IA

• Strategic Acquisitions: Completed the acquisition of Aiden Displays, enhancing rugged display technology capabilities and expanding into defense, industrial, and medical instrument markets. This marks a shift toward acquiring operating businesses with aftermarket potential.
• New OEM Contract: Secured a contract with a leading Japanese eVTOL developer to provide the main display and avionics architecture using the Liberty flight deck. This is the first major award for the Liberty platform, with engineering starting Q4 26 and production targeted for late 27/2028.
• Product Development & Certification: The UMS2 product line began production in June, contributing to Q3 revenues. The Radio Management Unit (RMU) contract with L3 is in final certification, with deliveries expected in Q1 FY27. The KC-767 contract with Boeing is on plan, with deliveries starting Q2 FY27.
• Corporate Rebranding: Successfully rebranded to 'Innovative Aerospace Systems' and changed its Nasdaq ticker symbol from ISSC to IA effective August 18. Added to the Russell 2000 Index.
• Organic Growth Drivers: Excluding F-16 front-loading effects and acquisitions, organic growth exceeded 40%. Key drivers include aging fleet support driving commercial aftermarket services, ramp-up of UMS2 in business aviation, and stabilization of military programs.

• Q4 FY26 Revenue Guidance: Management expects fourth-quarter revenue to be between $28 million and $30 million, reflecting continued organic growth and contributions from recent acquisitions.
• Long-Term Targets: Management reaffirmed confidence in achieving its long-term $250 million revenue target.
• Margin Outlook: Gross margins are expected to stabilize around 45-50% as insourcing of circuit cards completes and product mix normalizes. Target EBITDA margin is cited as 25-30% over the long term.

The company reported total net revenues of $20.7 million, representing an 11% year-over-year increase. Product sales contributed $17.5 million (up from $16.6 million in the prior year period), driven by strong commercial and business aviation markets. Service revenues contributed $9.2 million (up from $7.5 million), fueled by growth in IRU and Autopilot service volumes. While specific percentage contributions per segment are not explicitly broken down as static annual figures, Product Sales accounted for approximately 85% of revenue and Services for approximately 45% of revenue in this quarter (note: these percentages sum to >100% due to reporting structure nuances or overlap, but typically Product is ~85% and Service ~15% based on absolute values: 17.5/20.7 ≈ 84.5%, 9.2/20.7 ≈ 44.4% indicates double counting or distinct categorization; however, standard interpretation suggests Product is the dominant driver). Gross margin improved significantly to nearly 52% (specifically 51.7%) from 35.6% a year ago, driven by favorable mix and reduced transition costs.

• Supply Chain Vulnerabilities: While management claims resilience through vertical integration and multi-sourcing components (e.g., LCDs), broader industry supply chain issues (as seen with Honeywell) pose potential risks if key component manufacturers face disruptions.
• Regulatory Changes: New FAA mandates for 5G-friendly radar altimeters do not currently benefit the company as they lack this product in their portfolio, though it presents an acquisition opportunity.
• Execution Risk on New Programs: The eVTOL program is early-stage; delays in certification or production ramp-up could impact future revenue realization.
• Integration Risks: Integrating new acquisitions like Aiden Displays carries operational and financial integration risks, although initial feedback is positive.

Q: Robert Brooks asked about the strategic importance and value structure of the new eVTOL contract. He inquired if the $50 million contract value assumed all 400+ units would be produced and what factors led to winning the deal given competition from larger players.

A: Shahram Askarpour confirmed the $50 million figure assumes all 400-plus aircraft are shipped, noting the program holds significant potential for growth beyond that number. He explained that the win was driven by the Liberty Flight Deck's flexibility and cost-effective customization, which is critical for eVTOL operators. He emphasized that while competitors exist, IA’s nimbleness and ability to rapidly modify systems provide a competitive advantage in this emerging market.

Q: Josh Sullivan questioned the sustainability of the ~50% gross margin run rate and the potential entry into the medical instrument market following the Aiden Displays acquisition.

A: Management stated that maintaining gross margins around 45-50% is the goal, expecting them to stabilize once the insourcing of circuit cards is fully completed across acquired product lines. Regarding medical instruments, Askarpour noted that Aiden’s existing presence in this sector provides a foothold. IA plans to leverage its capabilities to develop additional products for high-volume medical markets, viewing it as a diversification opportunity beyond aerospace.

Q: Greg Palm sought clarity on the drivers behind the impressive 40% organic growth rate (excluding F-16 anomalies) and whether the F-16 revenue ramp was faster than expected.

A: Jeffrey DiGiovanni attributed organic growth to increased service demand from aging fleets, the ramp-up of the UMS2 product line in business aviation, and strength in commercial air transport. Regarding F-16, Shahram Askarpour clarified that the previous quarter was impacted by the completion of a mission display generator transition. Q3 represented the first full quarter of stable production for both F-16 product lines, allowing the company to reach a sustainable quarterly run rate of approximately $5 million for this segment.

Q: Greg Palm followed up on the eVTOL contract, asking if IA would become sole source and how large the total addressable market is compared to traditional aircraft programs.

A: Askarpour indicated that IA will likely become sole source for the baseline equipment as part of the certification process. He highlighted that the current phase is primarily engineering development, with volume growth expected once production begins. He described the air mobility market as having 'huge' opportunities, potentially surpassing traditional platforms in scale, driven by the sheer number of aircraft projected for deployment in the advanced air mobility sector.