Innovative Solutions and Support Inc (ISSC) 2007 Q4 法說會逐字稿

Good morning. My name is Jerleen and I will be your conference operator today. At this time I would like to welcome everyone to the Innovative Solutions and Support fourth quarter 2007 earnings 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 period. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Ray Wilson, Chief Executive Officer. Sir, you may begin your conference.

Good morning. This is Ray Wilson, Chief Executive of Innovative Solutions and Support and I welcome you to our conference call this morning. In a few minutes we will discuss the results of the fourth quarter and the fiscal year ending September 30, 2007. In addition, we will discuss the current business climate and outlook.

Joining me today in our corporate office is Jim Riley, our Chief Financial Officer. Due to a death in the family, Roman Ptakowski unfortunately is unable to join us today. He of course is our President.

Before we get started, I would like to say that I am extremely pleased with the progress achieved over the past year, a very tough year for the Company and its employees. When we first introduced our flat-panel display system we essentially had no market. Today, through the relationships with some of the world's respected commercial and military and business aviation operators we have created a very healthy increasing demand for our corporate IP.

We are now using the in-depth knowledge gained from working with these world-class operators to expand and improve our product to not only respond to existing needs but to build a new functionality in anticipation of new uses brought about by increasing concerns regarding safety due to runway incursions, airspace congestion, and other emerging challenges precipitated by growth in air travel. And our investments have been rewarded.

We have grown our flat-panel display system backlog to $63 million in fiscal 2007. That is an increase of $45 million or 250% from September '06. In addition not considered in backlog is significant additional revenue that our contracts with Cessna, Eclipse and FedEx will be generating over the next several years. In a very short period of time we have created many solid relationships and established a stream of future revenues that will serve as an excellent foundation from which we can leverage additional growth.

I am also very pleased to reiterate the fact that we received a favorable jury verdict at our trade secret misappropriation case and in addition the jury found that the Company had suffered damages approximating $6 million. The jury also found in favor of the Company's claims for breach of duty and contract and unfair competition. The judge presiding over the case will hear the Company's claims for a permanent injunction as well as punitive and exemplary damages in future proceedings.

None of the numbers shown here or on the attached financial statements reflect the $6 million in damages awarded by the jury nor do they reflect any anticipated punitive or exemplary damages to be determined in future proceedings. Now I'll turn over the call to Jim Riley our CFO. Jim?

Thanks, Ray and thank you all for being on the call with us this morning. Certain matters discussed in this conference call today including operational and financial results for the future period are forward-looking statements that are subject to the 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 which is on file with the SEC. I would now like to take a few moments after that statement to address last night's press release.

Revenue in the fourth quarter was about $5.1 million and was marginally ahead of last years $4.6 million fourth quarter number. On a sequential basis revenue in the fourth quarter this year was down slightly from the third quarter by about 12%. Revenue in the fourth quarter was also slightly lower than what we expected and what we discussed with you on the conference call about three months ago. At that time we expected the fourth quarter revenue to be between $6 million and $10 million and we were hoping to come in the middle of that range.

The shortfall in revenue was essentially due to a delay in achieving software certification on the Eclipse 500 flat-panel display system. And as a result we were unable to recognize any Eclipse production hardware revenue in the quarter. Completion of Eclipse software has since been achieved and we're working closely with Eclipse to establish a production hardware delivery schedule that will meet their needs.

A recap of Q4 sales reflects the revenue split between product and EMD sales which we call engineering, development and modification. Product revenue was about $4.8 million in the quarter and recorded a gross profit of $1.8 million or a gross profit margin of 38%. The EMD revenue was about $400,000 in the quarter and recorded a gross loss of $2.2 million.

The product gross margin is expected to increase as volume picks up and approach levels that have been experienced in the past. EMD margins are expected to be in the breakeven range. The current quarter loss on the Eclipse program is unusual and reflective of the complexities and added scope and functionality associated with this development phase of the contract.

The Company recorded a future cost of completing the development phase in the fourth quarter and will begin negotiations with Eclipse to recoup out of scope efforts as well as formulate further EMD requirements with Eclipse.

In the fourth quarter, research and development expense on a period cost level was $1.3 million. However, when we combine that amount with the EMD cost of sales we actually incurred about $3.8 million in research and development during the quarter as approximately $2.5 million of our total R&D spending was the specific development modification works on the Eclipse program and some other NRE work as well. That investment is included in cost of sales sold -- cost of goods sold and as I previously mentioned, produced a gross margin loss in the period.

