Innovative Solutions and Support Inc (ISSC) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Natasha and I will be your conference facilitator today. At this time I would like to welcome everyone to the Innovative Solutions and Support Second Quarter and Year-to-Date Earnings Conference Call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Geoffrey Hedrick, Chairman and CEO. Sir, you may begin your conference.

Yes, good morning. This is Geoff Hedrick, Chairman and CEO of Innovative Solutions and Support, and welcome you to our conference call this morning. In just a few minutes will discuss the results of our second quarter, year-to-date periods ending March 31, 2006, current business activity and climate, and our business outlook, strategy and plans.

Joining me on the call from our corporate offices in Exton, Pennsylvania, are Roman Ptakowski, our President, and Jim Reilly, our CFO. Before I turn the call over to Jim Reilly, I'd like to say that the future looks stronger than any point in our past. The strategic plan we initiated almost five years ago is really paying off. In the June quarter of last year, we turned great sales and earnings results, but the community perceived weakness going forward and didn't reward our performance. Now, I am happy to say that our forward look looks terrific. We turned in less than mediocre results for the quarter, but with a strong focus and expenditure toward bookings and development of our forward-going business.

To date we have booked almost $15 million, 14.6 in the first half of flat panel business, and an additional $10 million in Air Data business for a total of 24.6 million to date. We expect to record additional new orders in Q3 in excess of 20 million, bringing the three quarter total to 44-plus million in new orders. In the past, the Company's one-year total was 57 million, and we expect to exceed that this year. I just would like to turn it over to Jim Reilly for you, and he will read the Safe Harbor, and then we'll have a Q&A session after Roman reviews the results for you. Thanks. Jim, go ahead.

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 10-K on file with the SEC.

To briefly get into the financials before we turn the meeting over to Roman, if you remember from the prior conference call in January, we indicated that the second quarter would be about the same as the first quarter. With one exception, the second quarter was pretty much consistent with our expectations. Not being able to achieve the revenue level and expected break-even position that we expected was singularly due to a delay in the certification process with the FAA. As a result, we were unable to ship firm orders that had we been able to would have given us the revenue we expected.

As you saw in our press release from last night, second quarter flat panel system sales were about $1 million, a threefold increase from the $300,000 in the prior year second quarter. In the first half, flat panel display systems were a record $4 million, and the head of the prior year first half sales of only about $600,000. This is an increase of over five times the revenue, and obviously we believe indicative of the traction and momentum that the panel is taking in the marketplace.

In the second quarter, new orders for flat panel display systems were $5.2 million, and that was up 46% from a year ago. Flat panel display system new orders in the first half totaled $14.6 million, and exceeded the prior year's first half by over $10 million, or about 250%. Flat panel systems backlog was a record $16.3 million at the end of the second quarter, and this represents the third consecutive record quarter for flat panel display systems backlog. The Company's total backlog at the end of the second quarter was over $28 million, up from $18 million just three months ago. Both flat panel display systems and Air Data product lines drove this increase.

Total second quarter and year-to-date sales were $3.7 and $9.2 million, respectively, and these compared to $19 million and $38 million, respectively, in the prior year. Keep in mind that last year's performance was fueled by peak demand for the RVSM compliant date for the Air Data equipment.

Gross margins in the quarter were 41% versus 70% a year ago, and 46% in the first half versus 69% a year ago. The lower margin percentages relate mostly to lower volume as fixed operating costs are being absorbed with this lower volume. The variable portion of our cost of goods sold, material and labor, are consistent across all product offerings, and as revenue increases, so will the margins.

Engineering, research and development spending continued at a strong rate despite temporary shortfall in sales. Spending in the first six months of the year was up 22% from last year, and in the second quarter, the R&D spending totaled almost $2 million, or 51% of revenue, a strong commitment by management in the Company and the future of the business. In the first half, it amounted to $3.5 million, or 38% of revenue.

SG&A spending is down about 5% year-over-year, and that's after absorbing the stock option expensing associated with the 123R requirement, and that aggregated about $235,000. Net interest income was about $750,000 in the quarter, and $1.5 million for the six-month period. This is more than double what it was last year essentially because of rising interest rates. About two-thirds of the net loss in the quarter was protected with income tax benefits resulting from the loss itself, and other one-time tax adjustments, mostly research and development credits, yielding a net loss of about $778,000.

