Executive Summary

Revenue beat but EPS miss: Q3 FY25 revenue of $24.1M (+105% YoY) exceeded S&P Global consensus ($19.2M) while diluted EPS of $0.14 came in below the $0.16 consensus, as gross margin compressed on Honeywell F‑16 safety-stock costs and mix shift to military . S&P Global estimates marked with *; see note at end.
Gross margin volatility near term, normalization targeted: Gross margin fell to 35.6% (vs 53.4% LY) due to lower-than-expected F‑16 margins and duplicate transition costs; management targets mid‑40% gross margin over time, with improvements expected after the Honeywell transition completes (late FY26) .
Near-term F‑16 revenue dip, capacity expansion on track: F‑16 deliveries were pulled forward into Q3; management expects nominal F‑16 revenue in Q4 and Q1 during equipment transition/calibration at the expanded Exton facility, whose construction is complete with fit-out expected early fall 2025 .
Liquidity and M&A capacity strengthened: New five-year $100M syndicated credit facility (JPMorgan-led) replaced a $35M line, lowering net leverage to 1.1x and positioning ISSC to pursue further line/product/company acquisitions; management is comfortable up to ~3x net leverage for larger deals .

What Went Well and What Went Wrong

What Went Well
- Triple-digit top-line growth driven by F‑16 and military momentum; Q3 revenue +105% YoY to $24.1M; adjusted EBITDA +43% YoY to $4.4M despite margin headwinds .
- Operating leverage improved: OpEx fell to 21.0% of revenue (from 36.1% LY) despite higher D&A, headcount, and integration costs .
- Strategic milestones: Exton expansion construction completed; $100M credit facility closed, expanding liquidity and optional accordion (+$25M) .
- Quote: “We delivered solid third quarter results, highlighted by revenue growth of 105% to $24.1 million and adjusted EBITDA growth of 43% to $4.4 million” — CEO Shahram Askarpour .
What Went Wrong
- Margin compression: Gross margin fell to 35.6% (from 53.4% LY) due to lower-than-anticipated margins on F‑16 shipments and duplicate transition costs (safety stock, staffing/training) .
- Mix headwind: Military carries lower gross margin; CFO reiterated near-term “lumpiness” as Honeywell product lines integrate, with less than 25% margin on F‑16 revenue this quarter .
- Near-term revenue cadence: Pull-forward of F‑16 revenues into Q3 implies “nominal” F‑16 revenue in Q4 and potentially Q1 while equipment is set up, certified, and calibrated .

Financial Results

Headline performance vs prior periods

Metric	Q3 2024	Q1 2025	Q2 2025	Q3 2025
Revenue ($USD)	$11,765,635	$15,968,729	$21,936,214	$24,144,832
Gross Profit ($USD)	$6,279,821	$6,610,457	$11,267,223	$8,582,235
Gross Margin (%)	53.4%	41.4%	51.4%	35.6%
Net Income ($USD)	$1,552,520	$736,192	$5,336,342	$2,443,814
Diluted EPS ($)	$0.09	$0.04	$0.30	$0.14
EBITDA ($USD)	$2,666,970	$2,716,149	$7,626,514	$4,339,365
Adjusted EBITDA ($USD)	$3,075,926	$3,078,676	$7,716,744	$4,407,365

Actual vs S&P Global consensus (Q3 2025)

Metric	Consensus	Actual	Surprise
Revenue ($USD Millions)	19.204*	24.145	+4.941 (+25.7%)
Diluted EPS ($)	0.16*	0.14	-0.02

Values marked with * retrieved from S&P Global.

Segment revenue mix

Segment ($USD)	Q3 2024	Q1 2025	Q2 2025	Q3 2025
Product	$5,127,056	$9,984,234	$13,180,032	$16,601,648
Services	$6,638,579	$5,984,495	$8,756,182	$7,543,184

KPIs and balance sheet/cash flow

KPI	Q1 2025	Q2 2025	Q3 2025
New Orders ($M)	$7.5	$20.8	$16.9
Backlog ($M)	$81.0	$79.6	$72.4
Net Debt ($M)	$25.908	$26.176	$22.657
Cash + Availability ($M)	$9.0	$8.8	$12.3
Operating Cash Flow (quarter, $M)	$1.841	$1.288	$7.207
Capex (quarter, $M)	$0.261	$1.556	$3.688
Free Cash Flow (quarter, $M)	$1.580	$(0.268)	$3.519
Net Leverage (x)	1.8x	1.4x	1.1x

Drivers/notes:

F‑16 contributed ~$12.6M revenue; Q3 included pull-forward as Honeywell built safety stock; expect temporary dip next two quarters as transition completes .
F‑16 revenue carried <25% gross margin this quarter; duplicate costs and D&A from acquisitions also weighed on margin .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue Growth vs FY24	FY2025	“On track to grow >30%” (Q1 & Q2)	“Remain on track to grow >30%”	Maintained
EBITDA Growth vs FY24	FY2025	“On track to grow >30%” (Q1 & Q2)	“Remain on track to grow >30%”	Maintained
Gross Margin Target	Multi‑quarter	Expected improvement as integration completes (mid‑2025)	Target mid‑40% over time; near term lumpy given mix/transition	Clarified trajectory
F‑16 Revenue Cadence	Q4 FY25–Q1 FY26	Pull-forward noted in Q2	Expect “nominal” F‑16 revenue in Q4 and potentially Q1 during transition	Lower near-term cadence
Exton Capacity Expansion	2025	Complete by mid‑year 2025	Construction complete; fit‑out early fall; capacity up >3x	Timeline updated
Leverage Policy	Ongoing	Not explicitly stated	Comfortable around ~3x net leverage depending on deal size	New disclosure
Credit Facility	Ongoing	$35M LOC; cash+availability $8.8M (3/31)	New $100M syndicated facility; accordion +$25M; cash+availability ~$12.3M (6/30)	Expanded liquidity

