain't going down at all and will probably will go up. So, we believe the demand will reoccur there, but we've done is now we're offering and RVSM upgrade and a flat panel upgrade simultaneously, where you have both, as Roman addressed a faster and much better, tangible immediate return on your investment.

So, and we're seeing some real interest in that. In fact, we won--we expect to certify a combination RVSM/flat panel solution, get an STC next month. So, that'll be first of, we believe many. So, we'll see the RVSM again to be incorporated in our flat panel. And remember we call the flat panel and informational portal. An informational portal meaning that it interfaces with a variety of systems onboard the aircraft and is a facilitator, actually, to--for implementation of various demands; things like RVSM and, by the way, cockpits or cabin surveillance and security.

Of the $6 million of backlog that wasn't flat/down at the end of December, was any of that RVSM?

Yes. [Overlapping speakers] was RVSM.

The $6 million was essentially RVSM?

[Overlapping speakers] or airdata related.

And, Jim, it looked like there was some use of cash in the December quarter, or was there an extra--extraordinary amounts of CapEx or what happened? Because your cash balance went down slightly from--

Yes. It went down slightly, David. Couple of reasons. Number one, we had some accrued expenses at the end of the year that we paid down--auto expenses, state income taxes, things like that.

There were accrued expenses that were paid out at the end of the year.

So, it was a dec---

And, we also paid some money for the STC efforts that we completed as well. So, there were two costs.

Some of it would be in CapEx, will be reported as a CapEx?

That's correct, David.

Okay, thanks. I'll let someone else have it.

Not a significant increase in CapEx though, by the way.

Thank you. Our next question is coming from Bill Sutherland from Boenning & Scattergood.

Good morning, and thanks for taking the call. I'm also new to the story and I just want to get clarification here; on the flat panel backlog you have to date, it is driven solely by the 767 and private aircraft market?

No, it's driven by three markets, all three. Military, commercial air transport, like airlines, cargo aircraft, and business and general aviation. All market segments.

And, it's almost uniform [overlapping speakers] spread equally among three cycles [overlapping speakers]--

---what you'd like, so it's all over all three segments and we're very excited about that.

Okay, I guess the thing I didn't understand was I didn't think you were certified on that many types of aircraft within the segments.

Well, we are---

---we're getting the backlog and now the certification efforts to support it, and then the deliveries start.

We have the military which is C130, KC10 and a variety of aircraft. We have the business and general aviation area where we booked in a couple of orders for [bizjet] kind of aircraft, and we have commercial air transport and cargo, like [Coleda] and [ABX] and that kind of thing.

Then, the backlog---I would think you cannot sell it until you're certified on an aircraft, or is that not true. [Overlapping speakers.]

We're certified on 767 and there's 900 of those aircraft. Okay? So, that would suggest we have a good market there. And the C130s, there's 1700 of those out, and so, that doesn't require much of a certification although we do have a certification [overlapping speakers]

---and we are qualified for that. We've passed all tests and we have equipment that's flying.

Okay, but I guess I'm getting at is you might go out and get an order for a 737 even though you're in the process of still getting certified. Is that true?

Oh, absolutely. And there is a significance--until recently, and we've talked about it on previous calls, we couldn't get orders because we didn't have the STC or the certification. But, what's happened now, since we've gotten the 767 STC, which was a really significant one, understand that's certification to the highest level of integrity and performance levels because it's airtransport, so-called part 25, that has given the entire program massive credibility. Until then, people were skeptical because they believed that our---they couldn't believe that our price was as low as it was and it could actually work. We actually had people saying, look to be blunt with you I couldn't believe that you'd ever be able to get that certified. Well, that's happened and what we're now seeing is that we're getting orders now for aircraft that we don't have STC's for with people who know now and are convinced that we will have and get an STC. And to be blunt with you once you've proved yourself with one significant STC like we have subsequent ones are much, much, much easier to do.