Before we address the balance sheet, I want to comment quickly on the new business received with flat panels. The $14.5 million was essentially made up of almost $10 million in general aviation business, the Lear Jet, Citation Jets, and Pilatus airplanes, along with some Boeing 747, C-130 and KDC-10s, showing a wide array of platforms that are now using our equipment.

The Company continues to have an extremely solid balance sheet. Cash was a little over $72 million at March 31, or about $4 a share. It's important to note that the Company purchased 961,610 shares of its common stock during the quarter at an average price of $14.29, the total cost of 13.7 million.

Assets on the balance sheet just over 92 million, and cash represents 78% of this. Shareholder equity, 84 million, and includes a negative of almost 14 million for treasury stock.

At this point, I'd like to turn the meeting over to Roman, to continue the call.

Thank you, Jim. The flat panel display system market demand for upgrades is relatively new. We are creating the demand with FAA-certified products that come to market at a price point substantially less than our competition. In the near term, we have focused on generating orders and building backlog, revenues follow. We believe we are achieving positive results. New flat panel display system orders that we received in the first half of the year, as mentioned before, total $14.6 million. That is about 2.5 times last year's first half. The market potential for flat panel display system upgrades approximates 31,000 aircraft. Using our price point, and please note, they are one-third to one-half that of our competitors, there is in excess of a $7 billion market available over the next 10 years.

The trademark IS&S Cockpit IP, or Cockpit Information Portal, offers compelling economics and features. The Cockpit IP is uniquely suited for upgrading the cockpits on existing aircraft. It lowers the cost of operation, offers logistic savings, and provides the platform for growth and adaptability to emerging needs. At the same time, it is very competitively priced. Our competitors install cost is typically in excess of $1 million plus the expense of two to three weeks' downtime for the airplane. In contrast, our [term E] cost is less than $250,000 for commercial aircraft, and less than $150,000 for typical general aviation packages. At $1 million or $1.5 million, operators cannot justify the expenditure. At $250,000 or less, and only a few days out of service, we see the market development.

Our flat panel display systems incorporate all of the primary flight and navigation information needed to safely operate an aircraft. In addition to the basic flat panel function functionality that supplies flight deck operation, the Cockpit IP makes it cost-effective to add new applications such as electronic flight bag, synthetic vision, and satellite weather radar features. While it will take time for this market to evolve and mature, there is still considerable near-term opportunity. Therefore, our marketing strategy is relatively straight-forward.

Our goal is to drive demand for flat panel retrofits by increasing the size of the market. We will expand the market by getting our product certified for an increasing variety of aircraft. We will continue to drive down price and put our Cockpit Information Portal technology within the reach of more operators, and will develop partnerships and other alliances that provide access to still more market segments.

As you know from 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 KC-10, the C-130, and the KC-767. Our latest certification efforts are being focused on aircraft types where there are other large fleets. For instance, we are working on the Boeing 737 and 747, where there is a potential market estimated at more than 3600 aircraft worldwide. We are already under contract with Kalitta Air to deploy flat panel technology on their 747 aircraft.

We are also working on the general aviation jet platforms, a market with over 12,000 aircraft. Last night we announced that we received TSO certification for the Cockpit Information Portal application on the Pilatus PC-12. This not only allows us to commence production shipments for the PC-12, but also represents another stepping stone for us to obtain certification for other general aviation business jet platforms.

We are employing differing market approaches to meet the needs of the various market segments. For instance, we have recently started offering a combined RVSM flat panel upgrade for general aviation. This allows the operator to generate a much better return on their investment by enjoying an upgrade with immediate tangible benefits, RVSM at a cost that is not much more than basic flat panel display installation. Our contract with 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 approach [inaudible] with authorized distributors and installers to develop an offering that minimizes downtime. Operators only want to take their aircraft out of service when it is absolutely necessary. If operators believe they are looking at significant aircraft downtime, this has a dampening effect on their willingness to undertake any upgrades, including the flat panel. We believe the market for flat panel upgrades increases as the length of time a plane is out of service decreases.

