INNOVATIVE SOLUTIONS & SUPPORT INC Q1 FY2025 earnings call

• Strategic outlook: First quarter revenue growth driven by military programs and legacy platforms, organic growth in mid-upper single-digit, commercial business improving. - Investments: Integrated modern ERP system, strengthened IT infrastructure and security/accounting services to comply with DFARS; expanding Exton, PA facility with $6 million investment, doubling footprint and tripling production; investing in Honeywell acquisition integration; increasing headcount over 25% to support growth. - New product development: Next-gen Utility management system II on track for Pilatus PC-24 test flight mid-2025, AI-enabled utility management system for military applications.

During the first quarter, net revenues were $16 million, up over 70% year-over-year. Product sales were $10 million, more than double last year's levels. Service revenue was $6 million. Gross profit was $6.6 million, up from $5.5 million in the same period last year. First quarter gross margin was 41.4%, down from 59.3% in the same period last year. New orders in the first quarter of fiscal '25 were $7.5 million and backlog as of December 31 was $80 million, compared to $14.6 million in the prior year. Organic growth was in the mid to upper single-digit range, driven by military end markets, and commercial business was seeing improved trends.

• Anticipates revenue and EBITDA growth of over 30% compared to fiscal year 2024. - First quarter adjusted EBITDA was $3.1 million, up from $2.5 million last year. - Confident in achieving the 30% growth target for the year.

• Incremental depreciation from recent product line acquisitions and sales mix shift impacting gross margin. - Duplicative costs and inefficiencies due to Honeywell acquisition integration and hiring/training. - Potential delays in Honeywell product line transition affecting revenue and profitability.

Q: In terms of this military revenue being now being a significant portion of the growth story, what strategies or investments are you making to remain relevant to gain market share?

A: To become a Tier 1 supplier to DoD, implemented compliance with DFARS, bought new tools, put in modern ERP system, applied for security clearance.

Q: How does the margin profiles of the foreign military engagements compare to the domestic market?

A: Foreign military sales not through US DoD treated as commercial deals, military sales have lower average gross margin but strong incremental EBITDA margins.

Q: How will you balance the need for significant infrastructure spend investments and pursuit of strategic acquisitions?

A: Funded through operations and credit facility, aim to stay around three times leverage ratio, be diligent with acquisitions.

Q: Could you share with us your strategy with where the acquisition opportunities are coming from?

A: Have a Business Development VP with M&A experience, talk to bankers, marketing guys in field, evaluate 1 - 2 small companies a quarter.

Q: Could you share revised thoughts on the pull forward effect expected in Q2?

A: Potential uptick in revenue from Honeywell military product line in Q2, transition to IS&S in third quarter.

Q: Is there any financial benefits from the ERP implementation?

A: Better data for management to make timely decisions, efficiencies throughout organization, time and cost savings.

Q: Will you be at normalized by the time you exit fiscal '25?

A: Likely by Q4, with building done, ERP in place, barring big delay from Honeywell.