Innovative Solutions and Support Inc (ISSC) 2019 Q1 法說會逐字稿

Good day, and welcome to the Innovative Solutions and Support First Quarter 2019 Fiscal Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Geoffrey Hedrick, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning. This is Geoff Hedrick. I'd like to welcome you this morning to our conference call to discuss the performance of the first quarter of fiscal 2019, current business conditions and our outlook for the upcoming year. Joining me today are Shahram Askarpour, our President; and Rell Winand, our CFO. Before I begin, I'd like Rell to read the safe harbor message. Rell?

Thank you, Geoff, and good morning, everyone. I would remind our listeners that certain matters discussed in the conference call today, including new products and 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 from 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.

Thank you, Rell. The new fiscal year has responded positively to the cost controls and marking refocus put in place at the start of this fiscal year. Both revenues and backlog were up. We reported a long-awaited profit for the first fiscal quarter of this year. I believe that the foundation for a growth here is now in place. Shipments of displays for retrofit programs of commercial air transport drove first quarter revenue growth, an encouraging sign that this market is rebounding.

In general aviation, the highly successful PC-24 UMS program is now in full production mode -- excuse me, now in full production mode and expectations of steady stream of orders is in place. Orders for the autothrottle have started delivery and installation. PC-24 flight deck orders will be delivered this quarter. In the military market, the development of the new air data computer for the F-5 is in final stages of predelivery qualification testing. We are pursuing applications of our technology into the drone market as well.

As previously discussed in the last earnings call, we have been concentrating our resources on few but potentially more lucrative opportunities. We have reorganized the company proved resources and focused our research efforts on developing new innovative products with clear performance and cost advantages.

The principal results of our efforts is our ThrustSense integrated PT6 autothrottle. We are notified that the ThrustSense autothrottle is the first FAA certified autothrottle for turboprop aircraft. ThrustSense protects the engine from exceedance damage and helping to protect against over and underspeed loss of control. We understand that there are over 10,000 vulnerable PT6 powered airplanes that do not include the potential and that does not include the potential of other markets such as drones and [remote generators].

Consequently, because of its light weight easily installed high value and low cost, we are experiencing expanding interest in a broad spectrum of applications. This is the first FAA-certified autothrottle. Traditionally autothrottles have been expensive, unnecessary and automotive-like cruise controls. The ThrustSense brings FADEC, that's full authority digital engine control-like protection to a very large market of hydromechanical engines with demonstrated reliability of hundreds of millions of hours of operations. Both the Pilatus PC-12 Classic and NG have been certified and an STC for the King Air is expected shortly, delayed only by a recent federal government shutdown.

We are in the midst of a rampup of our full-scale marketing campaign. Our efforts are being led by our recently hired director of autothrottle programs, Tom Grunbeck, a seasoned professional with 10 recent experiences in this market alone.

We were successfully raising market interest and awareness of the compelling safety features and low installed cost. The interest is expanding and increasing. And orders are starting, the low cost autothrottle and the PC-12 NextGen 2015 large-panel cockpit. That is the new cockpit for the PC-12. We'll start deliveries this quarter. I am encouraged and gratified by the results of our restructuring efforts.

Let me turn it over to Rell for discussion of financials.

Thank you, Geoff. And thank you all for joining us this morning. Revenues for the first quarter of fiscal 2019 were $4 million, a 29% increase from the first quarter of fiscal 2018. While most of the increase was in product sales, primarily air transport, we did recognize $200,000 of engineering revenue in the quarter related to the F-5 development contract.

Gross margins for the quarter were 54%, an increase from 48% a year ago. Gross margins reflect an increase of first quarter revenue from product sales as well as the impact of the workforce reduction implemented in the third quarter of fiscal 2018.

Total operating expenses for the first quarter of fiscal 2019 were 2.1 million, down $500,000 compared to approximately 2.6 million in the first quarter a year ago. Research and development expense were down $300,000, while selling, general and administrative expenses were down approximately $200,000. Each of these decreases reflect the impact of the third quarter fiscal 2018 workforce reduction.

Keep in mind that our more-focused business strategy enables us to do more with less R&D spending as we invest in fewer but more promising technologies. We reported quarterly net income of $139,000 or $0.01 per share. A significant improvement from the net loss of 882,000 for $0.05 a share a year ago.