SG&A spending totaled $4.7 million in the fourth quarter, an increase of $1.5 million from the $3.2 million spent in the fourth quarter of '06. The increase was principally the result of $2.1 million of legal fees incurred in the quarter to protect our intellectual property from infringement. The recent favorable jury verdict lends support to the decision to proceed along these lines.

Net interest income was about $650,000 in the fourth quarter compared to $780,000 last year. This decline of about 16% is mostly the result of lower cash balance this year.

For the quarter, we had a net loss before $4 million or $0.24 per fully diluted share. This compares to a net loss of about $900,000 or $0.06 per fully diluted share in the fourth quarter last year. If we exclude the nonrecurring legal costs that we incurred to enforce our intellectual property rights the net loss in the quarter would've been about $0.15 per fully diluted share.

We continue going forward with a very strong financial position and enter the new year with some ratios -- current ratio of about 7.6 to 1, $49 million in cash or almost three dollars a share, virtually no debt, assets at $85 million, 58% of which is cash and shareholder equity of $71 million or a little over $4 per share. Clearly, our balance sheet reflects the financial flexibility and capacity we need to ramp up for future production levels.

Quickly reviewing the results for fiscal 2007, revenue rose about 10% to $18.3 million compared to $16.7 million in '06. We incurred a net loss of a $8.8 million or $0.52 per fully diluted share in the fiscal year of which about $4.2 million or $0.25 of that was related to the intellectual property legal fees that we've talked about previously.

I'd like to quickly summarize the new business for the year. And new flat-panel display system orders in the year amounted to $55 million and other new business orders were about $6 million for a total of $61 million in the year. As a result, backlog at September 30 was a near record $70.4 million. This was an increase of $42 million or 150% over the September 30, 2006 backlog of $28 million. The flat-panel portion of backlog was $63 million this year an increase of $45 million or 245% higher than the $18 million recorded at September 30, 2006.

Thank you for the opportunity to address you. I would like to now turn the call back over to Ray Wilson. Ray?

Thank you, Jim. To follow up on what Jim just discussed, our results for both the quarter and the full year continue to demonstrate growing demand for our flat-panel display systems and preparations in our manufacturing facilities for the ramp up and production as orders head into the factory floor. These are strong indicators of the long-term health of the business.

In the short-term obviously we're disappointed with the slippage in shipments to Eclipse that were originally anticipated during the fourth quarter. Unfortunately software development took longer and costs more than originally anticipated in part due to normal evolution in product specifications and requirements commonly associated with the development of a completely new cockpit system.

However, with our software completed in November we shipped hardware to Eclipse. They have provided us with production schedules that will require us to ship 60 more flat-panel display systems before the end of this calender year and we have these in various stages of completion in our factory today. These systems are delivered, we will see the next to set of production schedules roll forward consistent with the terms of our contract.

Over the past year, we have continued business development in each of our main market segments including commercial, air transport, military, and business in general aviation. These efforts are yielding notable results with IS&S signing significant new contracts in each quarter of 2007 with high-profile, well-respected operators such as Cessna and American Airlines and most recently in the quarter just ended, FedEx, the international cargo carrier.

The net result is a steady increase in backlog and an even greater increase in our visibility as a result of the credibility that accompanies success with leading operators in a wide variety of markets. Successful implementation of these momentum orders and potential regulatory changes are expected to stimulate market growth as operators expand retrofit programs to meet their entire fleet's needs of similar aircraft in line with new standards. The bottom line is we think we're getting people's attention.

As a result, as of today the Company has $73 million in release backlog as well as the opportunity for significant additional revenue for more than 3000 flat-panel display installations potentially available to IS&S over the next few years between Cessna and Eclipse. Also, only a small proportion of the FedEx order is in backlog.

We're making significant progress not only in the market but also in improving the capabilities and versatility of our products. In the last few years, we have invested almost $20 million to add new features and functionality that make our products even more compelling.

For example, in the third quarter, we received a supplemental (technical difficulty) certificate STC from the FAA for our Class 3 Electronic Flight Bag. [Each adds] full-color high-quality electronic display flight bag product consisting of electronic navigation charts (inaudible) and applications such as take off, en route to approach, landing, missed approached and go around information. Since Electronic Flight Bag features improve the pilot's ability to operate the aircraft and consequently enhance safety, it's a significant market for this feature.

