Innovative Solutions and Support Inc (ISSC) 2015 Q4 法說會逐字稿

Good morning and welcome to the Innovative Solutions and Support fourth-quarter and fiscal 2015 year-end earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation by management, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Geoffrey Hedrick, Chairman and CEO. Mr. Hedrick, you may begin.

Good morning. This is Geoff Hedrick, Chairman and CEO of Innovative Solutions and Support. I would like to welcome you this morning to our conference call to discuss fourth-quarter and full-year 2015 results, current business conditions, and our outlook for the upcoming year.

Joining me today are Shahram Askarpour, our President, and Rell Winand, our CFO. But before I begin, I would like for Rell to read our Safe Harbor message.

Thank you, Geoff, and good morning, everyone. I would remind our listeners that certain matters discussed on the conference call today, including operational 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 than those discussed, including other risks and uncertainties reflected in our Company's 10-K, which is on file with the SEC, and other public filings.

Now I'll turn the call back to Geoff.

Thanks, Rell. Fiscal 2015 was a year of recovery. Although our revenues were down, we increased the proportion of our higher-margin production revenues, increased gross margins, and generated $1.5 million in cash flow from operations, ending the year in a better cash position than we started the year.

We have made significant progress moving from a concentration on a select engineering development program to a broader focus on the opportunities in support of our growing portfolio of products. The end of the Delta program accelerated the transition to a greater focus on production contracts.

Earlier this year, we strengthened our sales and marketing efforts as well as our internally-funded research and development efforts. Once again in the fourth quarter, research and development expenses exceeded those of a year ago. Now we believe we are starting to reap the benefits of these decisions.

In the fourth quarter, we booked $6 million and ended the quarter with an increase in backlog for the first time this year. Orders were primarily for existing products across a number of platforms where we've had great success in markets where there are large fleets. In addition, we received orders for our newer products. This record return on our internally-funded research and development investment is especially rewarding.

Many of the orders from our international markets -- excuse me. We continue to view international markets as particularly attractive, and as our proprietary price-performance value proposition, seems to be resonating with broad cross-section of owners and operators in Europe, Asia, and the Middle East.

I would like to comment on a new product, which is different than virtually all of our products in our portfolio. You may recall that the Eclipse jets contained an ISNS auto-throttle computer that is certified and operating well. We decided to adopt the entire eclipse flight deck to several high-end turbo props -- PC12 is an example. This auto throttle requires a development of a revolutionary power control actuator for non-FEDIC engines.

We have developed and have patents pending which are applicable to a broad range of turbo props, including twins. It may be -- it may also be applicable to large multi-engine military aircraft. The enthusiastic reception at NBAA was exciting and remarkable. We are optimistic about a large expanding market for our new product.

The order trend continues, even accelerating into the first quarter of fiscal 2016. We have booked in excess of $10 billion of new orders already this quarter and again primarily for existing products. In contrast to the large programs of recent years requiring extensive engineering before they are ready for production, many of these new contracts will enter production immediately.

Given that we have spent a considerable amount of effort implementing efficiency and productivity enhancements, we believe we can achieve the margins on our product revenue in line with historical average. A heavier overall portion of production revenues should boost gross margins.

Order momentum has increased recently compared to the beginning of fiscal 2015 with $16 million recently-booked quarters. We plan to continue our aggressive sales and marketing effort, especially in international markets. We also plan to maintain our internal research and development to further broaden our product portfolio, particularly in the high-interest areas such as next-gen technology.

Now let me turn this over to Rell for a detailed description of our financial performance.

Thank you, Geoff. And thank you all for joining us this morning. For the three months ended September 30, 2015, revenues totaled $3.1 million compared to $9.9 million in the same quarter a year ago. Fourth-quarter revenues are consistent with the quarterly variability and anticipated in fiscal 2015.

