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IS

INNOVATIVE SOLUTIONS & SUPPORT INC (ISSC)·Q1 2025 Earnings Summary

Executive Summary

  • Revenue rose 71.6% YoY to $16.0M on Honeywell military product line contribution and legacy program momentum; EPS was $0.04 as gross margin compressed to 41.4% from 59.3% YoY due to mix shift to military, TSA costs, and higher D&A .
  • Backlog ended at $81M (down from $89.2M in Q4 given acquired backlog step-up), with Q1 orders of $7.5M; management reiterated FY25 targets for >30% growth in both revenue and EBITDA and expects gross margin to improve by mid‑2025 as F‑16 integration completes .
  • Military revenue reached $8.0M (vs. $2.0M YoY) and is expected to exceed 40% of FY25 mix; capacity expansion to triple output by mid‑2025 and ERP/DFARS investments underpin scaling for DoD programs .
  • Near‑term catalysts: potential Q2 revenue uptick from Honeywell military product deliveries; Honeywell manufacturing transition targeted for Q3; mid‑2025 margin recovery as duplicative costs roll off and integration completes .

What Went Well and What Went Wrong

  • What Went Well

    • Military mix inflection: Military revenue grew to $8.0M in Q1 (from ~$2.0M YoY), with management expecting >40% military mix in FY25; CEO: “our U.S. manufacturing footprint is a competitive advantage…positions us to capitalize on an increasingly favorable outlook for domestic defense spending.” .
    • Scaling and systems readiness: ERP go‑live, DFARS/compliance, and tripling capacity by mid‑2025 enable pursuit of larger Tier‑1 DoD programs; “we have integrated a modern ERP…to make us compliant with DFARS requirements.” .
    • EBITDA resilience: Adjusted EBITDA rose to $3.1M (from $2.5M YoY) despite lower GM; management reiterated >30% FY25 EBITDA growth target .

  • What Went Wrong

    • Margin compression: GM fell to 41.4% (from 59.3% YoY), driven by ~500 bps lower‑margin Honeywell volume, ~200 bps TSA costs, and ~500 bps higher D&A; mgmt expects normalized GM “closer to mid‑50%” over time .
    • Profit dilution from ramp costs: About $0.7M in integration/training and facility expansion costs reduced profitability and EBITDA in Q1 .
    • Cash flow down YoY: Operating cash flow declined to $1.84M (from $4.22M YoY) and FCF to $1.58M (from $4.03M) on inventory build, ERP capitalization, and growth investments .

Financial Results

MetricQ3 2024Q4 2024Q1 2025
Revenue ($M)$11.8 $15.4 $16.0
Gross Profit ($M)$6.3 $8.5 $6.6
Gross Margin (%)53.4% 55.4% 41.4%
Operating Income ($M)—$4.37 $1.34
Net Income ($M)$1.6 $3.18 $0.74
Diluted EPS ($)$0.09 $0.18 $0.04
EBITDA ($M)——$2.72
Adjusted EBITDA ($M)$3.1 $5.63 $3.08
Operating Expenses ($M)—$4.16 $5.27

Segment mix (Product vs. Services):

Revenue MixQ3 2024Q4 2024Q1 2025
Product ($M)$5.1 $9.83 $9.98
Services ($M)$6.4 $5.55 $5.98

Selected KPIs:

KPIQ3 2024Q4 2024Q1 2025
New Orders ($M)$10.6 $95.4 (incl. $74.3 acquired backlog) $7.5
Backlog ($M)$9.3 $89.2 $81
Cash from Operations ($M)—$2.10 (Q4) $1.84
Capex ($M)—$0.30 (Q4) $0.26
Free Cash Flow ($M)—$1.80 (Q4) $1.58
Total Debt ($M)—$28.03 $26.51
Cash ($M)—$0.54 $0.60
Net Debt ($M)—$27.49 $25.91
Net Leverage (x)0.8x 2.0x 1.8x

Additional disclosures:

  • Non‑GAAP adjustments in Q1 included $0.26M acquisition‑related costs and $0.10M CFO transition/strategic initiative costs (Adjusted EBITDA 19.3% margin) .
  • Military revenue detail: $8.0M in Q1 2025 vs. $2.0M prior‑year period .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue growth vs FY24FY25“Similar growth in 2025” (30%+ implied) “On track for >30% growth” Maintained
EBITDA growth vs FY24FY25“Similar growth in 2025” (30%+ implied) “On track for >30% growth” Maintained
Gross margin trajectoryMid‑’25/normalizedNormalize toward mid‑50% over time Normalize mid‑50% over time; improvement expected by mid‑2025 Clarified timeline
Military revenue mixFY25Prior long‑term mix aspirations (1/3 each) >40% of total revenue in FY25 Introduced/Updated
Leverage targetOngoing—Stay around ~3x on acquisitions Introduced

No specific numerical revenue/EPS guidance was provided.