So you would think that, I don't know, within a year you'll have all the essential types of aircraft certified

No. No. I don't think so. I think, the reason is is not because we can't, but the load on the FAA huge. We were just going through the reviews. You know that the FAA actually was going to reduce personnel for certification. And they're doing a [expletive] of a job trying to accommodate certification, especially our local branch has done a herculean task---job of supporting us, but they have a limited number of people. They have the same number of people they've had for several years. And, they're all stretched pretty thin because there are a lot of people who are applying for supplemental type certificates on a variety of equipment, anything from cabin interiors to [taws] and all kinds of things.

So, we would be limited in the number of STC's we're going to do, so that's why we're watching carefully each one that we do to make sure that it can be done relatively in a straightforward low time and with very large markets. So, I mean. You don't need much of a market to make our business grow quickly.

I can see that One last question, and then I'll get off. Could you paint a little bit of the competitive profile--you said that your offering is significantly below what's out there. Just a little bit on what is out there for what aircraft. Thanks very much.

Yes, I'm not sure I want to address that. I think I would be--I would be preempting trying to tell you what our competitors are thinking and doing and that's really pretty hard to do. I can only tell you that our own assessment suggests that our price point is significantly, meaning 30 to 40% lower than any of our competitors. And, beyond that it would be unfair to conclude. The interest that we're seeing today is obviously because we have a remarkable performing product at a very competitive price. Next question?

Thank you. Our next question is coming from Keith Hearson from Ohio State Teacher.

Yes, could you provide an update on the share repurchase program?

Yes. We have been unable to buy shares because we've been in a blackout period since we announced that share repurchase. We have, as you know, a blackout period prior to the release of earnings and then after the release of earnings. In addition--so the update is we've done no repurchasing as of yet.

When does the window open?

A couple of days.

Okay. Great. Thank you, and good luck.

Thank you very much.

Thank you. Our next question is coming from Mike Benjanhall from Oppenheimer Capital.

Good morning, guys. It's Mark Degenhart. I wanted to---backlog at different intervals in the mix. At September I have it was 13.7 and do you recall the mix of RVSM versus flat panel then?

Yes, we can. [Overlapping speakers] 2005--

The September backlog was $12 million.

And how much flat panel?

6 million was flat panel.

Now, the end of the first quarter.

The first quarter were 18 million total and 12 million flat panel.

Okay. Does that answer your question?

Would you mind giving the mix as of January on the 27 million?

No we can't even do that. I can only tell you it is substantial increase in both, I guess--

that's an interim number--

and we don't distribute normally an interim number except that we were asked about the 7.4 million and I simply comment that the 7.4 million was combined with some--a flat panel order as well and that brought our backlog up to over 25.

Okay, and when I--my last question is when I saw you at the Needham conference I was asking about a timeline for additional certifications with the understanding that a certification is sort of the gating factor for gaining new business on the commercial side. So, when do you expect your next 102 certifications on commercial and for what platforms do you expect them? And how many planes would date evolve behind those?

I'd prefer not to describe in detail what platforms because I think that's very sensitive, competitive information. But, I can tell you in response to your question we expect the next STC next month. And the only limiting factor, just to give you some sense, is that STC--again the FAA is overloaded, and in most cases, not in our case, I'm happy to say. There is a 90 day rule. So they delay it for 90 days even before you are allowed to work on it. In our case, we got a go ahead in less than 60 days and we expect potential completion in 90. From that point on, we'd like to be able to do as close to one a month as possible. But that is going to be dependant, very heavily dependant on the FAA.

What we will do though, is we'll focus on markets that are very large. Again, 767 is a significant market. As we get major orders you'll see very large orders in that area. Same thing with [three seven] and some of the [bizjets]. Now we have recently gotten and order on a piece of equipment that we don't have an STC for for over $2 million, because there is now an understanding in the marketplace that we are fully capable and can readily get STC's on virtually any aircraft. Because we have proven ourself on the most difficult of STC's.

Again on the 27 million, how much of that is for business you are not currently certified on? You just referred to a 2 million that is not.

It is relatively small. A few million dollars.

Can I make the suggestion that you have different classes of backlog, maybe one set that you expect to do in the next quarter, one that is further than that and then one is that certified versus non-certified business?

