Innovative Solutions and Support Inc (ISSC) 2007 Q1 法說會逐字稿

Good morning. My name is Tashanta and I will be your conference operator today. At this time, I would like to welcome everyone to the Innovative Solutions and Support first-quarter 2007 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Mr. Hedrick, you may begin your conference.

Good morning. This is Geoffrey Hedrick, and I am Chairman and Chief Executive of Innovative Solutions and Support. I welcome you to our conference call this morning, where in just a few minutes we are going to discuss results of the first quarter ended December 31, 2006, our current business activity climate and our business outlook, strategy and plans. In that discussion, we will discuss the OEM flight deck contract recently received and in our backlog, and the Cessna Textron legacy upgrade agreement. This will follow the business outlook and strategy plans.

Joining me in the call from our corporate offices in Exton are Roman Ptakowski, our President, and Jim Reilly, our CFO. Jim, over to you.

Thank you, Chairman, and thank you all for being on the call this morning. I'd like to first read our Safe Harbor message into the call.

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 10-K on file with the SEC.

Now I would like to address last night's press release. Q1 revenue was $3.4 million. Last year, Q1 revenue was $5.4 million. This was a quarter-over-quarter decline of $2 million that we will discuss in more detail later.

Our gross profit margin was 41% in the first quarter of 2007 and 50% in the first quarter of 2006. These margins are lower than our historical performance would indicate, and this is essentially because of lower sales volume in the quarters. The margins will, however, have a strong upside when quarterly revenues begin to increase.

Our research and development spending, also referred to as product development here, is viewed as an investment in the Company's future, and we continued a strong R&D spending pattern in the first quarter of 2007 for both current and new product development, as well as for certification efforts.

R&D spending in the current quarter was $1.3 million or 39% of sales. In last year's first quarter, spending was $1.5 million or 28% of revenue in that period.

SG&A spending totaled $3.1 million in the first quarter, as opposed to $1.9 million in the first quarter of 2006. This increase in spending included an exceptional expense item for the defense of our intellectual property. That exceptional charge approximated $0.04 a share in the quarter.

Net interest income was $765,000 in the first quarter of this year and $738,000 in the first quarter of last year. These amounts are similar and reflect higher interest rates this year, offsetting a lower cash balance. The lower cash was mostly the result of last year's stock buyback program, where the Company purchased about 1.2 million shares of stock at an aggregate cost of $18.1 million.

As a result of these numbers just discussed, the Company incurred a loss in the first quarter of $1.1 million or $0.07 per fully diluted share. I would like to point out that the consensus guidance for the first quarter was a loss of $0.02 per share. While we missed that number, the miss would have been substantially less had we not had the negative $0.04 impact for the exceptional charge I discussed in the G&A section. A timing miss on some foreign military sales revenue in the quarter made up the difference between what we reported and the consensus. In last year's first quarter, the Company essentially broke even.

Now I would like to take a quick look at the balance sheet. We continue to have an extremely solid balance sheet, with a current ratio of almost 22 to 1. Cash was $63 million at the end of December or $3.74 a share. It is important to note that the Company purchased approximately 1.2 million shares of its common stock last year at a cost of about $18 million. Had we not purchased the stock, the cash balance would have been in excess of $81 million. Our shareholder equity equals about $78 million or $4.64 a share.

Shifting to new business, new orders in the first quarter were $7.7 million. $6.7 million of that amount was for flat-panel business and $1 million for air data equipment. These orders contributed to a backlog at December 31, 2006, of $32.3 million. In contrast, last year's first-quarter backlog was $18.2 million. The year-over-year increase was $14.1 million or 77%.

The flat panel display system portion of backlog was $23.5 million in the first quarter of this year versus $12 million last year. That is a 94% increase year over year.

At this point, I would like to turn the call over to Roman.

Thank you, Jim. As we have previously reported, we continue to invest a significant amount of time and resources developing and marketing flat panel display systems and positioning the product as more than just another option for the replacement of obsolete displays. Each quarter, we have seen increasingly encouraging signs of acceptance and recognition by the market of the many advantages of the IS&S flat panel display system.

While it takes time for a new market to evolve and mature, there's no question demand is on the rise, with the recognition that the flat panel display system is not just a retrofit replacement, but is a growth platform for the aircraft.