The IS&S Cockpit Information Portal is designed to be a gateway for additional application. It's versatility and programmability has even been featured on the Today Show. In the December segment, we were able to demonstrate the advantages of flat panel technology in accommodating proposed new FAA regulations requiring video surveillance of aircraft cabins. If an operator already has the IS&S flat panel display in their cockpit, we could easily and inexpensively integrate video cabin 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. As an illustration, airports with crowded airspace, such as Amsterdam's Schiphol Airport, are requiring aircraft to be equipped with new instrumentation that allows them to safely reduce the spacing between aircraft so they can accommodate the growing traffic volume and do it safely. Aircraft are going to need to be retrofitted with new instrumentation to meet these requirements, requirements, incidentally, that we believe will start being phased in for all airports later this decade. We can quickly integrate the 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 panels in the cockpit. We believe your Company is well positioned to create and satisfy a growing demand for flat panel display systems.

Operator, at this time we'd now like to open the call for questions. Thank you. Sorry, operator. Please hold for a second.

This is Geoff Hedrick again, and I'd like to add a few comments. We've talked about price point and the importance of the price point. The price point itself isn't a question of a competition for the lowest price, but in fact it opens up a massively new market by establishing a different price point. As a reasonable analogy, the mainframe computer of many years ago was replaced -- more than simply replaced by the mini, the mini computer opened up a demand for a small and medium-sized computer that was in order of magnitude larger than the mainframe. In turn, the PC, that is, the personal computer, has opened up the demand for that kind of household computer capability, which is at least two orders of magnitude larger than the mainframe of the mini computer market prior to that. It is the establishment -- by establishing a lower price point, it has massively opened up the available market and the interested market for our flat panels. We're seeing that almost on a daily basis, where inquiries are coming in from a broad range of operators and manufacturers, and that's why our optimism is as high as it is.

Just two or three other comments. Just to let you know, our repurchase program, we purchased the maximum number of shares until our blackout period caused us to stop on 17th of March, last March, but each -- we were limited, as most of you know, in the amount we could buy in any given period, and we have not bought any stock by our blackout period until, I guess, two days from today. We are enthusiastic, as we were able to repurchase almost a million shares. That enhances the stockholders' value and, most importantly, our rapidly increasingly demand for the product is doing that as well.

One final note. The receipt of the TSO for the latest two-panel configuration of hardware for the PC-12 has enabled us to start our shipments to our authorized distributor, dealers and installers. We have 50 firm orders in place, and we are shipping into those orders, and they receive airplanes from their customers. So that's all started, it's very positive. We look forward to a couple of very important announcements and negotiations with different aircraft fleets.

Finally, the breadth of our products are Lear jets, PC-12, and now we're looking at 747s, and 767s, and a broad range of small bizjets that we can apply the PC-12 technology into directly. Now, I'd like to turn it over to questions.

(OPERATOR INSTRUCTIONS) Your first question is coming from David Campbell of Thompson Davis & Co.

Hey, Geoff and Jim, the visibility for the second quarter seems to have increased since you got the Pilatus deliveries starting underway. That should give you some visibility on revenues, but I haven't heard any revenue forecast for the second quarter. Can you give us some help on what you expect in the second quarter?

It's the third quarter, as you probably remember --

Third, third fiscal quarter, yeah.

Third fiscal quarter. And, yes, it does give us some visibility, but, I mean, we're literally into one day into the start of production shipments. We shipped last night and we're starting to ship tomorrow and the day after, but we're now looking at approximately $10 million for the third quarter with a reasonable profit on that $10 million, and we're hoping and expecting a fourth quarter of almost double that. We see the demand and our certifications, but what hurt us this past quarter was getting time for flight test by the FAA. The FAA is overloaded. They've been reasonably accommodating, but we were over a month delay in actually getting our TSO and final flight test with the FCC. So, we now have a large base for the PC-12. It's about 400 aircraft out there in the United States that are available for install, so we see a strong area there. We also see a strengthening in our Air Data market as well. As we've talked in the past, the over-purchase in response to the RVSM left us with a big lag for about two quarters. That has now seemed to be recovering quickly and we're seeing that the Air Data equipment is starting to grow as well. So, we expect by the end of the year some real stability and far better prediction on the forward going long term of the Company.