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2024, Q4 2024)Current Period (Q1 2025)Trend
Military mix & marginsGrowing military exposure; GM normalization toward mid‑50% Military $8.0M in Q1; >40% FY25 mix; EBITDA focus vs GM Mix shifting to military; emphasize EBITDA
Honeywell integrationTest equipment delivery and synergies; acquired backlog $74.3M Duplicative costs impacting GM; transition to IS&S expected Q3 Near‑term drag; Q3 transition relief
ERP/DFARS readinessERP implementation and compliance efforts ERP live; DFARS compliance enabling Tier‑1 DoD bids Infrastructure strengthening
Capacity expansionPlanned 40k sq ft expansion, $6M capex Production capacity to triple by mid‑2025 Capacity ramping
Autonomous flight/UMS2UMS2 AI‑capable product; testing in 2025 UMS2 first test flight by mid‑2025 (PC‑24) Program progressing
Orders/backlogQ4 orders boosted by acquired backlog; Q3 backlog $9.3M Q1 orders $7.5M; backlog $81M Normalizing post acquisition step‑up
Tariffs/reshoringManufacturing in Exton as differentiator U.S. manufacturing cited as policy advantage Strategic positioning

Management Commentary

  • “We are pleased to report first quarter revenue of $16.0 million…driven primarily by the contribution from the recently acquired Honeywell military product line and organic growth in our legacy operations, including continued momentum from new military programs.” – CEO Shahram Askarpour .
  • “As we increase our market share of defense programs, we anticipate overall gross margins to be lower than our historical levels; however, we expect our gross margins to improve by mid‑2025 as we complete the training and integration of F‑16 products into our facility.” – CEO .
  • “Given the significant potential we see for absolute EBITDA dollar growth in military, we believe this is good for us…we continue to expect our consolidated gross margins will likely trend closer to mid‑50% on a normalized basis.” – CFO Jeffrey DiGiovanni .
  • “Our headcount is up over 25%…UMS2 remains on track to have our first test flight by mid‑2025 for the Pilatus PC‑24.” – CEO .
  • Liquidity: “Current cash balance and availability under our credit facility of more than $9.0 million” supports operations and expansion. – CFO .

Q&A Highlights

  • DoD Tier‑1 supplier readiness: Company completed ERP, IT security, and accounting systems to meet DFARS and government accounting standards, enabling bids on larger DoD programs; aiming to become a prime on select contracts .
  • Military margin profile: Gross margins lower than commercial but minimal engineering and selling burden yields comparable EBITDA margins; “focus on EBITDA” as better indicator .
  • Honeywell transition timeline: Potential Q2 revenue uptick from Honeywell shipments; manufacturing transition targeted for Q3 (May–June), after Honeywell builds sufficient backlog for Lockheed .
  • Capital structure discipline: Sufficient liquidity (~$9M cash+availability) and preference to keep leverage around ~3x for future acquisitions .
  • M&A pipeline: Evaluating 1–2 small avionics opportunities per quarter; disciplined and accretive approach; reshoring/tariff dynamics could create bolt‑on opportunities .

Estimates Context

  • Wall Street consensus for Q1 2025 EPS and Revenue from S&P Global was unavailable at time of retrieval due to S&P Global daily request limits; therefore, we cannot quantify beat/miss vs. consensus for Q1 2025. Values would ordinarily be retrieved from S&P Global.
  • Based on management commentary, investors should expect estimate revisions to consider: lower near‑term GM from mix/duplication, potential Q2 revenue uptick from Honeywell deliveries, and mid‑2025 GM improvement as integration completes .

Key Takeaways for Investors

  • Mix shift to military is durable in FY25 (>40% of revenue), compressing GM but supporting EBITDA growth; focus on EBITDA trajectory vs. GM percent .
  • Near‑term setup: watch for Q2 revenue uptick from Honeywell product shipments and Q3 manufacturing transition to IS&S to reduce duplicative costs; margin recovery expected by mid‑2025 .
  • Capacity and systems investments (ERP/DFARS and tripled production capacity by mid‑2025) expand eligibility for larger DoD programs and underpin scaling .
  • Orders/backlog normalized after Q4’s acquired backlog step‑up; Q1 backlog at $81M remains robust and excludes OEM long‑term program orders (PC‑24, King Air, T‑7, KC‑46A, F‑16) .
  • Liquidity adequate for growth; management targets ~3x leverage on M&A and remains disciplined on accretive bolt‑ons .
  • Tactical trading angles: potential positive reaction around Q2 delivery cadence; further clarity on F‑16 integration timing and mid‑2025 GM improvement; monitor autonomous flight UMS2 flight test milestones .
  • Non‑GAAP adjustments remain modest; Adjusted EBITDA grew YoY despite margin headwinds—watch for adjusted EBITDA scaling as integration costs roll off .

Additional Relevant Q1 2025 Press Releases

  • Earnings release and schedules (press release mirroring 8‑K): metrics and commentary consistent with 8‑K .
  • Governance: appointment of Denise L. Devine to the Board and Audit Committee (Jan 27, 2025) .
  • Earnings date announcement (Jan 29, 2025) and post‑Q1 Investor Summit participation notice (Mar 7, 2025) .