In the fourth quarter, product sales were $2.4 million or 77% of total revenues; in the third quarter, 84% of revenues were product sales. These two recent quarters of predominantly production revenues are in line with what we have expected to be a steady transition to a higher proportion of production revenues.

For the full year 2015, engineering revenues were $5.5 million, one of the lowest levels in years, and down 61% from 2014. Gross margins for the fourth quarter were 35%, in line with full-year gross margins. For the year, gross margins were up compared to fiscal 2014. Gross margins continue to be greatly influenced by quarterly revenue volumes and products.

For both the quarter and the year, margins do not benefit from an increase in engineering revenue margins, which had frequently yielded little to no margins in recent years. Based on the composition of current backlog and opportunities in our pipeline, we expect to see a proportion of revenues generated from production contracts to increase in fiscal 2016.

Total operating expenses in the fourth quarter were $2.6 million, with selling, general, and administrative expenses of $1.6 million. As previously mentioned, we began to incur additional legal expenses from the Delta matter in the third quarter, and we expect to see those expenses continue into the beginning of 2016 at least at higher levels.

For all of fiscal 2015, Delta-related legal expenses totaled over $600,000. R&D expense for the fourth quarter rose to $955,000 from $682,000 a year ago, and was the highest quarterly level for fiscal 2015, reflecting our commitment to new product research and development.

For the fourth quarter, the operating loss was $1.5 million and the net loss was $1.4 million or $0.08 per share. Operating loss for the current year was $2.2 million and the net loss for the current year was $4.7 million or $0.28 per share, of which $3.7 million or $0.22 per share was attributable to a non-cash evaluation allowance of the Company's deferred tax assets, some of which may be recoverable in future profitable periods.

At September 30, 2015, the Company had $16.3 million of cash on-hand and remain debt-free. Since the tax valuation allowance was a non-cash charge over the course of the past 12 months, we generated $1.4 million in cash from operations. We believe the Company has sufficient cash to fund operations for the foreseeable future. With the influx of new orders received to date, we believe that the variability evidence in fiscal 2015 will be minimized, as there will be less reliance on book and bill orders in fiscal 2016.

Shahram?

Thank you, Rell. Good morning, everyone. I would like to provide an update on the progress achieved during the fourth quarter as well as our current strategy and plans. Since the termination of work on the Delta contract, we have been articulating our strategy to improve efficiencies, increase sales and marketing activities, and invest in new product development to win new orders, to backlog, and return the Company to growth.

I'm pleased to report that this strategy is starting to deliver the intended results as we see that the increased activity levels of the past year are starting to be converted into new orders. An example of our newly developed products is the Integrated Global Navigation System or IGNS. IGNS development has been entirely funded with internal resources and not dedicated to a specific customer.

Since the IGNS was designed to be integrated with our flat panel display system, a large customer, a European airline, has also purchased our flat panel displays and integrated stand-by for their fleet of Boeing 757 aircraft. Also, our intensified marketing efforts for international customers are showing positive results.

Over the past few months, we have received orders for a Boeing 757 display system from an international cargo carrier. And we have received orders for our Boeing 737 flight management and display system from another international operator.

The Boeing 737 flight deck and flight management system order marks our first commercial customer to purchase the advanced cockpit, which we developed for our National Nuclear Security Agency. The full flight deck, comprised of our flight management and display systems, received FAA certification a year ago. We are seeing strong indications that our classic Boeing 737 flight deck upgrade offers good growth potential in Europe and in the Far East.

Similar to the IGNS product, in light of the sale of our flight management system by linking our Flat Panel Display systems to the order deck as a means for the customer to maximize aircraft safety and situational awareness, while significantly reducing their cost of ownership over the existing aging avionics. In total, new orders for the fourth quarter were $6 million, increasing backlog to $76 million at September 30, 2015 from $4.8 million at June 30, 2015.