We have told you that we have adopted a relatively straightforward marketing strategy in our drive to expand demand for flat panel retrofits through increasing the size of the market. We said we would expand the market by getting our products certified for an increasing variety of aircraft, continuing to drive down price, thus putting our Cockpit Information Portal technology within the reach of more operators and developing partnerships and other alliances that provide access to more markets. We continue to deliver on each of these objectives.

IS&S announced on Monday that the Federal Aviation Administration issued a Supplemental Type Certification for use of its Cockpit/IP Flat Panel Display System on B757 aircraft. The issuance of this STC offers the operators of approximately 900 B757 aircraft a flat panel display system upgrade at a time when there is an unprecedented demand for existing B757s.

Just the last few years, the value of existing B757 aircraft has more than doubled in price, providing operators with the incentive to retrofit their aircraft with modern technology that reduces the cost of operation, increases safety and provides a growth path for future requirements. Our flat panel display system upgrade provides all these benefits and more. It can provide a payback on investment on par with virtually any other improvement the operator can make to their aircraft.

The state-of-the-art cockpit IP from IS&S is an all-glass cockpit offering LCD displays for primary flight, PFD, and navigation, ND, as well as multi-function display capability. As with the B767, the 757 cockpit upgrade optionally offers Class 3 Electronic Flight Bag capabilities that consist of electronic navigation charts powered by Jeppesen and applications such as take-off, en route, approach, landing, missed approach and go-around information.

Notably, Class 3 e-charts from IS&S will display own-ship position to pilots through our digital representation of the aircraft's exact real-time position on the runway or in the air. IS&S e-charts will be installed in the forward view of the pilot on the aircraft's multifunction display and include critical zoom features, making the Class 3 e-charts larger and easier to read and improving the pilot's ability to operate the aircraft.

As with the B767, the installation downtime for the B757 Cockpit/IP flat panel upgrade is down to 48 hours, consistent with our commitment to team with authorized distributors and installers such as ABX Air to minimize aircraft downtime. We are marketing this turnkey solution to the owners of more than 1700 Boeing 757 and 767 aircraft worldwide.

IS&S recently announced that the Company entered into an agreement with Cessna Aircraft Company, a Textron Inc. company, to provide flat panel display systems on legacy Cessna Citation aircraft. Flat panel display systems will replace existing round dials and displays and will be distributed and installed through Cessna Service Centers, of which there are 34 worldwide.

The Company's flat panel display system product line, or Cockpit/IP, is the most timely and cost-effective way to upgrade legacy Citation aircraft with state-of-the-art technology offered in our systems.

Based on unit sales, the Cessna Aircraft Company is the world's largest manufacturer of general aviation airplanes. The global fleet of more than 4500 Citations is the largest fleet of business jets in the world. We believe that more than half of this fleet is addressable with the Company's flat panel display system upgrade. This agreement further solidifies the success of the Company's strategy for targeting select market segments.

To further elaborate on a comment Jim made earlier on this call on the missed sale in the last quarter, we have equipment that has been inspected, certified, manufactured for a foreign military sale. Based on the funding delay that occurred, we were not able to ship last quarter, but we anticipate shipping very shortly and will ship during this quarter.

Last quarter, we also told you that we would be submitting proposals for flat panel display systems valued at over $100 million. We did so, and now continue in active discussions with each of the parties. As you can imagine, programs of this size go through multiple evaluation steps and reviews. It will take time, but we are guardedly optimistic about the outcomes.

To quickly summarize, we continue to make significant progress in broad-based flat panel market acceptance. We continue to cultivate the market for the Company's Cockpit/IP product line and we are confident of continued growth.

I'll now turn the call back to Geoff for concluding comments.

Thanks, Roman. As I said in the beginning of the conference call, we are involved in a development contract for new OEM flight deck for light business jets. I expect to have production from the design and development stage within 12 months. This will establish us on an OEM program and, in this case, provide some exciting advances in our own technologies. We're not prepared to discuss this in too much detail at this point, but I address it because it is in our backlog and represents part of our backlog.

Now at this point, I would like to turn it over for questions.

(OPERATOR INSTRUCTIONS). Paul Kaump, Northland Securities.

A quick question for you -- the litigation or the defense of IP that you noted in the quarter worth $0.04 -- can you just elaborate on that a little bit, if possible?

We cant' discuss it because of restrictions from the court. It is part of our policy to strongly enforce our own intellectual property. And that is part of that effort. Other than that, we can't discuss it. But because it is noted in our K, again, in that event we have to -- wanted to address it in our conference call.