Current challenges in the airline industry have resulted in the FAA increasing its attention on air traffic control and safety. The difficult job of improving coordination and safety in the skies can best be accomplished by automating and enhancing information flow to pilots and controllers. Consequently we are constantly improving the ability of our cockpit IP portals to present more information in a cohesive user-friendly fashion to improve performance and safety.

As the FAA increases the pace of new regulations, in response to growing air traffic, operators are recognizing the benefits of solutions such as our FBD systems that reduce the time, cost and complexity needed to comply. This is an additional updraft that we think will improve more and more -- sorry -- will move more and more operators off the sidelines and into the market.

We continue to enter into partnerships and other alliances that will more rapidly get us into large vibrant markets. Our contract with Marshalls Aerospace in United Kingdom is an example of our strategy to open new markets through alliances, joint ventures and partnerships. Our relationship with this integrator provides access to the large European military, tanker, and military transport market.

In August we announced that we had slashed the installation downtime for Boeing 767 cockpit IP flat-panel upgrade to 48 hours consistent with our commitment to (inaudible) to authorize distributors and installers to minimize aircraft downtime. We have just completed an aircraft for TAG Aviation replacing 22 instruments, removing 252 pounds of weight and completed it in 48 hours. We are now aggressively marketing to owners of more than 1700 Boeing 767 aircraft worldwide.

We are also offering general aviation operators a compelling value proposition with combined RVSM flat-panel upgrade. This allows an operator a much better return on their investment as they get the added immediate tangible benefits of RVSM upgrade at a cost that is not much more than the basic FPD installation.

As with our price and performance leadership, we are raising the bar of the speed of corporate upgrades and installations. By dramatically cutting aircraft downtime, we're providing operators with a more compelling reason to invest in FPD. Now by achieving the installation in 48 hours we're well on our way to our next milestone to ultimately offer overnight training and regiment packages to install our state-of-the-art (inaudible) cockpit system. We're doing a cost analysis of what it would take to achieve a one-year payback on FPD investment which although tough and difficult it appears to be feasible at least possible.

Increasing awareness has also opened the door to some exciting opportunities with the US military. At their invitation we now have our nose in the tents on the entire military aircraft market. And all of these opportunities it does not hurt to show them how our products also lower the cost of operations, offer logistic savings and provide them with a platform for growth and adaptability to emerging needs such as state-of-the-art highway in the skies and (inaudible) vision and satellite weather radar features. At the same time, it is very competitively priced.

To quickly summarize, we accomplished significant progress in both broad-based flat-panel market growth during 2007. We are shipping to all the major customers in each quarter of this financial year. And consequently a $50 million revenue line is achievable which would bring about profit in the second half of the year.

Thank you for this opportunity and we'd now like to open the session for questions.

(OPERATOR INSTRUCTIONS) Paul Kaump, Northland Securities.

Good morning gentlemen. A couple of quick questions housekeeping related really. Jim do you have the breakdown of air data revenues versus flat-panel in Q4?

Yes I do, Paul. The air data revenue in the quarter was approximately $1.2 million.

And all the rest was flat-panel?

That's correct.

Cash flow from operations during the quarter, what was the use there?

The cash in the quarter was principally to drive the operations we have had. Obviously we had the net loss in the quarter which soaked up cash. We grew our inventory a little bit. The accounts receivable were up in the quarter. They have since come right down. But basically a lot of the revenues we had in the fourth quarter came in the last month unfortunately and as a result we're showing on the balance sheet as of the end of the year is outstanding receivables. Those have since been collected. We had some additional expenses that we put through at the end of the year in terms of some of the legal bills and things like but --

Do you actually have the cash flow from operations number for the Q4 though?

The cash flow from operations for the Q4 I don't have right here. But I can give you the cash flow from operations from the year (multiple speakers) a lot easier.

That's fine.

For the year it was a loss of $10 million. $8.8 million of that of course was the net income loss. The other pieces of that are principally accounts receivable, inventories and prepaid expenses. Those things actually added up to little bit more than that. Then we had some offsetting amounts, accounts payable and things like that.

Switching gears, can you talk about the status on the timing of some of the STCs for the 737, 747 and Cessna Citation? If I'm not mistaken, the 3-7 and 4-7 are more than a year old at this point from when you got the initial orders and the citation. We're coming up on a year here. So I'm just curious about the status on those things.