Geoff, 50 Pilatus aircraft backlog, that's the same as it was in January or February, isn't that when you announced the orders?

No. I think we announced them last quarter, and it was about two months ago, and yes, it's the same as that and we've been unable to ship anything until last night.

I understand that, but you seem confident of getting more than just the 50 orders.

Obviously. But you've got to remember that's 50 aircraft orders on equipment that wasn't yet certified to put in the airplane. Now as we start delivering them, they're going to start installing them in the aircraft, and we expect to continue to get ongoing orders and support of that. But I'm very comfortable with the 50 backlog on a new product. That's quite remarkable, actually, to open up initial deliveries -- open up initial deliveries the day the certification came through. And actually there's an airplane sitting at the installer disassembled, ready for the parts to be put in and fly away in about two weeks. So, we're very pleased with that performance and, most importantly, we see the same system now applicable to a broad range of other aircraft we hope to announce in the very near future.

They are business aircraft.

Yes.

And the backlog is roughly the same as it was in the middle of January, the end of March? In January you said it was around 27 million, and it was 28 the end of March. I understand your optimism about the PC-12, and so what about other aircraft? Has the failure of the FAA to give you certification held up the announcement of more orders?

It impacts everything, and I hate to use the word failure of the FAA. I mean, FAA is trying to accommodate a fairly heavy load. They've done a damn good job. But there is a significant delay. Surely each one has impacted the other. We have to get through this first STC -- or the most recent STC before we can go onto the next one. But each one gets faster, easier and smoother. So, we're optimistic in the forward. But in the meantime, we've opened up, we drew a couple of very significant markets which have the potential of generating $50 to $100 million of business. So, we for the first time have really some decent footing and traction in the marketplace. So, we're really pretty optimistic -- in fact, very optimistic.

Okay, thanks. I'll let someone else ask questions.

Your next question is coming from Steve [Rizzio] of Landmark Capital.

Hey, guys. Great info on the flat panel system. Question for you regarding price points. Obviously, that's a key advantage for your product going forward. Have you seen any sort of competitive response or maybe some buzz from some of your competitors, potential competitors regarding the price point and what perhaps their reaction will be?

The only comment I can make is that one of our competitors, a very good one, that has traditionally been half to two-thirds the price of the big two, or big three, that being Tallis, Honeywell and Collins, they are two-thirds -- half or two-thirds of their price -- they announced the product to become available in the near future for the PC-12, and their price point, equivalent price point is more than double ours.

Wow.

But the importance of the price point is not -- look, our performance is really remarkable, and this product will sell just on a performance comparison. Remember, we are now installing a package deal of RVSM, which is traditionally, as an example, the PC-12, close to $60,000 on its own. That's included in a system of a total new flight deck installed and delivered for 150 in the same time. So, it's an incredible paradigm shift in the whole market. What we're seeing is people saying that there is truly now an opportunity broadly to install flat panel displays in virtually any aircraft. So, the price point is important. The only response we've seen is inquiries from some of our competitors to find out of we'd be interested in teaming, but other than that, not a lot. That's not uncommon. We've been very successful with teaming with other major manufacturers, and we look forward to that kind of relationship to expand our distribution system.

That's great news. One other thing, I guess on the last call you guys -- and I guess maybe this ties into some of your comments and some of the verbiage in the press release regarding FAA certification for perhaps an Airbus or Airbus products. Is that one of the sort of -- are they somewhat low-hanging fruit, potentially, that we could see approvals on in the next couple of quarters?

