INNOVATIVE SOLUTIONS & SUPPORT INC Q2 FY2025 earnings call

• Revenue grew over 100% in Q2, driven by military programs like F-16 and commercial air transport strength.
• EBITDA increased by over 200% and profit by over 300% from the previous year, showing operating leverage.
• Completed ERP system integration, expanded IT infrastructure, and strengthened security/accounting to comply with DFARS requirements.
• Exton, Pennsylvania facility expansion on track for mid-2025 completion, doubling footprint and tripling production capabilities.
• Continued integration of Honeywell acquisition, with duplicative costs but promising opportunities.
• Focus on commercial air transport and business aviation growth, with organic product growth and strategic acquisitions.

In the second quarter, net revenues were $21.9 million, more than double the previous year. Product sales were $13.2 million, up significantly from $4.9 million last year, driven by the recently acquired military product line. Service revenue was $8.8 million, largely from customer service sales of acquired product lines. Military contributed approximately $10.3 million (including F-16 and Honeywell acquisition), and air transport showed improvement. Revenue contribution from military customers is expected to be at least 40% during fiscal 2025.

• Expect over 30% revenue and EBITDA growth for FY '25 as seen in Q2 progress.
• Anticipate pull-forward of revenues under F-16 program to continue into Q3, related to Honeywell production transition.
• Backlog of approximately $80 million as of March 31, 2025, supports future sales.

• Trade uncertainty and current administration priorities pose risks, but reshoring potential is an advantage.
• Supply chain issues with Honeywell transition could impact production and delivery.
• Gross margins are volatile due to acquisition mix and product variability, making precise margin prediction difficult.

Q: Can you provide color on the magnitude of Honeywell product line pull-forwards and order delays post transition?

A: We don't anticipate further delays. Working closely with Honeywell and Lockheed for successful transition. FY '25 guidance of over 30% growth is on track.

Q: What's driving air transport revenue improvement and pipeline for commercial retrofits amid interest rates?

A: Interest rates don't significantly impact operations. Supply chain issues with Airbus and Boeing create high demand for aftermarket upgrades, expected to continue.

Q: On gross margins, will they stabilize near current levels as Honeywell production transitions?

A: Gross margins are volatile and lumpy. Difficult to predict due to product mix variability; focus on EBITDA and profit margins instead.

Q: What's the status of the next-generation utility management system?

A: On track, finishing qualification testing and preparing for flight tests over the next month.

Q: Any updates on additional acquisitions?

A: Constantly evaluating opportunities to acquire small avionics manufacturers to bring production to US.

Q: On revenue breakdown from acquisitions, product vs customer service?

A: Total $10.8 million from acquisitions, $3 million from customer service, $7.8 million from product.

Q: On CapEx and D&A normalization?

A: CapEx for full year expected to be good. D&A had changes due to acquisition valuations, settling next quarter.

Q: Expectation of revenue pull-forward in Q3 and Q4?

A: Difficult to predict huge swings, but no significant decline expected barring supply chain issues; backlog of $80 million supports.