Is there a conclusion in the upcoming quarter, too? I'm just trying to get a feel for how much to model for in terms of additional and incremental SG&A going forward. Is this something that is nearing a conclusion?

We can't comment on that. As you can imagine, it's pretty involved. I prefer not to comment on it. But we will keep you advised with anything that is relevant that we can announce.

And then with respect to the $100 million that you have in bids out there, has that number increased, decreased from the last time you had talked about it?

This is Roman Ptakowski. It is about the same. We do have other opportunities we see on the horizon which will add to that. But this was --

We have won some.

We have won some; we have replaced some. So this is an ongoing -- and we do see -- each one of these opportunities fosters still more. So we consider that as very good news.

Included in that $100 million, was the Cessna contract or the Coast Guard relationship -- were those included in the $100 million?

Those are excluded.

And then finally, with respect to the backlog, it was up nicely this quarter, and I would imagine it is going to continue to trend higher. But how much of the backlog is for flat panel display that you currently have an STC on? In other words, how much is -- should we expect to see flow through the revenue line here in the coming quarters?

I would say we're about two-thirds, but I won't comment any further on that because of competitive posturing, if you will.

So two-thirds of it is stuff that you already have STC on?

Right.

Michael Ciarmoli, Boenning & Scattergood.

Jim, can you give us a breakout of the current revenue -- the split between flat panel and air data?

In the current quarter?

Yes.

It was about split evenly, Mike. As Roman mention, we slipped the FMS sale out, but of the $3.4 million that we have, it's about half flat panel and about half air data.

And then getting to those military orders on the air data -- so what kind of numbers can we expect going forward? And I know you guys have stated that you expect that business to generate maybe a $20 million annual run rate. Can you give us any detail as to those orders going forward?

The opportunities that we have identified previously continue to exist. However, I think as we all see, the military funding situations is in flux. They need this equipment. We can't forecast their needs any better, I think, right now than they are, but this is still a significant part of the business, still significant opportunities, and they require the equipment. So we would expect you'll start seeing some towards the end of the year, we'll start seeing some impact.

A question about a particular customer, the order with Jet Partners -- I think the first order is for 30 planes on the 737 for $7 million and then a follow-on for $7 million. What is the likelihood that that whole order, including the follow-on, gets delivered in this current fiscal year?

The follow-on definitely would not be this fiscal year. That was never in the plans. The initial one we're working with Jet Partners to solidify the timetable.

As you can imagine, this is a leasing company. They have contractual requirements they have to meet and we have to fit within their windows.

Very alive program, though.

And then lastly, I read a recent article just profiling IS&S and Universal Avionics. It seems like Universal has some more features, synthetic vision on some of those flat panels. And knowing that you guys still have the cost and installation time advantage, when do you anticipate some of the additional functionality being offered, specifically the synthetic vision or terrain awareness?

Well, I would comment, we expect that probably to come along this calendar year. But right now, the terrain awareness doesn't happen to be part of that synthetic vision on Universal, it's my understanding. I don't know that it's certified to provide that terrain awareness other than in a reference mode, as opposed to a [pause] mode, which is (indiscernible).

And the second comment I would make is we were recently selected on a program because of the significant advantages we have in performance both from a display size and display resolution on a major retrofit program in which we are both qualified.

So we feel very confident that our position is strong. Universal is a good company, but our product is profoundly larger, higher-performing product, and significantly less expensive. And the synthetic vision system is integral, is part of the database that we're going to get from a certified database from Jeppesen, which will allow us to keep it operational when the pause alert is up.

[Steven Rissio], Landmark Capital.

A couple of questions. You guys mentioned you are now designed in or you will be designed in on an OEM flight deck module for business jets?

That is correct. We're working on a program now that we will be developing a cockpit -- we will be paid to develop a cockpit for a new business jet OEM.

And that is your first OEM order, at least for the glass cockpit, right?

That is correct.

Now from a margin perspective, and I can understand if you can't comment directly on this, but maybe if you can just give me a sense as to the margins typically that you can get from an OEM customer versus a retrofit customer I would think would be greater?

Can I address that generally? That way, I can give you an answer, I think. The OEM customer, because of the development of our product, we believe that we are going to preserve very high margins even at the OEM level. It's possible to do as long as your price is right. And we believe in this case we're going to be able to preserve probably comparable margins to large retrofit programs.

