INNOVATIVE SOLUTIONS & SUPPORT INC Q4 FY2025 earnings call

• Fiscal 2025 was transformational with disciplined execution on strategic priorities, including rebranding to Innovative Aerosystems in October to reflect focus on advanced avionics. - Achieved integration of F-16 program production into Exton facility, with recertifications and resumption of production. - Advanced new products like the next-generation UMS2 platform for autonomous flight in business jets, with test flights on Pilatus PC-24 and delivery planned in June 2026; also, the Liberty Flight Deck unveiled with positive feedback, aiming for 2027 certification. - Invested in engineering department, expanding team by over 50% in recent years, with engineering representing 1/3 of total headcount. - Completed NetSuite ERP integration for efficient business scaling, and secured a new $100 million committed credit agreement for liquidity. - Focused on strategic acquisitions of aerospace and defense component product lines with aftermarket potential.

For the fourth quarter, revenue increased 45% year-over-year to $22 million. Fourth quarter net income was $7.1 million or $0.39 per diluted share, with adjusted EBITDA of $9.6 million, an increase of 71% versus the prior year. For the full year, revenue was $84 million, up nearly 80% from the previous year. Full year net income was $15.6 million or $0.88 per diluted share, and adjusted EBITDA was $25 million, up just over 80% from the prior year. The product segments contributed to growth through increased volumes from client programs, favorable sales mix, and operating leverage.

• Fiscal 2026 first quarter revenues expected in the range of $18 million to $20 million. - Long-term target of $250 million in revenue and adjusted EBITDA margins between 25% to 30%, driven by organic and inorganic growth. - Anticipate organic revenue growth to be high single-digit on a normalized basis long term, but more modest in fiscal 2026 due to revenue pull forward from prior years.

• Market volatility and transition periods can affect results. - Timing of governmental program revenues and production can cause volatility in margins. - Factors outside the company's control could cause actual results to differ from forward-looking statements, as noted in the Risk Factors section of the SEC report.

Q: So terrific 4Q results, and you had mentioned that the strength in sales is driven by some momentum in the military programs. Is it right to assume that when you're referencing that, it's really all related to the work with the F-16s, or is there something else?

A: No, it's not just the F-16, there's also -- we do work with the C-130 and other Boeing products programs. So that's kind of where we saw some of the fourth quarter impact.

Q: Congrats on a good way to close out the year. Maybe we can start with, I just wanted to dig into that fiscal Q4 results just a little bit more. I mean, I think you mentioned air cargo, business jet, but was there specific product lines that contributed to the upside relative to maybe your prior expectations?

A: So our prior expectations, a couple of things. One, when we look at what occurred over the quarter, as we mentioned before, we always have a lot of volatility, I think, when we're in these transitional periods with Honeywell. When we got their revenue reports and things like that, my team digs through them, challenges those questions and margins. We knew Q3 looked a little off. We got that resolved by the end of this year, fiscal year, and that was probably about another $1.5 million, roughly $2 million there, which went right to margins. So when you look at overall margin kind of, I would say, for the full fiscal year, you're in that 45% margin, but Q4 was high and Q3 was low, again a little bit there. And in terms of the air transport, we just saw more demand in the retrofit market, which typically has higher margins. And we saw comeback in business aviation as well.

Q: So my congratulations on really successful quarter and the year. And my question is gross margin is much better than expected. You've achieved such a low product cost level, which is the same a year ago. Whether it's only due to sales mix or there is anything else? Should we expect any substantial changes in next year?

A: So when we look at gross margins, as we said before, there's a lot of volatility, especially when you're doing transitions, product mix, especially with the governmental programs. That's kind of why we look at it from a whole year basis versus quarter-over-quarter because it's timing of also product wins and production. So when you look at the full year, we're in the mid-40s, and that's kind of what we projected a few months ago to say we're in the mid-40s. Q4 was over 60% and Q3 was under 40%. That -- there was a little bit, I would say, of a shift in terms of when we got the revenue and the information on the F-16, the margins were lower. Again, my team challenges and then we go back and forth, but that takes time and sometimes there's nothing there. This time, we had a resolution and we worked through with that with Honeywell. And there's probably about close to almost $2 million in changes there, which affects the margin quarter-over-quarter. So when you take that out, it's kind of, I would say, consistent between those quarters, but again, blended on the mid-40s