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IS

INNOVATIVE SOLUTIONS & SUPPORT INC (ISSC)·Q2 2025 Earnings Summary

Executive Summary

  • Q2 2025 delivered net revenue of $21.9M (+104% y/y), gross margin 51.4%, diluted EPS $0.30, and adjusted EBITDA $7.7M; driven by F-16/Honeywell product lines and air transport strength .
  • The quarter beat Wall Street consensus on revenue ($15.4M*) and EPS ($0.12*) and exceeded EBITDA expectations ($4.46M*); management highlighted operating leverage from military mix and low incremental OpEx as drivers of the upside .
  • Backlog remained strong at ~$79.6M with $20.8M in new orders, supporting >30% full‑year revenue and EBITDA growth guidance; facility expansion to triple capacity remains on track by mid‑year .
  • Near‑term catalysts: continued Honeywell transition and potential further revenue pull‑forward into Q3, ERP integration benefits, and growing defense contribution (~≥40% of FY25 sales mix) .

Note: Values marked with * are retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

  • Strong top-line and profitability: revenue doubled to $21.9M; adjusted EBITDA rose to $7.7M (+219% y/y), with diluted EPS at $0.30; management emphasized operating leverage from incremental military revenues .
  • Execution on strategic initiatives: ERP integration completed, DFARS compliance progress, and Exton facility expansion on track to increase capacity >3x by mid‑2025 .
  • Defense momentum and platform integration: F‑16 product line contributions and normalized gross margins under Honeywell contracts drove sequential gross margin recovery to 51.4% (from 41.4% in Q1) .

What Went Wrong

  • Gross margin volatility persists: management reiterated margins will remain “lumpy” given product mix and Honeywell transition; they encourage focusing on EBITDA/profit margins over gross margin targeting .
  • Free cash flow turned negative in the quarter due to higher capex tied to facility expansion (Q2 FCF: -$0.27M) despite positive operating cash flow .
  • Continued dependence on Honeywell supply chain during the transition introduces execution risk; management expects pull‑forward to continue into Q3 but cannot predict magnitude precisely .

Financial Results

Quarterly Trend (oldest → newest)

MetricQ4 2024Q1 2025Q2 2025
Revenue ($USD)$15,384,806 $15,968,729 $21,936,214
Gross Profit ($USD)$8,528,245 $6,610,457 $11,267,223
Gross Margin (%)55.4% 41.4% 51.4%
Operating Income ($USD)$4,366,168 $1,343,818 $6,984,320
EBITDA ($USD, GAAP)$4,975,665 $2,716,149 $7,626,514
Adjusted EBITDA ($USD)$5,630,676 $3,078,676 $7,716,744
Net Income ($USD)$3,180,194 $736,192 $5,336,342
Diluted EPS ($USD)$0.18 $0.04 $0.30

Year-over-Year Comparison (Q2 2024 → Q2 2025)

MetricQ2 2024Q2 2025
Revenue ($USD)$10,739,516 $21,936,214
Gross Profit ($USD)$5,582,362 $11,267,223
Gross Margin (%)52.0% 51.4%
Operating Income ($USD)$1,643,050 $6,984,320
Net Income ($USD)$1,208,316 $5,336,342
Diluted EPS ($USD)$0.07 $0.30
EBITDA ($USD, GAAP)$2,120,378 $7,626,514
Adjusted EBITDA ($USD)$2,413,160 $7,716,744

Consensus vs Actual (Q2 2025)

MetricConsensus EstimateActualBeat/Miss
Revenue ($USD)$15,367,000*$21,936,214 Beat
Primary EPS ($USD)$0.12*$0.30 Beat
EBITDA ($USD)$4,462,000*$7,626,514 Beat

Note: Values marked with * are retrieved from S&P Global.

Segment Breakdown (Product vs Services)

MetricQ4 2024Q1 2025Q2 2025
Product Revenue ($USD)$9,833,165 $9,984,234 $13,180,032
Services Revenue ($USD)$5,551,641 $5,984,495 $8,756,182

Q2 Attribution Details

AttributionQ2 2025 Amount ($USD)
Honeywell military product line (total)$10.8M
F‑16 customer service (subset of services)$3.0M

KPIs and Balance Sheet

KPIQ2 2025
New Orders ($USD)$20.8M
Backlog ($USD)$79.6M
Total Debt ($USD)$27.4M
Cash ($USD)$1.2M
Net Debt ($USD)$26.2M
Net Debt / TTM Adjusted EBITDA (x)1.4x
Operating Cash Flow (6M) ($USD)$3.1M
Capital Expenditures (6M) ($USD)$1.8M
Free Cash Flow (Q2) ($USD)-$267,745
Cash + Credit Availability ($USD)>$8.8M

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue Growth (%)FY 2025“>30% y/y” (Q1 commentary) “>30% y/y” reiterated Maintained
EBITDA Growth (%)FY 2025“>30% y/y” (Q1 commentary) “>30% y/y” reiterated Maintained
Military Mix (%)FY 2025~≥40% of revenue (Q1) ≥40% reaffirmed (Q2) Maintained
CapEx ($USD)FY 2025~$6M (Q&A context) ~$6M reiterated Maintained
Gross Margin profileNear term/normalizedNormalized mid‑50% expected over time (Q1) Margins “lumpy”; focus on EBITDA; sequential rebound to 51.4% (Q2) Clarified focus