Perhaps the 7-4 engine displays that we're working on we should have an STC in the next quarter on that i.e. first calendar year quarter 2008. On Cessna, it's probably going to be into the third quarter of 2008, i.e. the fourth quarter of this fiscal year. On the 7-3, quite frankly I think it's going to drift out to the beginning of the next fiscal year. So we're probably twelve months away from that.

Have any customers pulled or reduced their orders for any of those airplanes? Because I know on 747 I think it may have been [Coletta] was in there with some orders and it was Jet Partners for the 737. Correct me if I am wrong on any of those but have any of them reduced or canceled orders or anything like that?

[Coletta] was still working on -- it's their aircraft that we have the specific work being done on. And Jet Partners are still hanging in there (multiple speakers) still got orders on the order book.

How much of the FedEx order went into the backlog? Was that $6.8 million?

No, it was a much smaller number. This is an interesting feature of the way people are contracting and it's rather similar to the Eclipse where we only get a few -- a leadtime of coverage. So it's a much smaller number than $6 million.

Okay, I'm trying to reconcile flat-panel display backlog from last quarter to this quarter and it looks like it went down by much more than it should have. Did anybody reduce an order or did something fall out of backlog, anything of that sort?

No nothing fell out of backlog, Paul. The shipments in the quarter which -- we shipped almost $4 million worth of flat-panel in the quarter and --

Which was in backlog right?

Which was in backlog.

Okay, and that's taking care of it. And then did I hear you correctly in your prepared remarks you're looking to recoup some of the added expenses or cost overruns with the Eclipse program?

We're having a discussion with them -- (multiple speakers) have to say.

How much could that be do you think?

It will be small numbers. I mean, it will get washed into whatever opportunities we have for providing future functionality I'm sure.

Tyler Hojo, Sidoti & Co.

Good morning, how are you? I was wondering I guess how should we think about some of these expenses as we move through the new fiscal year specifically kind of these Eclipse cost overruns and some of this legal expense? I know you guys won a nice settlement there but it seems like you could see some additional expense at least in the near-term. And I'm just trying to contemplate that in terms of what you said with kind of a $50 million runrate and I think Ray you said being profitable in the back half of the year, was that correct?

Yes, that's what I said.

How does that all mesh together?

First of all, Tyler, I don't think Ray said a $50 million runrate. I think he said $50 million for the year.

In revenue, I apologize.

Because the runrate hopefully will be substantially different. But having said that we do expect legal expenses to continue into the -- but at a significantly reduced rate into the current quarter and perhaps even into the next quarter because as you see by the press release we put out, there will be some proceedings that are going to take place probably in the January timeframe. But we don't believe that this is going to be anything of any significance at that point.

The cost on the Eclipse program, the EMD portion, there should be no further overruns on that. We have taken a very close look at the program. We are almost done with it and we have written off the cost yet to be incurred in the fourth quarter to bring that thing totally clean.

How much did you write off?

We're not really going to talk about specifically what we wrote off but the numbers are very clear in the financials that we put out. We had in the quarter we incurred revenue of $352,000 and we had $2.5 million of cost so you can impute that difference yourself I'm sure.

Good analysis. Just in terms of you know -- I think earlier in this fiscal year you guys kind of gave a range of backlog in terms of a goal I think it was 75 to $100 million. I was wondering if you could may be provide another goal for next fiscal year?

I will take this one because we have been having some interesting discussions internally about this whole concept of people looking at the backlog and trying to determine the way business is going. The concern is that the contracting style and practice for some of this stuff is actually different from what we have all been used to and it is -- and that's why we keep talking about the unreleased backlog.

And we don't actually know that people are going to come along and give us a firm irrevocable contract for the full volume of their upgrades because it will depend on where they are in their own aircraft programs and their own fiscal disciplines. So it's difficult to say what the backlog is going to be but we are working with a good number of operators to try and get them under contract now. And that's all I can say I think.

Just in terms of the backlog as it sits currently, I think it is $70 million. How much of that is long-term and how much do you expect to be delivered say within the next twelve or some months, twelve months or shorter?

Yes well in that backlog Tyler, you're absolutely right. The backlog is about $70 million. We anticipate liquidating it by about $15 million in the current fiscal '08. But keep in mind what Ray had mentioned earlier. A substantial amount of the so-called unreleased backlog will be contributing to revenue as well and that is the type of a backlog that we will for example from Eclipse and FedEx, companies like that where they will give us a release in a given month that may roll out for the next two or three months. So in some respects it hardly will ever hit backlog just because of the nature of the way they're contracting. Does that make sense to you?

