Q1 2023 Innovative Solutions and Support Inc Earnings Call

Greetings and welcome Joe You know data solutions and support Inc. First quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.

A question and answer session will follow the turmoil presentation, if anyone should require operator assistance during the conference. Please press star zero on your trial.

G pad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Michael with no great. Thank you Sterling I agree you may begin.

Thank you operator, and good afternoon, everyone.

I would remind our listeners that certain matters discussed in the conference call today, including information about 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 public filings.

Now I'll turn it over to our CEO , Sean I'm asking here.

Thank you, Mike and good afternoon, everyone.

I will begin today with remarks on our performance in the fiscal first quarter of 2023.

Reply comments on the upcoming year, and our long term growth strategy.

I will then turn the call over to Mike, who will take us through the details of the financials.

We began the year on solid footing with revenues of $6 5 million driven by stronger OEM volume and engineering development contracts.

Underlying end markets remained strong, particularly with OEM customers.

I'm pleased to announce that during the Q1 2023 period.

<unk> S a supplemental type certificate.

S T C for the team gets with the G 1000, and an exciting slide decks.

Deliver all stressed aircrafts.

This STC opens an additional 700 potential aircrafts.

King Air oral struggle, which builds on the existing growing aftermarket king games.

Yes.

This effort is supported by more than 500 cockpit upgrades.

75767, 737 platforms combined with a rapidly growing presence in general aviation.

Gross profit in the first quarter was $3 7 million compared to 4 million in the prior year, mainly due to product mix.

As a percentage of sales gross margin was 57, 1% compared to 59, 3% in the prior year.

We believe these results reflect the success of our innovative products in the market and our dedication to excellence in delivering for our customers.

Turning to product development and beginning with oral small.

To invest in additional platforms that benefit from our process problems.

As well as increased functionality that.

<unk> generates additional revenue.

I'll be 757767 engine indication and crew alerting system upgrades development program is progressing well.

And we expect this additional offering on our successful 75776 of them platforms to generate solid revenue for years to come.

It's all sort of been laser focused on the short term opportunity to meaningfully expand margins through purchase facility utilization and intend to accomplish this goal through a mix of organic growth and strategic.

Bolt on M&A.

On the organic side, we continue to expect an expansion of our R&D program in fiscal 'twenty to 'twenty three to around 13% of sales from 10% in fiscal 2022.

The first quarter, our R&D right below this level as we are in the process of wrapping up our engineering resources.

Cockpit automation remains a focus area for us as demonstrated through the development of the oral sulfur Kinga PC 12.

Clips.

Auto throttle you are expanding automation throughout our product portfolio.

Specifically to other areas that can drive customer value by enhancing safety and reducing operating costs.

You have the key product lines and technologies to further automate cockpit operation, which would significantly in house flight to safety and eventually lead to crew reduction.

Yeah.

Dynamic opportunities.

As noted in December .

We have assembled a business development team to pursue opportunities.

During the first quarter.

And active pipeline I'm, while it is too early to share any details. We now have the ability to identify and execute on attractive product line type acquisitions that complement our existing portfolio.

We expect to be able to fund bolt on acquisitions.

Cash on the balance sheet and free cash flow from operations, which exceeded 6 million dollar in fiscal 'twenty to 'twenty two.

Taken together, we believe we can grow ourselves increased our asset utilization.

Drive incremental margin to overall business.

At full capacity, we believe our infrastructure to support a meaningful increase to our operating results and total free cash generation.

To conclude.

We're off to a good start for the year with a strong outlook.

We deliver on our legacy products and new offerings.

Thank you for your time and interest and we look forward to updating you with further details in the upcoming quarters I will turn the call over to Mike for a closer look at the numbers.

Thank you Sharon and thank you all for joining us today.

I'll review, our financial results for the first quarter of fiscal 2023.

Revenues declined slightly by two 7% to $6 5 million in the first quarter versus $6 7 million.

First quarter of fiscal 2022.

The decrease was largely due to lower commercial aftermarket revenue.

Which was partially offset by growth in our general aviation OEM business.