We can't do that. If you go--if you ask Collins they will tell you nothing. They will tell you absolutely nothing about the backlog. What we've tried to do is we recognize that there is a very rapid build up to extent that we can project the next quarter and the years we will do that. For us to break down details on the backlog, puts us in a difficult competitive position. We you recognize the desire and why you'd want it but it is very difficult to do.

Okay. Alright. Thank you.

You're welcome.

Thank you. Our next question is coming from Tom Lenn from Wise Faucet Research.

Good morning gentlemen.

Good morning Tom, how are you?

Very good thank you. I have just a couple questions. You referred to 900, approximately 767's. I was wondering how you think about those 900, are they of a certain age or is that the global fleet? I think the global fleet is actually larger than that. Can you tell me how you came up with that number?

What it is is that--you are right global 767 fleet is larger, but the candidates are older aircraft. The 767, 200's and 300's. Short terms. Then longer term is that of the newer aircraft come up for refurbish. They become candidates. Right now we are looking at the more immediate candidates.

200's and 300's.

Then, same thing is a segregation like that in the 757's, and again we look at the more immediate term candidates or older aircraft. [Overlapping speakers] They didn't make the update.

-- Sorry I didn't catch that.

---there are fewer --later production unit that incorporate a new display play technology. That is a very small percentage of the fleet. We exclude ones that we believe are a more--

--out in the distant future.

Exactly.

Got you. My other question is regarding---is there an air bus opportunity in your future?

Yes. Yes. There is certainly an opportunity.

Is that certification process, is that an FAA certification process, or would you also have a European certification process?

They inevitably have both, but we have--- the FAA certification process, you do it correctly is automatically accepted through the JAA.

There are reciprocal agreements between the European authorities and the FAA.

Is the air bus opportunity a longer term opportunity for you?

It is a sensitive issue. I prefer not to comment.

Okay. Fair enough. Thank you very much.

Thank you.

Thank you. Our next question is coming from Mark Encohen from Baker Street Capital.

Hi. Can you clarify for me, I know you addressed this earlier, the amount of time that elapses between when you book something in the backlog and when you can recognize it as revenue, typically for air data and for flat panel.

It varies by customer. Depends what kind of release period. It is purchase order by purchase order.

We have some contracts that are a two year contract and sometimes we have situation that the same product, where we will deliver them in two or three months. If you are trying to figure out exactly what the distribution of that 27 million is, we can look into it. It would be distributed probably over the next, is that two years, about 99 %, over the next two years? [Overlapping speakers] We can get product in and we have gotten product in, including flat panel. Last year---at the end of last year we got purchase orders in for flat panel equipment in the month of September and shipped it in the month of September. And it was a brand new product.

Okay, and then secondly in your air data segment, at what point, I mean, where do you expect the revenue to base out at? I'm new to your company so I'm not really sure what is causing the slow down in that segment of the business and why you are expected to recover. But where should it base out at?

Again, I provide details past the point of competitive information we choose not to discuss. However, air data, there is a continuing market. All aircraft require air data equipment. It is a constant replenishment. There are upgrades that occur. There are wearouts and so on.

And we're going to see a lot of air data, coupled in with flat panels. So we get the best of both worlds.

And just to mention we are combining flat panels and RVSM as an example to satisfy two needs out there at the same time for approximately the cost of either one of those.

Okay. So as a result would gross margins be coming down for the bundled offering?

No.

Okay.

We consistently, over years in different kinds of products maintain gross margin since we have gone public of over 50 %. Isn't that true?

Right. We continue to design cost improvements into our products so we don't see--

---one more time, I want to try to emphasize the fact that we are trying to optimize earnings per share. We could push gross margins to 75 % if we wanted to but our revenues would probably drop to $1 million a year, so what we want to do is try to find a balance where we can get--maximize the earnings per share. We do that by---providing a competitive price.

I will reiterate that the products we built today and the orders that we have today are all consistent margins with business that we have historically produced. So we don't see any cause effect for reducing the gross margins. The gross margins are in there because of the technical approach and design of the product and its unique competitive position. That is how we price it. That is how we position ourselves in the marketplace.

Okay.