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024 and Q1 2025)Current Period (Q2 2025)Trend
Honeywell integration & F‑16Acquisition integrated; efficiency gains (Q4) ; duplicative costs & margin headwinds near-term (Q1) Normalized margins on Honeywell contracts; F‑16 drives revenue, some pull‑forward; further Q3 pull‑forward possible Improving integration; sustained revenue support with mix volatility
ERP & DFARS complianceERP in progress; DFARS investments (Q1) ERP integration completed; DFARS capabilities strengthened Execution milestone achieved; expected process efficiency gains
Facility expansion (Exton)Doubling footprint; >3x capacity by mid‑2025 (Q1) On track; clean room expansion proceeding On track; capacity catalyst for scaling
Gross margin vs EBITDA focusNormalized mid‑50% target (Q1) Management emphasizes margin lumpiness and EBITDA focus; sequential margin improvement Mix-driven volatility; operating leverage benefits evident
Defense/military mixRising military revenue; aim ≥40% FY25 (Q1) Military ~≥40% of mix; ~$10.8M Q2 from Honeywell military; low incremental OpEx Increasing defense exposure; strong leverage
Autonomous flight/UMS2Launch planned FY25; AI-capable system (Q4) UMS2 flight test planned in coming month; qualification ongoing Product development progressing
Air transport demandImproved trends expected (Q1) Strength realized; aftermarket retrofits benefiting from OEM delays; interest rates not a headwind Tailwind from OEM supply constraints

Management Commentary

  • “Revenues more than doubling to $21.9 million and our adjusted EBITDA increasing by 219% to $7.7 million…driven by contributions from our F‑16 product line and the air transport market.” — CEO Shahram Askarpour .
  • “We completed the integration of our NetSuite ERP system…we remain in a strong financial position with ample liquidity…” — CFO Jeffrey DiGiovanni .
  • “Gross margins…are very volatile and kind of lumpy…we’ve been trying to steer everybody away from gross margins and put a focus on EBITDA margins and profit margins.” — CEO Askarpour .
  • “We generated more normalized gross margins under our Honeywell contracts…incremental military revenues came through with little to no incremental SG&A expenses, resulting in meaningful operating leverage.” — CFO DiGiovanni .

Q&A Highlights

  • Honeywell pull‑forward: Q2 benefited from pull‑forward on F‑16; similar dynamic may repeat in Q3 though magnitude uncertain; supply chain coordination with Honeywell/Lockheed continues .
  • Air transport demand: Aftermarket retrofits strong amid OEM production delays; interest rates viewed as not material to demand .
  • Margin outlook: Management reiterated gross margin lumpiness with mix; emphasis on EBITDA/profit margins; sequential margin improved to 51.4% .
  • Mix and defense exposure: At least ~40% FY25 military revenue; ~$10.3M Q2 associated with F‑16 (product/service), and legacy revenue a bit north of $11M .
  • CapEx and capacity: FY25 CapEx ~$6M; Exton facility projected eventual capability near ~$250M revenue; clean room expansion controlled and on track .

Estimates Context

  • Q2 2025 vs S&P Global consensus: Revenue $21.94M vs $15.37M* (Beat); EPS $0.30 vs $0.12* (Beat); EBITDA $7.63M vs $4.46M* (Beat). Upside driven by F‑16/Honeywell contributions, product mix, and low incremental OpEx enabling operating leverage .
  • Coverage depth remains thin (# of estimates: 1 for EPS and revenue in Q2 2025*), so revisions may be more volatile around each print.
    Note: Values marked with * are retrieved from S&P Global.

Key Takeaways for Investors

  • Q2 print was a broad-based beat with strong operating leverage from defense mix; expect continued mix-driven margin volatility but growing EBITDA/profitability as Honeywell integrates .
  • Backlog ($79.6M) and new orders ($20.8M) underpin >30% FY25 revenue/EBITDA growth guidance; watch Q3 for additional revenue timing benefit from Honeywell transition .
  • ERP integration and DFARS compliance are execution milestones that should improve decision velocity and support larger DoD bids; capacity expansion is an oncoming scaling catalyst .
  • Near-term watch items: Honeywell/Lockheed supply chain execution risk; quarterly gross margin lumpiness tied to product mix; sustained capex for facility expansion .
  • Medium-term thesis: increasing defense exposure with low incremental OpEx, vertical integration, and U.S.-based manufacturing are competitive advantages—supporting sustained EBITDA growth even with lower gross margins vs commercial .
  • Potential stock catalysts: Q3 follow-through on F‑16 transition/pull-forward, UMS2 flight test progress, and visibility on additional acquisitions/product lines .
  • Valuation/estimates sensitivity: With only one covering estimate*, positive/negative surprises can drive outsized reaction; focus on backlog conversion, mix, and EBITDA trajectory.
    Note: Values marked with * are retrieved from S&P Global.