As an example, if somebody buys 100 chipset retrofit, you would expect to provide them a very competitive price. And we will certainly meet the same kind of margins at comparable quantities. So the answer is yes, I think that you're going to see good margins. And the nice part about these OEM programs is they give you real advantages in economies of scale. So this was not a buy-in program, put it that way.

Question on the Cessna business, and I really need some help here in getting an understanding as to the potential of this contract. Obviously, I have seen figures out there stating that there are about, what, 3500, 4000 planes flying around right now, is that right?

Yes, but that is not the addressable market. Let's be clear -- that includes a lot of very recent aircraft. So clearly, we're not going to be retrofitting brand-new aircraft with flat panel flight decks. So the addressable -- I think what Roman specifically said is he said about half.

Yes.

Our estimates are somewhere between 1500 and 2500 aircraft addressable, and it varies with timescale. In two or three years, some of the new aircraft will come along. But it is an incredibly addressable market. It's a wonderful airplane. And Cessna has stepped up and seen that and is now supporting their user base -- broadly their user base. And that is why they are providing this upgrade.

It's a wonderful upgrade path for a very inexpensive aircraft, the Cessna Aircraft used market, to get an incredible value, and with the cockpit upgrade, end up with an extremely competitive product to some of the new aircraft that are coming out today.

Again, help me understand here -- so say there's 1500 potentially that you guys could retrofit. I'm not familiar with the maintenance schedules, where you would have an opportunity or the planes owner would have an opportunity to actually upgrade to your glass cockpit or your flat panels. On an annual basis, does that mean roughly half of that 1500 will come in for some type of scheduled -- major scheduled maintenance?

Well, 100% will come in because there's an annual on all airplanes. 100% will come in. But understand the significance, and you've heard a number of times us talking about the time it takes to install the equipment.

Our competitors take three to four weeks to do that kind of installation. Three or four weeks, the only way you can reasonably do it is when you bring it in for heavy or significant maintenance activities to be done simultaneously. Otherwise, it puts your airplanes out of service for a very disruptive period of time.

The advantage of our system is that we can install in a fraction of the time of our competitors, and that is a huge advantage. It means that it can be brought in, not necessarily on an annual -- wait for the annual -- it can be brought in and reasonably turned in a week or two as opposed to a month.

And that is a huge advantage, and it opens up the retrofit opportunity not to be isolated simply for the annual check. And it very likely can be at the annual check, but it will be probably more controlled by the ability of the installers to do it rather than the availability of the airplanes.

So does the annual check typically take up to a week, where obviously they could fit in maybe--?

Absolutely, yes. And many aircraft will have, depending on the aircraft -- in fact, our airplane has a 100-hour check. And a 100-hour check in our case is about a four- or five-day downtime anyway. And that is every 100 hours. So not every aircraft has that, but that is not an unreasonable maintenance.

So I don't think that is going to be the limitation. I think the biggest limitation is going to be the availability. The real advantage in teaming with -- and the selection by Cessna Textron is that they have this now through worldwide installation that we're -- not only is the distribution available, but the actual maintenance facilities are available to do the work.

So it is a realistic possibility for an owner of one of these Cessnas, once they come in for the annual checkup, so to speak, their plane is going to be out of commission for let's say a week, that at that time, given your advantage for the install times, they could possibly just say, hey, it makes sense now to do an upgrade. So you potentially can address 100% of that annual market?

That is a lot of speculation. But your reasoning is reasonable, put it that way, but that is a lot of speculation.

And as far as the competitors that are out there, obviously we know the install times are not close to yours, but what about the price points? Do you have a significant -- like you do in some of your other platforms where you have significant cost advantages?

Absolutely, across the board, and a very significant price advantage.

Mary Anne Sudol, Caris & Co.

Nice backlog growth. I wanted just to pursue that Cessna relationship. Will ISSC provide some training to the Cessna service people and the maintenance? And is that something of a startup cost to ISSC, or does Cessna take care of that?

We would obviously do it. And that is factored into our normal support costs for our product. But yes, we will do that. And does it represent a significant investment on our behalf? No, we believe -- we don't believe on a balance sheet basis or on a P&L basis it will have a significant impact. It is clearly an invested cost. But that is part of our cost of doing business.

Is a lot of that behind you or ahead of you, do you think?

Well, in the training, in Cessna's case, it is ahead of us. But remember, this is the Cessna factory and Cessna distribution. These people know the airplane as well or better than anybody in the world, and probably teach us more than we would teach them.

