Innovative Solutions & Support - Earnings Call - Q1 2019

Transcript

Speaker 0

Good day, and welcome to the Innovative Solutions and Support First Quarter twenty nineteen Fiscal Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Jeffrey Hedrick, Chairman and Chief Executive Officer. Please go ahead, sir.

Speaker 1

Good morning. This is Jeff Hedrick. I'd like to welcome you this morning to our conference call to discuss the product performance of the 2019, current business conditions and our outlook for the coming year. Joining me today are Sharon Mascupur, our President and Raul Wenhan, our CFO. Before I begin, I'd like Raul to read the safe harbor message.

Raul?

Speaker 2

Thank you, Jeff, 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 ks, which is on file with the SEC and other public filings. Now I'll turn the call back to Jeff.

Speaker 1

Thank you, Ralph. The new fiscal year has responded positively to the cost controls and marketing refocus put in place at the start of this fiscal year. Both revenues and backlog were up. We were we reported a long awaited profit for the first fiscal quarter of this year. I believe that the foundation for a growth year 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. It's now in full production mode and expectations of steady steady stream of orders is in place. Orders for the autothrottle have started delivery and installation.

PC 12 flight deck orders will be delivered this quarter. In the military market, the development of the new air data computer for the F5 is in final stage 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 on 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 result of our efforts is our ThrustSense integrated PT six autothrottle. We are notified that the ThrustSense autothrottle is the first FAA certified autothrottle for turboprop aircraft. ThrustSense protects the engine from exceeding its damage and helping to protect against over and under speed loss of control. We understand that there are over 10,000 venerable p t six powered in airplanes that do not include the potent and that does not include the potential of other markets such as drones and remote generators. Consequently, because of its lightweight, easily installed, high value, and low cost, we are experiencing expanding interest in a broad spectrum of applications.

This is first FAA certified autothrottle. Traditionally, autothrottles have been expensive, unnecessary automotive like cruise controls. The ThrustSense brings FADEC, that's full authority digital engine control, like protection to a very large market of hydro mechanical engines with demonstrated reliability of hundreds of millions of hours of operation. Both the Pilatus PC 12 classic and NGR 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 ramp up of our full scale marketing campaign.

Our efforts are being led by our recently hired director of our auto throttle programs, Tom Runbeck, a seasoned professional with 10 recent experiences in this market alone. We're successfully raising market interest and awareness of the compelling safety features and low installed cost. The interest is expanding and increasing, and the orders are starting the low cost autothrottle and the PC 12 next gen 2,015 large panel cockpit. That is the the new cockpit for the PC 12 are will start deliveries this quarter. I am encouraged and gratified by the results of our restructuring efforts.

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

Speaker 3

Thank you, Jeff,

Speaker 2

and thank you all for joining us this morning. Revenues for the 2019 were $4,000,000 a 29% increase from the 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 F5 development contract. Gross margins for the quarter were 54%, an increase from 48% a year ago. Gross margins reflect the increase of first quarter revenue from product sales as well as the impact of the workforce reduction implemented in the third quarter fiscal twenty eighteen.

Total operating expenses for the 2019 were $2,100,000 down $500,000 compared to approximately $2,600,000 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 twenty eighteen workforce reduction. Keep in mind that our more focused business strategy enables us to do more with less R and D spending as we invest in fewer but more promising technologies. We reported quarterly net income of $139,000 or $01 per share, a significant improvement from the net loss of $882,000 or $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 3138, we had over $20,000,000 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 Sharon.

Speaker 3

Thank you, Brill, and good morning, everyone. As Jeff mentioned, the new fiscal year is off to a good start with an increase in revenues, an 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. We are starting to see a return on that investment with growing interest in our portfolio of cockpit technology.

As well 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 seven fifty seven and seven sixty seven. In addition, we are generating revenues from a number of ongoing programs such as the Pilatus PC-twenty four, which has achieved steady rise in production levels. With $4,300,000 in orders booked over the course of last twelve months, we see an increase of approximately $1,000,000 from the last quarterly annual orders reported. The PC-twenty four program is going well as the aircraft has been enthusiastically accepted by the aviation market. Very little of our expected PC-twenty four revenues are in backlog, although orders may exceed 40 ship sets per year while the plane is in production.

And we are now generating both product and engineering revenues in the military market. Our KC-forty six a program continues to trend well, and we are responding to Boeing for additional requests from international customers. Our development contract for a newer fiber data computer for the US 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 adapting that technology to the f five, we are minimizing its cost and accelerating its time for development.

We believe that there are further opportunities to adapt this air data computer to a variety of other military platforms as our new design has more versatile capabilities 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-twelve and King Air aircraft, we are making numerous on-site demonstrations of the technology with manufacturers, installers, fixed base operators and others.