The company remains in a strong financial position despite a very modest use of cash in the quarter. At December 31, 2018, we had over $20 million of cash on hand and no debt. We believe the company has sufficient cash to fund operations for the foreseeable future.

Now I'd like to turn the call over to Shahram.

Thank you, Rell. And good morning everyone. As Geoff mentioned, the new fiscal year is off to a good start with an increase in revenues and increase in backlog and a return to profitability. Let me provide a little more insight as to what is driving our progress. Recently we have been receiving orders from our air transport dealer network in both domestic and international markets as our strategy is beginning to take effect. You are starting to see a return on that investment with growing interest in our portfolio cockpit technology.

As Rell mentioned, most of our revenues in the first quarter were from product sales, with an uptick in sales of existing products such as flat-panel displays for the Boeing 757 and 767. In addition, we are generating revenues from a number of ongoing programs such as the Pilatus PC-24 which has achieved steady rise in production levels.

With $4.3 million in orders booked over the course of last 12 months we see an increase of approximately $1 million from the last quarterly annual orders reported. The PC-24 program is going well as the aircraft has been enthusiastically accepted by the aviation market.

Very little of our expected PC-24 revenues are in backlog, although orders may exceed 40 chipsets per year while the plane is in production. And we are now generating both product and engineering revenues in the military market. Our KC-46A program continues to trend well and we are responding to Boeing for additional requests from international customers.

Our development contract for new F-5 data computer for the U.S. Navy is nearing completion. And we expect that the production orders will commence shortly after. This is essentially a replication of a product we built for the A-10 that has shown remarkable performance and reliability.

By adopting that technology to the F-5 we are minimizing its cost and accelerating its time for development. We believe that there are further opportunities to adapt this data computer to a variety of other military platforms as our new design has more versatile capability than our past products.

While the direction of revenues and backlog is certainly rewarding, neither of these measures adequately capture the opportunity that has us most excited. And that of course is our ThrustSense autothrottle technology.

With STCs now in place and others imminent, we've begun to ramp up our comprehensive marketing plan. The infrastructure to ensure that we can support this launch continues to strengthen. Utilizing our PC-12 and King Air aircraft we're making numerous onsite demonstrations of the technology with manufacturers, installers, fixed base -- fixed based operators and others.

With new orders in hand and deliveries already commenced for the PC-12 standalone autothrottle, a full cockpit configuration, we are beginning to see a payback of our investment in this unique and exciting product line that has been praised in leading industry publications.

Furthermore, since we believe this patented technology to be unprecedented, our expectation is that these initial STCs, especially the sophistication of our twin engine STC would pave the way for a much easier path to additional STCs in the future.

Finally, we are pleased to observe that last year's reorganization is beginning to produce expected results by improving efficiency and providing the return to profitability in this first quarter.

Over the last few quarters we have provided a fair and balanced look at our business by anticipating a gradual market acceptance of our autothrottle-based products.

As we are experiencing positive response to our marketing efforts of ThrustSense and receiving orders for our certified PC-12 product line, we believe this reception is an early indicator of market acceptance of a product strategy for general aviation with ThrustSense being in the center of that strategy.

Let me turn the call back to, Geoff for some closing remarks.

Thank you, thank you, Shahram. You will excuse me, because I'm struggling with my records. Here. Fine. Thanks. Over the past few years we have been returning to our roots, pursuing products where we bring real product innovation that leads to better performance and reliability, as well as potentially lower cost. That is why we are focusing on products such as the Autothrottle and utility management systems never previously designed or conceived.

Through patents or other controlling uniqueness of technology, we establish special strength in the marketplace and create real value for our stockholders.

So in conclusion, I appreciate your attention today and will open the call up for questions. Operator? Operator?

(Operator Instructions) The first question comes from Charlie Pine of Van Clemens & Co.

Congratulation on you return to GAAP profitability in the quarter.

It's a long time between drinks.

Yes, it has been. But looking forward to the next round. Couple of question. The -- it's obviously well known that due to shutdown the FAA was pretty much out of commission for a month, so that being known, how much of an effect did that have on the processing of what was going on with the STC for the ThrustSense for the King Air. What is that purview right now?