It is really an integration system. We plan on holding, as we have with Pilatus distributors, we hold training sessions at the factory and in the field with groups. And it's usually a day or two, and sometimes three days. We clearly will, on some of the initial installations, we will obviously have our field engineers, whom we pay anyway, to sit and support the initial installations.

So it is ahead of us, certainly, on the Cessna program. And because it is critical that this goes smoothly, we will put whatever effort that we can to make sure that it will go smoothly. But we don't see it as an unreasonable cost. In fact, if anything, it is probably easier in most cases, but again, because these are factory centers.

And will you focus on the busiest service centers first, and then roll it out across all the 34?

We will listen to our customer. Whatever they want us to do, wherever they want us to be, we will be, anywhere in the world.

Great. Are you working on any other similar arrangements with other biz jet people?

That is a reasonable conclusion. As you can imagine from a competitive standpoint, we can't comment, but --

Absolutely, but it's a very natural question.

I'm sorry, it is part of our plan. We are going to be announcing new products as well that further facilitate the installation of the equipment, again focusing on the turn time, to enhance our ability to put it in the marketplace. So new products are going to be announced shortly -- they are pretty exciting, actually -- and a much broader product line. The next couple of months are going to be very interesting. And yes, we will be doing that.

Watch those press releases. And finally, how are you tracking for your flight testing schedule, for example, for the 737?

We're working like crazy. And as usual, we are probably behind where we should be, but the end date doesn't change. So we just work a little harder. But things are moving along very well. The installation looks extremely good, better than expectation. So we think it will be easier than expectation.

We are working with ABX Air right now on the installation kits' design. And we expect to have an amazing product, actually. And we will be announcing -- there will be further discussion of that actually tomorrow. We are going to an investors' conference, which may or may not be webcast, but certainly comments from it will be distributed.

Great, because the press release is out there. I think it is the Emerald Groundhog Day or --

Exactly.

Wonderful. Well, thank you so much, and good luck to you.

[Christina Whitehead], Thompson, Davis & Co.

I just had a couple of quick questions. The first was I was wondering if you could give us the cash for operations in the quarter.

Our CFO will do that.

I apologize, would you repeat the question? I was talking offline here.

What was the cash from operations for the quarter?

We lost from operations -- we lost about $500,000 from operations in the quarter. Most of that was generated by creating some prepaid assets. And of course, we lost about $1 million at the net income line. Our accounts receivable improvement -- I say that with tongue in cheek -- was a positive $1.5 million. So all of those bouncing back and forth left us with about a $0.5 million drain on cash at the ops level.

And my second question was the $32.3 million backlog as of December 31 -- when will that be delivered? Are you able to discuss that at all?

It's pretty complex, as you can imagine. It will be distributed -- the largest percentage of it, I'm going to try to do that -- say 80% of it will be certainly within the next 18 months. Roman, I can't --

It is largely deliverable. Some of it is pending additional STC issuance. But quite a bit of it will roll out yet this fiscal year. We continue to expect other orders that we'll add to our backlog that will have the intended impact in the second half of the year, as we have discussed previously. Right now, we are taking the orders, we are building the backlog and we are doing everything we can with the customers to convert it into revenues.

Hasnain Karim, Pacific Edge.

I think Roman was implying something in his answer that I wanted to ask. With regards to fiscal year '07, are you still fairly comfortable with that $40 million revenue run rate you mentioned last quarter?

Yes.

And so, based on the comment that at least 80% of the backlog will be delivered in the next 12 to 18 months, is there a lot of turns business that you're expecting in the next six months to reach that goal, then?

We expect quite a large number -- I'm not sure what term you used, but I'm calling book-and-bill type of business, absolutely.

And is that contingent on the 737 STC? Or is that based on just closing some of this --

There's a portion of that, but then there's -- it's additional business, where the work has been done previously, it's releases of -- against STCs that we already have in place, which is the PC-12, PC-12-type operators. The Boeing 757 -- six operators, so you are going to see --

Substantially equipment that we have STCs on already. As you can probably appreciate, that is all we can do on a book-and-bill in a year anyway.

And then the other is, we have a military business also which is not governed by STCs per se, but we focus on that in some of these calls. But they are mil standard.

We see a tremendous expansion in that area.

We see that type of thing continue to go on. And we offer TSO -- our equipment has the Technical Standard Order certifications which already -- that awaiting any kind of STC effort. And the military does like to pick up on that type of equipment.