It does, it does. I will hop back in the queue. Thank you.

[Jeff Harvey], Janney Montgomery Scott.

Good morning. I just want to go back to the backlog a minute. I think at the end of the third quarter your backlog was roughly $72 million and now we're down about $70 million. I guess I would have thought even with some deliveries for the quarter and with some new contracts your backlog would have been ahead of what you stated in your third quarter.

Well Jeff, it is strictly a matter of timing. I'm not going to stand up and shout about the revenues in the fourth quarter. They're only $5 million and the order book in the quarter was a little lower because of the fact that some of the programs that have the continual turn on didn't get turned on.

Part of that was perhaps our fault and part of it was perhaps the customer's fault in terms of releasing new business but nonetheless the backlog is substantial. The timing of it can be a little bit problematic. But the numbers stand on their own. The increases have been remarkable.

Perhaps I could just jump in. The water has been muddy in this period by the fact that we rescheduled some Eclipse that we had expected to deliver in the quarter and moved them into this financial year. So there is -- that doesn't make it absolutely clear what's come in and gone out of backlog to be honest.

Kevin Wenck, Polynous Capital.

Good morning, first question on inventories. The growth from June to the end of December September from 7.6 to 9.3.

Right.

How much was from not shipping what you originally might have anticipated shipping in the September quarter and how much is billed for supporting whatever the revenue plan might be for the December quarter?

A lot of it obviously is tied into the anticipated volumes that we plan on getting to. The inventory increase without being program specific obviously a lot of it was for Eclipse. We're ready and able to deliver Eclipse hardware. We are in the position to do that and essentially that's what the inventory buildup relates to.

And as you have been discussing on this call the dynamics of how you are -- or the changing dynamics of how you're starting to receive orders from customers where it's more sort of -- I'm trying to think of the right word -- instead of coming out of backlog it is more sort of as the customer now decides they need it. Do you have to have somewhat more inventory on hand or are they still giving you reasonable visibility as to when you are going to get those what I almost call spot orders?

Yes, we do have visibility. We have a forward schedule that is not fully committed by them but we do understand what the requirements are. So that's the first thing -- we have a picture ahead of us and production orders for an aircraft producer. We have it for like what they have -- the same few as they have for the next 18 months. In the case of a flat panel display retrofit contract that we have our books we know what their total requirements are. We know what their expectation is for aircraft availability but their actual commitment comes only in can lead time for the product. So we are able within that lead time to provision the materials and ship and bill the product.

Okay so in any case you're not having to lay in (multiple speakers)

We're not having to pile up inventory to support short orders.

That's very helpful. I was a little bit distracted by something else going on in the market when expenses were being discussed. But the growth in SG&A expenses sequentially was that mainly from the additional legal expenses?

Yes it was. The legal expenses obviously we have talked about over the last several calls, Kevin and they have been significant.

Absent legal expenses, what is a core level of SG&A expenses at this point for the Company?

We would like to target if you were building a model we would like to target G&A around 16% of sales. That's a long-term goal for us and something we have achieved in the past.

And so, assuming if $50 million of sales are reached in this fiscal year so you're talking roughly $2 million a quarter of SG&A?

Round numbers I guess you could say that. We don't want to get pegged down to anything right now. We are truly going through a kind of a renaissance year from the small company we used to be to a very large company in terms of being able to generate significant revenues. We put the infrastructure in place to get there but --

And then one last question. $50 million is kind of a round number. But what would cause it to be reasonably higher than that and what could cause it to be somewhat below that?

Obviously a significant demand increase from any of our current major customers could increase that because for all of those who we're delivering today given that the year is only a few months old, a couple months old we could increase their shipments certainly in the second half. So if suddenly American for example said we're going to increase our pace from X aircraft a month to X (inaudible) four we could meet the demand and the revenue line would go up. And you could apply that any of our existing customers.

In terms of new contracts I think on the military side there are probably some opportunities which we're working at that we don't -- we haven't anticipated in this year's planning. But we have them on our radar screens and they could come in earlier. (multiple speakers) On the other hand I must say customers can make up their mind to go in either direction.

This morning there is a new revenue estimate for the Company of $36 million. Is that something that has a 10% change of happening, a 25% chance of happening? What are your thoughts on that?

It wasn't our estimate.