More importantly, in the current first quarter, we have continued to convert pipeline to backlog with in excess of $10 million in new orders booked from October 1 to date. I would like to emphasize that a majority of the new orders are for existing products and built upon the platforms where we have historically had success. The Boeing 737, 757, 767, as well as the C-130. These are all large fleets, where our strategy has been to expand market share by introducing new products and features that augments our existing offerings.

As a result, we are having success not only with our established products, such as Flat Panel Display systems, but we are also making progress with our newer products, such as our integrated stand-by units, flight management system, and IGNS.

In many cases, it is a solution sale comprised of multiple ISNS products. This reflects a concerted effort to continually broaden our offering portfolio in the markets we believe to bear the greatest potential.

On the new product development front, we just introduced our future generation flight deck featuring the patent-pending PT-6 auto throttle for a multitude of general and business aviation aircraft. Our initial installation is in the Pilatus PC-12 aircraft that features our latest generation cockpit system developed for the Eclipse 550.

This offering includes our integrated dual RMP flight management system, electronic flight pack, synthetic vision, air data, attitude, head and reference system or our ADAHRS, integrated stand-by, ADS-B capable Beta 3 GPS, and of course our new auto throttle controlled by our integrated Flat Panel Display system. We are seeing encouraging interest from aircraft OEMs and installers for forward fit and retrofit of the PT-6 auto throttle into various platforms.

I would now like to provide some brief comments on our other development programs. With flight testing on the way, the Pilatus [PC-12 -- 24] engineering development program remains on course for commercial orders starting in late 2016, and our Boeing KC-46A program is also making steady progress. Heading into fiscal 2016, our goal is to continue to build on our momentum and establish innovative solutions and support as a partner on which owners and operators can rely to cost-effectively outfit their cockpits with technology that significantly improves aircraft performance and safety.

I would now like to turn the call back to Geoff.

Thank you, Shahram. Over the past year, we have balanced the need for recovery of the organization while maintaining a stronger financial position to support our future growth initiatives. We believe much of the heavy lifting is completed and that we now expect to be on an upward slope looking at new orders and building backlog.

I want to thank everyone at IS&S for their efforts in making this happen. Now we need to build on our momentum. Our goal for 2016 is to grow profitably in the business and generate cash, and we believe this is a solid strategy to create value for our shareholders.

We thank you for your continued interest and support. Operator, we are now ready to take questions.

(Operator Instructions) David Campbell, Thompson Davis & Company.

Congratulations on all these new orders. Very impressive.

It's good because they are from a broad variety of products throughout our product lines. I told you we had a spectacular reception at NBAA. Plus we had 300 people at the airplane. It was amazing.

Well, it sounds like you will be profitable this fiscal year.

Oh, yes. Oh, yes.

You don't have any problem with that. Okay. Because the backlogs are growing so fast. I mean, $2 million in new orders?

That's in two months.

I know it.

Well, I wouldn't count on that happening every two months, but I think it will -- I think it certainly in the hand is better than in the bush.

So I will redo my numbers and send them to you, but I will be forecasting a profit for the fiscal year.

Yes, we'll be doing that. We should do that well. And importantly, we have very, very few -- very little revenue if any from engineering development programs. And they are all from production programs. The only expense that's going to hit us is the legal fees that -- on the Delta suit.

But we see them as certainly manageable. And they can't -- they might affect our earnings for the year, but we're confident on that. I think that the court will bear us out and we feel positive that we'll get our contract too, as it is.

Well, yes. One way to look at that is that's a -- legal fees are nonrecurring or at least an extraordinary expense that you could almost take out of the operations, so.

Yes, I know, but I -- they are an operating expense. The good news is we're generating cash to pay for it. So, that's -- we are in solid shape.

I've got to go, but thank you very much. I will talk to you soon.

Good talking to you. Thanks for calling in.

All right, bye.

Since there are no more questions, this concludes our conference for today.

Thanks for being here today.

Thank you for attending. Thank you. You may now disconnect your lines.