The decrease in commercial sales was primary primarily a function of when the sales orders were received for our aftermarket retrofit business from commercial air transport customers.

These orders may fluctuate from quarter to quarter.

But we continue to anticipate that sales will support the short term organic stroke growth trajectory.

Demand from our OEM business remained strong during the quarter.

Sales from engineering development contracts or EDC improved as a result of two research and development projects.

Customer service revenue was consistent with prior year.

New orders in the first quarter or approximately $3 3 million in backlog was $8 5 million as of December 31st 2022.

Backlog is up from $6 2 million as of December 31, 2021.

We include only purchase orders in hand from the plot of PC 24, Textron King Air and the KC 46, a long term program and our total backlog.

The current backlog includes a large contract with one of our general aviation Oems that is locking in their supply chain beyond their normal advanced order.

Given this increase total backlog levels do not necessarily translate to increased sales.

We anticipate that these programs will remain in production for about a decade.

And should continue to add to production sales already included in that.

First quarter gross margin was 57, 1% versus $59 three in the first quarter period from a year ago.

Cost of sales increased due to the combination of higher less profitable OEM business lower product sales and slightly higher direct material cost, which adversely impacted our operating leverage.

Note that all our long term OEM production contracts include escalation clauses that provide for the passing along a portion of cost increases incurred as a result of inflationary pressures.

As we've mentioned on previous calls our optimized operating model is based on a fixed cost platform with relatively lower employee head count.

We expect our operating leverage and margin profile to improve as sales growth returns over the remainder remainder of the year.

Total operating expenses were up $2 9 million in the first quarter compared to 2.5 in the prior year first quarter.

The uptick in general admin and administrative expenses in the quarter was mainly on account of noncash long term employee stock compensation.

Professional and legal fees.

Higher G&A costs are expected to continue into the second quarter and moderate into the second half.

Thank you.

The growth in operating expenses was offset in part by higher interest income generated from the combination of a larger amount of balance of balance sheet cash.

Higher interest rates.

And the reallocation of funds into higher interest yielding investments compared to the same period in the prior year.

R&D expenses were approximately 11% of revenue and in line with a year ago first quarter levels, our expectation of targeting 13% of revenue for R&D in 2023 is unchanged and we therefore expect R&D expenses to gradually rise over the coming quarters.

Tax expense in the first quarter was <unk> 2 million compared to <unk> 3 million.

In the prior year quarter.

First quarter net income was <unk> 7 million or <unk> <unk> per share versus $1 1 million or <unk> <unk> per share in the first quarter of fiscal 2022.

Our intent is to maintain ample flexibility driven by significant liquidity and a debt free balance sheet, which enables us to be very well positioned to capitalize on organic and inorganic opportunities.

We had $19 $4 million of cash on hand as of December 31, 2022 up from $17 3 million at the end of fiscal 2022.

The company generated cash flows of $1 8 million from operations and received net cash of zero point $4 million from financing activities from the exercise of stock options during the quarter.

Looking at the remainder of fiscal 2023, we expect to continue to generate strong cash flows with the maintenance of current gross margin levels and cost control.

We anticipate increasing our capacity utilization and expanding operating leverage as we drive revenue growth by capitalizing on organic and inorganic opportunities through the remainder of the year.

With that operator, we are ready for any questions.

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Mike.

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Yeah.

Yes.

Yeah.

Our first question comes from Dave Kimbell, We've done some Davis. Please go ahead.

Oh thank.

Thank you for taking my question.

Graduations on a solid quarter.

I'm surprised.

General and administration expense.

One 1 million I believe it was.

In the quarter.

Does that reflect a angry they give her a creation of a new York.

Team.

James and look for.

Additional opportunities are different products that you may acquire.

Uh huh.

Oh.

Will you continue to generate that two 1 million every quarter.

Okay.

Yeah. Thanks for the question, David and Yeah. The actual operating expenses were $2 90 versus $2 five last year.

That's part of the increase as well as what you mentioned, but.

Really a lot of this came up was added as a direct result of the passing of our founder.

Going forward, we have a long term compensation and a bonus plan in place that we have not had before that will put us more in line with our peers in the industry.