And the other question, be -- on the 737, you mentioned that the timeline still stands. Could you remind me what the goal is to get that STC done, what month that --

We hope to start installation and flight test in April.

So I am guessing that around that same time frame, in April, then, you hope to get the STC?

April/May.

For that, we are beholden to the FAA on, but we've done this a few times, and that we think is factored in.

It's the extra effort we are putting in today which significantly reduces the install time and the performance versatility of the package. There are features that I'm not prepared to discuss at this point that are significant breakthroughs and will enhance its marketability.

And does that change the ASP for the product as well, do you think? Or is that just feature sets that that improve the salability of the product?

There's just features and advantages to the product. It is not going to change the ASP.

And then I guess -- again, you had mentioned $100 million worth of bids out there, the fact that you have already gone through it sounds like at least Phase I of the bidding process. Is there any way to better describe what this $100 million is? Is that based on STCs that you already have? Is that based on STCs that you're working on? Is that a timeline of two years? I'm just trying to -- it's just a very large number to comprehend.

I am not going to comment on that further right now because we believe there's some competitive information and so on that we have not available to others. We will disclose that as these things become orders, etc. We certainly will be disclosing that as early as we can.

Do you expect either the win or loss, whatever it may be, to be finalized by the end of the fiscal year?

Yes. We certainly will have major impact in that during the fiscal year, yes.

So there is a timeline to this from your customers' point of view as opposed to open-ended RFP?

No, these aren't opening-ended RFPs. There are decisions at the end of them. And obviously, the approximation of what we had out -- it's still there. But some of it has been replaced -- in some cases, we have actually gotten awards, in one case, of an outstanding bid and been replaced by additional bids. So it is a variable, as you can imagine. The good news is there is a lot of opportunity.

So considering the large amount out there, over the next few fiscal quarters, we should expect to see backlog continue to grow on the flat panel side?

That is correct. And it's worthwhile -- just an aside comment -- Avionics Magazine recently had an article in which they defined the necessity for significant cockpit upgrade. And they identified the total market value at, Jim, what did they --

$130 billion over the next decade.

Avionics -- we have always said that we saw our opportunity as being somewhere around $7 billion. Avionics determined that in a broad sense, that it's going to look like $130 billion. So every one of our estimates, all of our strategic planning has been reinforced and actually been expanded by all the available data.

There have been numerous articles in all the publications about the necessity and activity in the retrofit market. As I have mentioned in the past, the good part about the marketplace, this segment, is when business is in a downturn, general downturn, people tend to avoid buying new equipment and upgrade their old equipment, and when business is good and the demand expands, there's never enough lift capacity or aircraft available to satisfy the need, and people invest in upgrading their existing equipment.

So we are seeing both ends of the market in an extremely strong way. And happily, we have expanded our reach into the biz jet marketplace, which as you know is at an all-time high.

There are several public companies that have reported their January that have talked about the retrofit market, their business accelerating there. So it's just understanding kind of where you guys are considering that it is a new product and what to expect out of it in this fiscal year.

Again, we have said that our year is very heavily weighted to the back end of the year. But that again is the ramping up of what we consider a long-term, very strong, steady growth over the next -- for the foreseeable future. So we are going to see that all starting to happen in the back half of this year.

Thank you and good luck this quarter.

[Mike Grondahl, Key Colony Funds].

Just two quick questions. Could you talk about the minimum level of an order that you need to get from Textron to make you want to go ahead and get the STC and invest the dollars there?

And then secondly, concerning the $100 million that you have out there for new business, if you will, you kind of broke that down between current STCs and STCs that you don't have. Could you break that down between military, commercial, passenger airplanes, business jet and cargo, maybe, just to help us understand it a little bit better?

Well, first of all, we have an agreement signed with Cessna Textron to support the program and have placed in backlog a significant order which we are not prepared to describe in detail yet. That is already in backlog. So the commitment is there. The STC is going ahead. And that is going to be done by Cessna Textron. So that is already in place. It's already on its way. And they are going to do the STC.

As far as the backlog is -- we didn't break it down. The last time I spoke about it, I said that in the last conference call, that we had -- I'm trying to remember the exact words -- but it was approximately $100 million in backlog.