Maybe, and that isn't to say that we're not very interested in the Airbus product. We have some very significant efforts in that area which I really would prefer not to discuss. But the importance is that if you think about Boeing products alone, if you look at three 767s, seven 747s, we're talking about 7,000 aircraft. Trust me, if we got 10% of that, you guys would be extremely happy because we would have over 100 million in revenue and probably 30 million in profit. So, the market in just that small fleet number is huge. We try to focus -- now we're focusing on what the next natural step would be to go into. We're actually getting more interest and more demand for our product than we're prepared to support with modifications to our basic system. We're learning to accommodate that quickly because we don't want to lose market share, and this, we think, is really a new market. This new price point has created truly a new market.

I know one of your expertises is in the area of manufacturing. As you ramp flat panels, do you foresee any problems with sort of meeting demand?

The simple answer is yes, and we're going to keep it minimal. We don't see -- we don't anticipate anything terrible, but to not anticipate some hiccups in a very rapid ramp-up would be, I think, a little naïve. So, yes, we do, it's a reasonable question, and yes, we do some, and we are doing everything we can. I've got to tell you, we've got a great team of people who have planned this growth for a while. So, we're pleased. This is really a product of a five-year development, or at least conceptual development with this product, and we're delighted with the recent results we've had and the broad acceptance we're getting in the industry.

One last question regarding that ramp. So, in the fourth quarter, obviously you said -- and, of course, I'm not going to hold you to this -- but you expect significant ramp of revenues from flat panels. At what point do you expect or should we expect to see somewhat of a normalized margin in those products? Of course, as you said, there is going to be a ramping process, probably margins are going to be somewhat below what you would expect next quarter, but should we expect to see sort of sustainable margins, and good margins in the fourth quarter?

Oh, yeah. Understand our model, the business model of IS&S is unique. It's unique in that it's designed specifically to respond to abrupt and very rapid changes. I mean, that is the business model. And how do you do that? You minimize some of your variables, like direct labor, not because direct labor somehow is a high expense, because it really isn't, but direct labor is limited by training. So, if you wanted to double, you have to double the number -- a large number of people and train them, and that's a nearly impossible task. So, by design we minimized the direct labor component. We don't simply outsource it to some other company which will, by the way, have exactly the same problems as we would ramping up, we actually design out the touch labor in the manufacturing of our product. That allows us to make massive increases in production volumes without having to go out and train and recruit hundreds of people to support. That's the secret. So, I would expect to realize the good margins quickly. Now, are they going to be perfect and peak that you would see as mature margins after a year? No. But they will be very close, and we expect that, and it was planned. The business model supports that. In the past, as I've mentioned before, we've done quarter-over-quarter, it's virtually doubled. We've done month-over-month -- where we've doubled volume month-over-month with no or little impact to the margin.

Great. Really great job, guys. Jim, I'll follow-up with you in the next day or so.

Sounds good, Steve.

Your next question coming from [Ed Keller] of [Kestro].

Good morning, this is Lee Kaplan. I have two classes of questions. The first one is about accounting. Tell me about, I guess the tax benefit that you received and where it is on the balance sheet.

Lee, obviously, the big part of the tax benefit was the fact that we had the loss in there by itself. The other piece of it was pretty much the R&D tax credit, and the R&D tax credit is obviously stuck in the balance sheet -- what section is it in? Probably in the prepaid expense side, about a $1.3 million worth of taxes in there. Part of this was caused by the fact that last year, Lee, we had a rapid drop-off in profitability in the fourth quarter. The Company had not anticipated that rapid drop-off in the RVSM business and had planned for greater profits, and in fact had paid more profits out -- paid more taxes out to the government than we had to. Since then we have gotten back a refund from the Federal side. We're also going to get back a piece from the State side.

Gotcha. Next class of questions is, okay, Boeing has a certain number of planes that come off their assembly line. How many of those planes have flat panel screens like right off the assembly line?

All of them.

All of them. And whose screen is it?

It depends. Some Honeywell, some Collins.

Why wouldn't they choose your screen?

Because they made those decisions 10 years ago and they got systems and certifications that cost tens of millions of dollars to maintain.

There is no way you can get into that new plane market?