It was significant. But we're happy, it looks like it's either over or close to over. I understand that we've broken some very new ground especially in the area of the King, the Pilatus PC-12s, both have STCs issued modifications to those, maybe delayed but that's less critical. Then the King Air STC incorporates a new technology, a safety technology that's unheard of expect in a rudimentary form used by the 787 Boeing airplane. So this new technology is -- prevents a serious out-of-control condition that can occur when you lose an engine. That technology is so new and revolutionary that it's taking special time, almost a year to understand and evaluate it by the FAA. Happily we've demonstrated it both to the manufacturers and the FAA, and it's gotten great reviews. So we believe it's a matter of time. They have to get through their process. Because it's never been done before they don't have anything to base it on. And that's probably the biggest impact.

On the last call you had talked about that you were scheduling with the FAA, was going to be scheduling test flights. And I believe also I had asked you just kind of roughly when you thought you might be able to get through all of this and get the paperwork filed, the large amount of paperwork that was going to be necessary. And what's your kind of a guesstimate of when you thought that you could conceivably get the STC? And at the time, couple months back we thought there was a good chance that you might have it by the end of Q1. But now I, of course assumed with the shutdown there has been some push back. You feel that you've got -- the process is moving forward in such a way now that the -- that the lights are on at the FAA and you can move this, that there is a good chance that you'll have this before the end of the second quarter?

Well, I don't know. I would -- I think that may be a little premature. Remember, what happens when you shutdown, the pileup of all of that -- all that information that has come in over the month typically it has a 3-month or 4-month impact. So considering the uniqueness of our application I would not be -- I believe there is an opportunity, a possibility, but it's more likely going to be not in the second quarter but in the third quarter.

Okay. Well, I appreciate that clarification. Can somebody talk a little bit more about what sort of orders that you are -- I mean, maybe I missed this a little bit, but if you could talk a little bit more about the characterization of the orders that you are currently getting for the ThrustSense on the PC-12?

Shahram, you want to do that?

Yes, we -- what we're seeing, actually we're seeing orders for both full cockpit configuration, which obviously has a much, much larger number in terms of revenue and profit as well as the individual installation of the standalone autothrottle. We've done deliveries, we've got installations. I believe one installation was completed -- is about to get completed today. And we're seeing a tremendous amount of interest coming in for both of those, not just within the U.S. but also internationally, which is very promising.

I would comment that, want you to know that originally the autothrottle was conceived as an addition, an enhancement to the Flight Deck, not simply as a standalone device, but to enhance the value of the Flight Deck. It enables us to provide a really, what we call a fourth dimensional -- fourth dimension control of the airplane. And that is to say that increasingly there is a demand by flight -- air traffic control to have arrival times precisely defined so that they can control the flow of aircraft into a field and get much more efficiency. In order to do that, that require some very detailed speed control, hitting waypoints at very specific times. To do that manually is almost impossible. So our autothrottle coupled with our Flight Deck allows you to have a required time of arrival. You can take off, fly 3 hours or 4 hours and land or arrive at a waypoint within less than 60 seconds of the defined time. So it's quite an achievement and it's now strongly enhancing a much more valuable product line of Flight Decks.

Okay. Two other things I'd like to ask. The first was could you expound a little bit more on the renewed business that you mentioned regarding what's going on in the air transport segment?

Shahram?

Yes. So I guess a while back we've invested in putting together kind of a larger dealer network rather than hiring a bunch of sales guys internally to go after the general aviation. And essentially what we've seen now is that -- that that is paying off. We also have, we're also pursuing some larger air transport customers utilizing our own sales guys. But by getting orders on the -- from some of the dealer network is something that's beginning to take effect and we're pleased to see that happening.

How much of a contribution to the business do you think it will constitute going forward over the next several quarters? What on a segment basis would you say?

I think we should be able to, I mean we're on -- we're -- when we look at our internal revenue targets on the air transport side, we're meeting those targets. So that's usually a good sign.

And the last one. About a year, maybe 1.5 year ago, the company put out some press releases talking about relationships with so-called MROs. I haven't heard much discussion about those relationships for some time. Can you talk a bit about that? Or are you now actually seeing some benefit from some of the groundwork that was done with that?

Exactly. That's on the air transport. We are getting -- these orders that we're getting is through some of those MROs.

(Operator Instructions) This concludes today's Innovative Solutions and Support earnings call. Thank you for attending today's presentation. You may now disconnect.