Not backlog, but the proposals --

-- proposals. Correct. And we didn't break it down specifically. And we don't want to do that. It is in a broad range of products, and some in military, and all three market segments. Those market segments are now being addressed by separate divisions of our business. We have built business units for each one of those marketplaces to focus on our customer and better serve them. So we now serves the military business, general aviation market and the air transport market in three separate business units. We don't report independently on those business units.

Congratulations on the progress.

[John Knowle], Barrington.

Actually, my questions have been asked and answered. Thank you.

Greg Fujii, Coghill Capital.

I wanted to just ask a couple of quick questions here. The first one is, Geoffrey, I noticed the S3 that was filed not too long ago. I'm just curious as to -- or maybe if you could comment on what the intentions are there?

It is very clear. And I'm glad you asked the question, because I can clarify that. It was a general housekeeping. We had 10 or 11 people that had unregistered stock. I, obviously, was by far the largest. It was a housekeeping process in which we registered all outstanding shares.

I would comment that I had over 0.5 million that were already registered, so there was no necessity for me to do that. It was not registered for any plans of selling it at all. The only thing I would comment is, it's possible that I may donate to charity some stock, but that is the only use of that stock I would ever imagine. And that is not as a result of the registration, of this S3 registration.

And then just the other question I had is you mentioned on the OEM partnership that you potentially have coming in the future, and you said that margins would be similar to larger type of -- I guess larger programs. I wonder, is that margin comparable on just the smaller program, or what sort of gross margin would we look for on a larger type of program which would be comparable to the OEM margin?

It would track our historical margins on large programs. And I have long said that I would like to see our margins in the 55% to 60% range. We constantly exceed that. That's terrific. But we can certainly expect to see margins in excess of 50% on large programs.

And smaller programs -- when I say a smaller program, clearly if you are producing a product and sell small quantities, your margins are higher on the smaller quantities, provided that you have some reasonable economies of scale that you are selling it to a number of other people.

Okay, but the margins in general on some of the larger projects should be in excess of 50%. And so we shouldn't see -- I guess this decline to 41% -- this is just on kind of a lower revenue run rate as you are ramping up potentially toward the back half of the year?

When you look at 40%, imagine that our total revenues have dropped by about 5 to 1. And we didn't lay off the overhead, the management people -- obviously all of the fixed costs that are associated with a manufacturing organization. So it's remarkable that we are making 40%, to be blunt with you.

(OPERATOR INSTRUCTIONS). Michael Ciarmoli, Boenning & Scattergood.

Just another point. I think a caller earlier asked about the remaining outlook for '07, and you did say that $40 million revenue number was within reach?

Yes.

Is there going to be any -- and it is going to be back-end-loaded. Is there going to be any capacity issues? It seems like you are going do have to deliver a lot of product to hit that number. Do have the installers in place to meet that number?

We believe so. And by the way, we already have a building expansion and plan which we expect to go ahead with. And as you might recall, this facility was already planned out and has already been -- all the planning have been approved for a significant expansion. So that is going to go underway and, because it was designed in the initial plan, will have no impact on our existing capacity until it is completed.

Is there going to be any additional costs over the next couple of quarters associate with that?

Yes, but it will all be fixed asset costs.

And then just one other question. It looks like you had another sizable tax benefit in the quarter. What can we expect going forward?

Well, obviously, the tax benefit really comes about from the loss. And we don't plan on having those for too much longer.

We hope to get rid of that tax benefit.

Paul Kaump, Northland Securities.

A quick follow-up, Geoff. Can you give us an update, if there is any, on the ADS-B initiative with the FAA?

I can't give you much of an update. I will be able to shortly because I am going to go to meetings on that. We have some people. But it proceeds, the requirement proceeds -- like everything, everybody is trying to push it out, but it's still, even the FAA says, absolutely, positively on I think the last ones, 2014 with a 2010 start of implementation.

My own judgment is and general consensus is that you'll get -- the way they will start implementing ADS-B is give preferential treatment in high-traffic areas, which means that your major operators and obviously many of your biz jet operators will get ADS-B installations that take advantage of the preferential treatment. But it is generally on schedule, and it is a hell of a good system, by the way.

I guess that is the last question. We have one more, I think? No, we're finished.

Thank you. We appreciate your interest and we appreciate your support. We are very excited about the future. I hope that comes through. And we are encouraged each day by the increasing demand that we are seeing in our products and in the industry in general. Thank you very much for your interest today. Have a good day.

This concludes today's Innovative Solutions and Support first-quarter 2007 conference call. You may now disconnect.