Well, we could do that. Let's assume that we got in the new airplane market and got 100% of every Boeing airplane and every Airbus airplane. We'd have a total available market at extremely beat-up margins, that's standard with OEM, of 900 aircraft. The alternative is by focusing on retrospect, as an example, there are 3500, 737s that are available today. We don't need massive control and recertification. It would cost Boeing probably $5 to $10 million to convert over to us and, frankly, the customers probably wouldn't want it, because as good as our product would be, they operate a fleet of 5 to 700 aircraft with all the same part number and the logistic support out there. They would not -- in order to put a new product like ours on, it would at least -- it may not require, but it certainly would be desirable to have a common part number so it serviced among all the so-called MEL stations where broken equipment is replaced in the aircraft.

Let me repeat what I think you just said. Let's say you have Southwest Airlines and they fly 737s, and they've got somebody's flat panel screen in there, so you cannot get retrofitting for Southwest Airlines.

Oh, no, no, quite to the contrary. In their case it's not true. You can retrofit those -- in fact, you will retrofit those, but the question you asked me was, what about the OEM. The new aircraft, when they bring an airplane along, you may go back and retrofit the entire fleet, but what you probably would not do is probably inject a new product in two-thirds of the way, or three-quarters of the way into the lifecycle of a product, and that's what I guess I'm saying. Now, that's not unusual. I mean, I've been similar situations by supporting a Boeing production. But, again, our focus is to produce a product in a market -- we look at the largest available market, the one that's quite frankly most responsive, and we've been successful in starting to penetrate that.

I don't mean to be tedious, I'm just not sure I understand. I mean, every plane that Southwest flies is a 737.

Yeah, but they're two different kinds. There is new generation and old generation. The new generation aircraft, which are the 600, 700 and 800, have a totally different display system in the aircraft than their classic fleet, which is about 400 aircraft, and the 400 aircraft use electromechanical designs. They just recently put flight management systems in. We've worked with them closely for several years now. The issue is that they have a mixed fleet -- by the way, they actually operate their brand-new airplanes, not with the new symbology on the flat panel display, but a recreation of their existing steam gauges on their older fleets, and that's how they operate it and keep a common workforce base. So, is it an opportunity? Absolutely. It's a strong opportunity, and that's where we see in the classic fleet a possibility of retrofit. By the way, in the next three to four years, we see a large opportunity in the so-called new generation fleet, because that equipment that's in there in some cases has to be -- the entire display has to be replaced if there's any damage to the front glass. So, these are all huge opportunities and, yes, we see that we identify, as we noted, something over 3,000 of the 737s as immediate targets. But those are not the same kind of airplanes that come off the production line today. Those are totally different airplanes.

Thank you for taking my questions.

You're very welcome.

Your next question is coming from Ashok Ahuja of ICOR.

Hi. Two questions. The first, I guess, when do you think you might do the road show in New York as you had planned a little time back?

I would hope in the next four weeks.

Great.

I mean, we're just trying to get everything coordinated, but, yes. What we'd hope to do and within the next four to six weeks is have a luncheon with equipment up there and maybe for some people a better definition and understanding of how we identify the market and why we're going after what we're doing. It's difficult -- it's sometimes difficult to understand. I'm reminded that I spent five years thinking about it. It's a little hard for somebody to pick it up in a three-minute phone call. So, hopefully we'll do that in the next four to six weeks.

Second question. In the last two quarters the revenues have declined quite a bit. You tightened your belt a fair bit. Hopefully, that has very positive impacts for margins as we look to the next fiscal year and possibly have some impact, but hopefully not, negative impact in terms of being able to meet volume demand, etc. Could you address those two issues?

Let me address that. We could have made some significant cuts and probably even at the level we ship broken even. We believe that would seriously damage our future. So, in two areas we sustained -- in some cases increased investment, in engineering, product development, and in certification, which is an independent effort. Both of those efforts we've actually tried to expand because we're looking at a market that we see as $7 billion, and we clearly want to be girded to attack that market.

In the second area, in the production area, a manufacturing -- the cost in our manufacturing organization, cutting people in there is certainly, in my judgment, was an inappropriate short-term measure that would hurt us very much in our ability to recover.