Earnings Call Themes & Trends

Topic	Q1 2025	Q2 2025	Q3 2025	Trend
F‑16/Honeywell integration & revenue timing	Military to >40% of mix; integration/training underway; margins below historical until mid‑2025	Pull-forward of Honeywell military product sales ahead of transition	Pull-forward into Q3; nominal F‑16 revenue expected in Q4 and Q1 during setup/calibration	Transition nearing final stage; short-term dip before FY26 ramp
Gross margin outlook	Lower than historical near term; improving by mid‑2025	51.4% gross margin; still mix/transition effects	35.6% margin; target mid‑40% over time; mix/transition headwinds persist near term	Volatile near term; normalized mid‑40% LT target
Capacity expansion (Exton)	Plan to >3x capacity by mid‑2025	On track for mid‑year completion	Construction completed; fit‑out early fall	Execution milestone hit; utilization next
Liquidity & leverage	$9.0M cash+availability; net debt 1.8x	$8.8M availability; 1.4x leverage	$100M facility closed; 1.1x leverage; comfortable to ~3x for M&A	Greater firepower; disciplined leverage
M&A strategy	Evaluating additional acquisitions across avionics suppliers	Continued focus; integration progress	Pipeline includes Honeywell auctions and smaller avionics firms; also adjacent markets	Active pipeline with broader scope
AI/automation	“Next-gen AI‑enabled Utility Management System” as flight automation platform	Not highlighted	Not highlighted	Longer-term initiative; limited near-term P&L impact
Tariffs/reshoring	Not discussed	Not discussed	U.S. manufacturing limits direct tariff impact; some foreign customers may trim forecasts; overall limited impact expected	Reshoring advantage; modest external risk

Management Commentary

“Our gross margin was impacted by elevated costs on the F‑16 product line as Honeywell incurred extra expenses in order to expedite the building of safety stock… once the transition is completed, we expect… cost efficiencies that will improve gross margins in the latter quarters of fiscal 2026.” — CEO .
“We expect the fit out [of Exton] to be completed in early fall, at which time we can begin to take advantage of our expanded manufacturing capacity… increase by more than three fold.” — CEO .
“The new [five-year, $100M] facility provides an additional $65 million in expanded liquidity and an option… to request up to $25 million… This improved flexibility better enables us to execute on our long term growth strategy.” — CFO .
“We remain on track to deliver our goal to generate both revenue and EBITDA growth of greater than 30% when compared to fiscal year 2024.” — CEO .

Q&A Highlights

Gross margin normalization: CFO reiterated a “mid‑40s” gross margin target over time, with near-term margins dependent on mix (military lower) and transition costs .
Leverage appetite: Management is comfortable around ~3x net leverage depending on deal size, supporting M&A flexibility .
M&A pipeline: Mix of Honeywell auctioned assets plus smaller avionics manufacturers; also evaluating adjacent developmental markets .
F‑16 revenue cadence: Expect “nominal” F‑16 revenue in Q4 and potentially Q1 during equipment setup/certification at Exton .
Defense outlook: Management cited increased interest from defense customers across programs; encouraging demand backdrop .

Estimates Context

ISSC beat revenue consensus but missed EPS: Revenue $24.1M vs $19.2M*; EPS $0.14 vs $0.16*; coverage depth was limited (1 estimate on both metrics)* . Values marked with * retrieved from S&P Global.
Expect estimate revisions to reflect: (i) temporary F‑16 revenue dip in Q4/Q1; (ii) gross margin recovery curve toward mid‑40% target post-transition; (iii) higher operating leverage and lower net leverage following facility completion and integration .

Key Takeaways for Investors

Strong topline execution with defense growth offsets; revenue materially beat consensus, but EPS missed on predictable transition/mix dynamics — near-term volatility is transitory per management .
Expect softer F‑16 contribution in Q4/Q1 as lines are set up; watch sequential revenue dip and margin stabilization as a setup for FY26 improvement narrative .
Margin inflection is central to the thesis: pathway back to mid‑40% gross margin post-transition with operating leverage intact (OpEx at 21% of sales) .
Liquidity upgrade is a catalyst for bolt-ons: new $100M facility plus leverage tolerance to ~3x expands optionality for accretive acquisitions .
Cash generation improving despite capex surge: Q3 OCF $7.2M and FCF $3.5M with net debt down $3.5M q/q; monitor continued FCF as Exton fit-out completes .
Backlog stepped down to $72.4M (from $79.6M) amid pull-forward; watch new orders cadence and OEM program activity for re-acceleration signs .
Medium-term setup: If execution on integration and capacity utilization proceeds as indicated, the FY26 margin and earnings trajectory could reset higher with military/commercial program ramps and M&A layering .

Additional documents reviewed:

Q3 results press release within 8‑K (Item 2.02)
Q3 call announcement PR (logistics)
Q2 results PR and metrics
Q1 results PR and metrics

S&P Global estimate note: Values marked with * are retrieved from S&P Global consensus for Q3 FY2025.

INNOVATIVE SOLUTIONS & SUPPORT INC (ISSC)·Q3 2025 Earnings Summary