Pardon me?

It wasn't our estimate and we haven't heard it. I haven't seen it. You're the first guy who mentioned that to me.

It wasn't my estimate either.

Okay, well that's good. I don't want to talk about it.

Greg Fujii, Coghill.

I had a couple of questions around the Eclipse business and so I know that you had invested a little over $2 million in some different engineering for the Company but -- and I wouldn't expect you I guess to comment on the state of affairs over there but I guess from your perspective internally how do you view further investment in Eclipse? Are there any concerns?

There are no concerns. You know as much about Eclipse as we do and (inaudible) and the round. We think they've got a winning product and we're talking to them about future enhancements that they may be looking for. So there are no particular concerns in that respect.

Okay, got you. And so I guess when looking at the $50 million numbers being achievable next year, your next fiscal year can give us a sense for how much Eclipse is baked into that? I'm guessing Eclipse is mostly turns business as well?

Eclipse numbers if I were prepared to give you them would actually muddy the water because you've got to remember that we have replaced another supplier on our airplane and we're new to it therefore we haven't really got production numbers, we have got spares being laid down and retrofits for the [Avadine] displays that are on the hundred odd aircraft today. So we haven't worked that program in detail yet towards Eclipse. But it would only confuse matters for me to give you numbers.

Okay got you. So the previous caller kind of said that $50 million is a little bit of a round number. So Eclipse it sounds like could have a relative meaningful impact on that number in your fiscal 2008. So I guess can you at least confirm that you are expecting meaningful revenues from Eclipse on a turns basis in 2008?

I don't understand what meaningful revenues mean? Can you explain a little bit more?

Say 10 to 15% or more of your revenue next year?

Yes, easily that sort of order, yes.

Okay, that makes sense. Thank you very much.

We will just --

[Dayton Rogers, TCS Capital].

Yes, I was calling to just kind of follow up on Eclipse. As far as the payments that you've received from them since I heard they have had difficulty making timely payments to one of their suppliers.

Given that we have only just shipped product there's no production payments due. So I will let you know -- I probably won't let you know because I really don't want to talk about our business with customers in that detail. But right now there are no production payments overdue. They haven't identified to me that there's any problem with paying the bill. I know that isn't the answer you're looking for but that's the facts.

[John Murazani], Warrington Capital.

Good morning, could you discuss what the next steps are in the lawsuit with Kollsman and when it might be reasonable to actually realize the settlement that you received?

Jim already mentioned that there might be some legal expense goes on into the early part of next calendar year and we would anticipate that this thing gets closed down early next year.

Early in the next fiscal year?

Yes, sorry, no actually the next calendar year (multiple speakers) 2008.

Adriano Almeida, Dalton, Greiner, Hartman, Maher & Co.

I'm wondering about something here on the balance sheet. I see in the press release that the receivables went to $6.3 million in this latest quarter?

Yes.

In previous quarters your receivables were considerably lower than that. I guess -- I mean that's like a $4.5 million increase just sequentially from last quarter.

Yes, that's right. But if you ask me what my receivables were today I would tell you they are probably down about $1.5 million to under $2 million. So there was a pop at the fourth quarter. As I mentioned a lot of the revenues for many and diverse reasons went out at the last month of the quarter and obviously they were current but significant.

The real -- obviously the real test of receivables is the days outstanding. And the days outstanding even as of September quarter were probably 35 days so we have no problem at all with receivables and when we do the Q for the first quarter you will see that.

Okay, but I mean, I'm asking just because it seems like the (multiple speakers)

No, it's a fair question.

The sequential increase in receivables is pretty much equal to revenues so it's a little bit alarming. The other thing I notice too on that same line item is that you actually had a zero allowance for doubtful accounts in this quarter. How can receivables go up so much and the allowance good down? Is there a mix issue here?

No, that speaks to the quality of our receivables. The allowance has gone down because our outside accountants Deloitte & Touche told us we couldn't carry an allowance for doubtful accounts because we never have doubtful accounts.

Adriano Almeida I guess that makes sense. And then with -- so (multiple speakers)

Can we start the limit that they -- perhaps you can ask a supplementary but from now on I think we're running the timeclock down and [there's] one question for each person in the queue, okay?

All right well I've heard enough. Thank you.

David Campbell, Thompson Davis & Company.