So, in part, what we've seen is some of that loss is really an investment to make sure that we're prepared to accommodate the business volume that is now being put on the books. So, we feel positive about that. We have a good, strong and very capable manufacturing organization, and we haven't disseminated it to put to another penny on the report, and the same thing in engineering, which is even higher expenses by a significant margin. So, we have a good, solid team. We haven't beaten it up. You know, you can beat me up for the results, but I think the team itself is in shape, ready to go, and we will realize and take advantage of the bookings that are coming in. And that's why you're going to see quarter-over-quarter almost 2-to-1 increases for the next several quarters.

Well, final comment, nice to see the shortcutting disseminated today.

Well, we appreciate your support. Look, nobody's more unhappy about not making money or even losing money, but we have to run a business foremost. It has to be what we're doing, and we're trying to focus on that. I am delighted and pleased to see that the vision we set out five years ago is actually coming to fruition. Thanks for your support.

Yes. Nice to see our faith being well-placed.

Thank you very much.

(OPERATOR INSTRUCTIONS) Your next question is a follow-up from David Campbell of Thompson Davis & Company.

Hey, Geoff, the 50 Pilatus aircraft orders that you're starting delivery on, is that $7.5 million worth of revenues for you, or is that the total installation cost of the 50 Pilatus?

No, that's for us.

That's for you.

That's our revenue. That's all we talk about.

Okay. And you got the TSO -- I think you got the TSO on the 767, is that not correct, or do you have to get one every time a new cockpit order comes to you?

We got the Pilatus PC-12. Understand, we got two STCs. We first got an STC for the right-hand side only, which established the equipment to be qualified for installation in the most stringent environment, that being a 767, or so-called Part 25 aircraft. It was a Part 25 certification unlike all the equipment that's going in the light business jet, etc. That's Part 23 certification, which is a significantly lower standard of both integrity and typically performance and safety. In our case, we went for the most stringent requirement and succeeded with the certification.

The certification we just got is now for a dual installation, which actually will be expanded into different varieties of display sizes, but that will be fixed for any PC-12, for virtually every one flying in the United States. When we go to a new aircraft, each new aircraft -- and we're looking at one now -- that will use three-quarters, or 90% of the equipment that we use in the PC-12, and its certification will appropriately be a small fraction of the effort that the PC-12 was.

And that's called a TCO?

An STC. STC is a Supplemental Type Certificate, and it is essentially the certification that the equipment can fly in the airplane, and what we received for our equipment last night was a TSO, and we expect the FTC to issue within two days, but it's just a paperwork thing. But TSO is in fact the specification, performance specification, on the equipment we actually make, and we have certified that and gotten approval from the FAA as of last night.

Now, where do you stand on the 767 process? You got the FCC, right?

Yes, now we've got to get orders. We're working that.

And when you get the orders --

Nothing to do but ship.

But when you get the orders, you've got to get a TCO, then, on the 767 cockpit?

No, we've done that.

You've done that.

It's STC, and the STC is done and completed on the 767, and we can now -- anybody can take a 767, bring it in and install our equipment and fly it away. It's approved already.

And so I assume you have bids out, or offers out or --

Absolutely, yes. We have a lot of quotes out for that equipment.

You're not disappointed that you haven't gotten any actual orders for that equipment other than the AVX aircraft?

Not especially. I think that the ramp-up -- I don't need to accelerate the ramp-up any further than I have been.

Has anybody indicated any problems in not ordering the 767 -- not ordering the flat panel for the 767s?

David, it's hard for me to look at this and -- if we're not careful, we can get sort of a candy store mentality where we say how many vanilla egg crèmes did we sell today? Clearly, we would love to have had 100 ship sets of orders. To be blunt with you, we wouldn't know where to have them installed right now. So, we could only do about two a month, three a month, accommodating the new installation AVX Air, but the quotes that we have out are for hundreds of these aircraft, and so when the orders come in, they come in big. You get a $50 million order, or a $25 million order. That's the kind of thing we see more often in the 767 market. I think we did or about to book a couple of 767s, which are going to start getting the installation line running. But we're just starting it. I would say in the next six months, if we don't see a steady trickle of orders coming in, that's the time to be a little concerned. But to date, I've got to admit, with no certification for a number of aircraft, we've received over $10 million of orders, I think that's a hell of an endorsement, and that is a result of our incredibly successful 767 installation.