The new orders in hand and deliveries already commenced for the PC-twelve stand alone autothrottle and full cockpit configuration, we are beginning to see a payback on 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 oral thrall based products. As we are experiencing positive response to our marketing efforts of FrostSense and receiving orders for our certified PC-twelve product line, we believe this reception is an early indicator of market acceptance of our product strategy for general aviation with ThrustSense being in the center of that strategy.

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

Speaker 1

Thank you. Thank you, Sean. You'll excuse me because I I'm struggling with my my reference here. 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 auto throttle 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 we'll open the call up for questions. Operator?

Speaker 0

The first question comes from Charles Pine of Van Clemens and Company. Please go ahead.

Speaker 4

Thank you. Good morning, everyone.

Speaker 3

Good morning. Congratulations

Speaker 4

on your return to GAAP profitability in the quarter.

Speaker 1

It's a long time between drinks.

Speaker 4

Yes. It has been. But I'm looking forward to the next round. Couple questions. The it's obviously well known that due to the shutdown, the FAA is pretty much out of commission for a month.

So that that being known, how how much of an effect did that have on the on the processing of what was going on with the FTC for the thrust sense for the King Air? Where does that put you right now?

Speaker 1

It was significant. We're happily it looks like it's either over or close to over. Understand that we've broken some very new ground, especially in the area of the King. The Pilatus PC twelves are both have STCs issued. Modifications to those may be delayed, but that's less critical.

Then the King Air STC incorporates a a new technology, a safety technology that's unheard of except in in in rudimentary form used by the seven eight seven Boeing airplane. So this new technology is prevents a serious out of control condition that can occur when you lose an engine. That 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

Speaker 2

to

Speaker 1

the manufacturers and the FAA, and and it's gotten rate 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.

Speaker 4

On the last call, you had talked about, that you were scheduling or the FAA was gonna be scheduling test flights. And I believe also I'd asked you, you know, just kind of roughly when you thought you might be able to get through all of this and get the paperwork filed, you know, the large amount of paperwork that was gonna be necessary. And what your kind of a guesstimate of when you thought that you could conceivably get the FTC, and at the time, a couple months back, you thought there was a good chance that you might have it by the '1. But now I, of course, you know, assume with the the shutdown, there's been some pushback. Do you feel that you got the process is moving forward in such a way now that the f you know, that the lights are on at the FAA and you can move this, that there's a good good chance that you'll have this before the end of the second quarter?

Speaker 1

Well, I I I don't I don't know. I would I think that may be a little premature. Remember what happens when you shut down, the pile up of all of that all that information information that has come in over the month typically has a three month or four month impact. So considering the uniqueness of our application, I I I would not be I believe there's an opportunity, a possibility, but it's more likely gonna be, not in the second quarter, but in the third quarter.

Speaker 4

Okay. Alright. Well, I appreciate that, that clarification. Can somebody talk a little bit more about what sort of orders that you are? I mean, I maybe I missed this a

Speaker 3

little bit, but if you

Speaker 4

could talk a little bit more about the the the the characterization of the orders that you are currently getting for the ThrustSense on the t c 12.

Speaker 1

Shyam, you wanna do that?

Speaker 3

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

Speaker 1

I I would comment to let you know that originally, the autothrottle was conceived as a as an an addition, an enhancement to the to the flight deck, not simply as a standalone device, but to enhance the value of the flight deck. It it enables us to provide a a really what we call a four 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 a much more efficiency. In order to do that, that requires some very detailed speed control, hitting waypoints at very specific times. To do that manually is almost impossible.

So our auto throttle coupled with our flight deck allows you to have a a required time of arrival. You can take off by three hours or four hours and and and and land or arrive at a waypoint within less than sixty seconds of the defined time. So it's quite an achievement, and it's now strongly enhancing a much more valuable product line of FliteDex.

Speaker 4

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.

Speaker 3

Sean? Yes. So I guess that a while back, we've invested in putting together a kind of a larger dealer network rather than hiring a bunch of sales guys internally to go after the general aviation. And and and essentially, what what what we've seen now is that that is paying off. We also have we're also pursuing some larger Air Transport customers utilizing our own sales guys.

But getting orders on the from some of these some of the dealer network is something that's beginning to take effect and we're pleased to see that happening.

Speaker 4

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?

Speaker 3

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

Speaker 4

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

Speaker 3

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

Speaker 4

Okay. Alright. Great. Well, thank you very much for for that. And once again, congratulations for being back in the black.

Speaker 1

Thank you. We're delighted.

Speaker 0

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