And--I know it is a good reasonable question, but historically if you look at it for the last five an a half years we have maintained above 50% gross margin and look at our direct competitors, they are all in the 30 % range. If we both had to reduce by a same percentage, they would go into a loss situation much faster than we would reduce our profits significantly.

Okay. Finally on a separate issue, the share buy back, do you plan on financing that through cash on the balance sheet or other means?

No, no, cash on the balance sheet.

Okay.

We have authorization that given prices etcetera and I'm looking at a the stock and--and, we have as I said, haven't purchased any, because we have been in a blackout period.

Very good. I appreciate it thank you.

Thank you.

Thank you. Our next question is coming from Kai Tao from [inaudible--background noise].

Hello. Okay.

Our next question is coming from Ashok Ahuja with ICOR.

Hi this is Ashok. My questions have been answered, Geoff, but it is nice to hear your voice come back, I was getting worried here.

I haven't died yet.

Thank you. All the best.

You are very kind.

Thank you. Our next question is coming from Kai Tao from [Advair Capital].

Hi, guys. Thanks for the update. I just had some quick questions. I was wondering can you talk about the price advantage between you guys and the competitors right now? The differential---were you talking about---were you saying it is a 20 % discount to what the competitors offer or a greater price offering?

Significantly better than that.

Significantly better. And, my other question is relatively to expectations, I guess in terms of what you came out with the result, I don't think anyone was surprised per se, but the one consensus estimate out there was way out of whack. Does this analyst follow our Company per se or do they talk to you? Do you have any active analyst that follow that have a good sense to understand what the dynamics are, because I guess business is lumpy depending on when contracts close and when you are able to fulfill your backlog.

That was a very old number from a firm that changed ownership. David Campbell & Thompson Davis follows us and has a good understanding of our business.

Got you. Great, well, thank you.

You're very welcome.

Thank you. Our next and final question is coming from Tamara Anokien from Greenwood Investments.

Hi. I'm also relatively new to this story; I just want to clarify if I got it right, is there a global opportunity for flat panels $5 billion right new?

We believe--the answer is, over the next seven years, reasonable future, there is a demand for $5 billion at our price levels. That's because we think the price levels have opened up a huge opportunity.

I think on the last call, you said that the opportunity was around $2 billion, so I was just wondering, how did you get to the $5 billion range?

Well we looked at the price of our equipment. We looked at the reasonable market of airplanes, and we determined on that. We use that as our estimate. It grew, bluntly our demand seems to be growing in all of the areas we had hoped for, but we were relatively conservative in previous phone calls.

We have learned more about the market, because we are seeing a response to our product and we see a broader response, not unexpected, but we are pleased to see it happen. We took a more conservative perspective the last time.

Another question, one last question. Can you give me some update on the strategic acquisition front? Are you still considering any acquisitions right now?

We continue to pursue that. We are talking to people and beyond that I have no comment.

Okay. Thank you very much.

You are very welcome.

Thank you. Our next question is a follow up question coming from David Campbell from Thompson Davis & Company.

Jim an Geoff, I just wanted to ask you---your SG&A was down since the September quarter. Nicely down. Do you think it will stay in that $2 million range for the remaining quarters?

It is going the stay relatively close to that, David, yes. We are about 11 % revenue last year and this year we are running, obviously much higher, at a slightly decrease in spending. But that is reflective, obviously of the commissions being down because sales have been down quite a bit. We have a commission the sales force out there. That is probably what drove it, David.

But David, our interest is, because we have a product that is clearly very attractive to the marketplace. We'll spend----anything in SG&A will all be in S, not in G&A and S is good.

Good. Thank you very much.

Thank you very much. Appreciate it. I guess that is the last question?

There are no further questions at this time, sir.

Okay. Thank you very much. Gentlemen, I appreciate your interest. You can always call Jim Reilly if you want some follow up. We are obviously pleased with the development and the strength of the demand and of our flat panel program. We are looking forward to a very good and strong future. Thank you again. Bye bye.

This concludes today's Innovative Solutions and Support conference call. You may disconnect your lines at this time and have a wonderful day.