AVX Air is not the only one who can do installations.

That's correct, but they are the ones that we work with the closest. And anybody can do it, but right now we're bringing one installer up at a time, but anybody could do it.

Southwest doesn't need AVX Air, they do their own.

No, they don't always do their own, actually. They use other people including Goodrich up in Seattle. They use other people.

But are you in the process of 737 certification, or are you waiting for someone to want to use the equipment?

We are in the process of certifying the 737s. So, that opens up another market yet. But we are finding that we have very large demands to certify for a number of aircraft. We have probably 10 potential customers who would like us to supply equipment for different platforms, and we're trying to meter out a strategic plan that maximizes the utilization of previous efforts. So, that's where we are today. We're looking at a very strong recovery this coming quarter that we're in, and the quarter after that. So, every indication looks very strong.

And where are you in the process of certifying the 747s for flat panels?

The 747s, STCs probably four months out.

So you haven't delivered on that --

Let me give you an example. The typical timeline for a person to apply for an STC and get it is about a year. We've managed to do it in about five months.

So the Evergreen plane hasn't been delivered yet.

I honestly don't know.

You announced that order -- no, it wasn't Evergreen, it was somebody else. But, anyway, okay. Well, I'm really pleased that you're seeing the light at the end of the tunnel here in all these certifications and orders, so it sounds like you're on your way up. So thank you for doing such a good job.

I appreciate that. Look, David, as you can imagine, we're very focused on trying to get this done, and our focus now is to turn this into a revenue stream that's going to start generating some palpable profit align, and see this strategy that we talked about for several years actually mature into something that you can poke at and point to. So, I mean, that's our focus now is performance, and we've got to execute, as Frank [Landa] loved to say.

Okay. Okay, thanks.

Thank you. We've got time for one more.

Your final question comes from Jim Colgan of Frontier Capital.

Good morning. Just a clarification on something said earlier. Did you say that based on the existing orders you think you could possibly be exiting you fiscal Q4 at about a $20 million run rate, revenues?

No, we don't have the orders in place to do that, but they're starting to come in. And, yes, 20 million was our target.

Okay, great.

I mean, we don't have the backlog in place, but we're very [inaudible] by the response to date, and that's certainly our plan.

Okay. I understand that. One other question. Could you just give a little more detail on the size of the retrofit market for the planes that have been approved so far? And then also the size of the market on planes that you believe are likely to be approved sometime in the future?

I'll pick two that we actually have STCs on, etc. There are other ones in place with partial, but just as an example, on the two that are there -- I'll have to do some calculations in my head, but we have 150 million plus -- almost $250 million in the STC that we have. That's the available market to us right now.

Okay. And what about the market --

I mean, beyond that -- remember, that's only a total of 1,000, 1,500 airplanes out of what we believe is a 10-year market of over 30,000.

Oh, wow, okay.

What's happened is, by keeping the price point and the cost of the system down, and the availability of new technologies that I'll briefly touch on. Every airplane -- everybody who flies an airplane has a roadmap in their airplane. That's part of the requirements of flying under instrument conditions. That roadmap is literally thousands of maps that you keep in a big box and you carry it in and out of your airplane and update twice a week, replacing over the period of a year thousands of pages, it's an incredible task. We all, as pilots, do this, they're called GPS. There is a new electronic version of that, which we are now putting on our display and eliminating all of this paperwork, struggling to find the right map for the right place. This electronic flight bag is a compelling design. You can only do it with a large electronic display system, our electronic display system. That's why we call it the Pilot's IP.

Okay, wonderful. Well, thank you.

But the potential is great. Now is the time to get down, grit our teeth and execute. We've got to do it, and we will.

Right. Thanks so much.

We'll die trying.

Right. Take care.

All right. Thanks. Ladies and gentlemen, I appreciate your interest. We will try to continue to keep you updated. Let's -- the future is exciting and we'll try to keep periodic updates on our performance and how we're doing against some of the things I've said today. Thanks again for your interest. Talk to you soon. Bye-bye.

This concludes today's conference call. You may now disconnect.