Hi, thank you very much. Most of my questions have been answered. I assume that you can't disclose or talk about the value of the Eclipse revenues. In the December quarter you mentioned that you delivered some in November and you will (inaudible) delivering I think you said 60 more by the end of December. You can't talk about the value of that, I suppose?

You're absolutely right, David.

I understand that. Thank you very much and I really -- most of the other questions have been asked. Thank you very much, good quarter.

Michael Ciarmoli, Boenning & Scattergood Inc.

We know where you're from even if the young lady doesn't.

Right, I was wondering if you could give us a composition of the backlog?

In terms of what my goal (multiple speakers) in terms of 1% is what?

In terms of customers.

Customers in backlog, we have roughly 20 or 25 customers.

Can you give us values on some of the bigger ones or no?

Michael, you know, we don't do that. We announce the big orders when they come in but we try to stay away from articulating by element the backlog.

On the margin structure it looks like you have incurred a lot of development costs with Eclipse. I understand that is a unique project. What kind of costs do you foresee going forward on say the American Airlines program, FedEx any other major customers you might get that might I guess bring your overall gross margins down or not make you able to achieve those historical levels? I just want to make sure going forward I've got an accurate representation.

We have studied that pretty carefully here and the programs that you have mentioned are programs that are really almost legacy programs for us now. We've been doing the flat panels for a couple of years and as long as the customer wants something that is relatively basic there's really no new added engineering and development work associated with it and that means that they should gravitate to the normal gross margins that we have had in the past.

The gross margin in the quarter that we're talking about here today is about 38% which is lower than our historical margins. It's interesting though we've talked about what volume will do to the margins here. You have seen it in the past. If you were to take the current quarter Mike and just increase it by 50% -- now 50% sounds like a lot but the numbers are very small. The margins would go from 38% to over 50%. That speaks volumes for our ability to transform profitability with volume here in the Company.

Thanks, Mike.

[Luke Williams, Burkove Associates].

Ray I wonder if you and Roman, Jeff and others are spending much time at this stage in talking directly with the FAA or high-level military people. It seems to me as though you offer such a solution to many of the congestion problems of the whole FAA system that you would want to spend some time talking with them to acquaint them -- all their people with what you have available which can alleviate many of the problems.

Well to be honest we're not actually doing that. The FAA have got a program of discussion going on with some people which we are watching very closely. But what we offer is the platform for the visibility. There are other things to be done by other people to enable for example all the aircraft in the vicinity of the known aircraft to be visualized on the screen.

We cannot do that unless there's some equipment on board other airplanes. And that's what the FAA are talking to some other major vendors in the about. We can't jump in on that act I'm afraid at the moment. But we're watching it carefully.

So there might be a time when you would have greater need to work with the FAA directly?

There might be, yes, there might be.

What about high-level military?

Well, we haven't pursued that avenue I must say but it's a good idea and I'll give that some thought. Thanks very much.

[Tamara Maddux], Greenwood Investments.

Good morning, a few follow-up questions.

One question only. You better pick the one you really want an answer to.

Okay, what portion of backlog is on airplanes with no STC right now?

Good question. I'm not sure we have got the answer to that off the top of our heads. Just let Jim take a few seconds to do some arithmetic. It's very small. If I were to guess I would say it's between 10 and 15%.

About 15%.

15% -- okay.

Ashok Ahuja, Icor.

There's only one question after this one, okay folks? And is not Ashok's question the second one.

I'm not even going to try to ask more than one. So the question I guess based upon your statement it appears as though at least 10 to 15% of backlog and "expected revenues" out of the $50 million will probably come from Eclipse. Based upon the questions that were asked about Eclipse it seems that the underlying concern that the people were asking the question had was whether you have a question in terms of viability of Eclipse long-term. So I guess that's really the question.

Your deduction is flawed. There's no STC on Eclipse. So the answer regarding STC in terms of percentage in the backlog not covered by STC has nothing to do with Eclipse. As far as the viability of Eclipse is concerned that's something we are very aware of where they sit at the moment but I'm not going to discuss it with anyone in the open marketplace for sure.

Last question now, okay?

Greg Fujii, Coghill.

Sorry guys I'm in the queue too many times here. No questions.

Thank you.

Thanks very much.

Thank you. At this time there's no further questions. I'll turn the floor back over to management for any closing remarks.

I think it's been a very worthwhile call and we would like to wish you all a very good day.

Thank you. This does conclude today's Innovative Solutions and Support fourth-quarter 2007 earnings conference call. You may now disconnect.