And a lot of this you know.

Having said that a lot of these expenses are in stock. So there was a non cat and theres not a cash impact as you can see that we generated.

$1 $8 million in the quarter free cash flows.

So so not affecting the company's ability to generate cash.

You know also some some one time legal fees in there bringing.

The company in line with peers as far as corporate governance.

There are temporary.

Our costs are temporary in nature.

So it sounds like some of this was a temporary.

Of course.

Related to.

Related to the stock options and <unk>.

Other.

Expenses.

You may not have in the rest of the year.

So should we didn't anticipate that.

That.

Joking.

General and administrative expenses.

It would go down from.

They were in the first quarter.

I would say the run rate will be and there are some temporary costs in there. Some one time costs, but they will be lower than what we ran in the first quarter, but I think generally they will be up from historic run rates.

Just based on our.

New long term compensation incentive as well as bonuses as well as investing in into the team for future growth.

Yeah.

I imagine imagine an impact from <unk>.

From the founders.

Die a year ago.

Yeah.

How was that an impact.

Well.

Our former founder did on 20% of our shares.

And we did.

From time to time issue special dividends that was effectively.

His long term compensation plan so.

To kind of replace that and.

Offer are Kurt exec.

Executives and management team of long term incentive plan.

And we don't own that percentage of shares we needed to.

You know I'm curious that G&A items.

Yeah.

Interest income was a substantial amount.

Is there anything nonrecurring about that yeah.

I realize introducing interest rates are higher and that's why.

That's why there have been.

Some of it but.

I'm surprised with it.

It wasn't as much up.

All of a sudden if you look at our cash from from year to year, our cash more than doubled last year. We ended the year at over 17, and we have over 19 in the first quarter, we only had.

9 million at the end of <unk>.

Last fiscal 2021 year end.

So it's a combination of having more cash.

Interest rates are also a lot higher now than they were a year ago and we also did reallocate some of the funds to higher yielding interest.

Interest accounts as well.

[noise].

Right.

The impact from.

Airbus.

<unk> converted converting their cargo.

More of their equipment is really good.

Passenger cargo news.

Which has benefited you.

Company's Boeing.

Well in contracts.

You can see do you see any play in.

And Airbus developing the same relationship.

We currently don't have.

Currently don't have this system offer a cockpit upgrade system for the.

For the Airbus fleet being converted to cargo.

But we continue.

Delivering on our 70, 37757, and 767 cockpits and.

For Carnival conversion as well.

Uh huh.

And on an operators as they yeah.

Are they looking to upgrade their cockpits.

So we see that.

Kind of a steady demand that we've had now.

It continue.

In general.

And.

Also.

Putting it together.

Place for them for the Iqos system.

Such as engine indication on crew alerting, we should augment those cockpits as well as the opportunity to go to.

Big chunk of those 500 airplanes on the right.

An additional offering.

I have seen where you'd be asking Fedex ground.

Grounding.

Several.

Their aircraft their older older aircrafts.

Could you just tell me that.

Yeah, the demand for capacity is down.

Yep.

Seen any impact on you.

You have customers from.

From that trend.

Oh, no not not significantly I mean, this is always been the aftermarket on the five 767 has always been for us kind of cyclic.

You know we began a few years off and then it kind of goes up and it varies between I guess $5 million to $7 million of yet.

I don't see getting out of that range anytime soon.

But it's going to have some years, it's going to be more some years are going to be less.

Oh airfreight rate jumped you know two years ago, but they're now down to normal levels.

Yeah.

So the airlines are not experiencing the same.

Same demand factors and that adds up to.

Thank you.

Passengers up significantly.

Yeah, Yeah. So.

Yeah again, not a cockpit.

It is not necessarily tied into cargo operations.

Africa will icelandair is one of our customers.

So we can provide the cockpit for 75767 months.

On the passenger.

Okay.

Well. Thank you very much I appreciate here.

Working.

Keep up the good work.

Thank you David Thank you David Thank you.

Okay.

Once again, thank you.

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Yeah.

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<unk> disconnect your lines at this time, thank you for your participation.

Yeah.