Good morning. And welcome to the Innovative Solutions & Support Fourth Quarter and Fiscal Year and 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Geoffrey Hedrick, Chairman and CEO. Mr. Hedrick, you may begin..

Good morning. This is Geoff Hedrick. I would like to welcome you this morning to our conference call to discuss the fourth quarter and fiscal 2016 results, current business conditions, and our outlook for the upcoming year. Joining me today are Shahram Askarpour, our President; and Rell Winand, our CFO.

Before I begin, I would like Rell to read the Safe Harbor message.

Rell?.

Thank you, Geoff and good morning everyone.

I would remind our listeners that certain matters discussed in the conference call today, including new products 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 than those discussed, including other risks and uncertainties reflected in our company’s 10-K which is on file with the SEC and other public filings.

Now, I’ll turn the call back to Geoff..

Thanks Rell. Fiscal 2016 was a year of significant improvement, returning to positive growth in revenues, profits and cash flow, while also positioning ISSC to capitalize on emerging opportunities expected to arise as NextGen mandates rapidly approach.

We believe these accomplishments are even more noteworthy as they were achieved while doubling our investment in internally funded development and managing outgoing litigation.

Fiscal 2016 was also a year on which we modified our strategy and realigned our resource system, all which now service as a solid foundation from which the company can continue to grow. We transitioned from a heavy reliance on customer funded engineering revenues to a much more -- much greater proportion of more profitable production contracts.

This is no more clearly illustrated than in our fourth quarter results where we generated revenue from current backlog as well as growing a stream of booking ship orders, virtually all of which were production based. This led to expanded gross margin and a returning to the level that were historically achieved.

Over the past year, we've also significantly increased our commitment to internally develop new products and expanding our sales distribution channels. The result has been greater ability to create new products that we believe we can quickly capitalize on current market needs and a wider reach into markets both internationally and domestically.

We are especially enthusiastic with the progress of the Utility Management System. It is smoothly transitioned into its initial production cycle. The Utility Management System or UMS replaces over 20 independent better rated systems, driving such systems as environmental control and cabin pressurization.

This allows customers, our customers to explore our system open architecture to create and maintain their own software and hardware solutions profoundly reducing their initial cost and subsequent maintenance cost. It is now scheduled for production, aircraft and new production aircraft and is showing interest broadly throughout the industry.

Our goal is to build on progress accomplished over the past year so we can continue to achieve consistent improvement year-over-year. Now let me turn this over to Rell..

Thank you, Geoff. And thank you all for joining us this morning. For the three months ended September 30, 2016, revenues were $6.2 million, doubled to $3.1 million in the fourth quarter of fiscal 2015.

In the fourth quarter, product sales were virtually 100% of total revenue reflecting success of our strategy to focus on obtaining new production orders both contract and book and ship. Production contracts are inherently more profitable and this continues to drive the significant improvement in both gross margins and overall profitability.

For the fourth quarter, gross margins were 54%, again consistent with the margins generated over the course of the year due to the strong growth in production revenues. As a reminder, margins can vary from quarter-to-quarter as a result of changes in either product mix or volumes.

Total operating expenses in the fourth quarter were $2.8 million, down $0.7 million from a year ago, in part reflecting all selling, general and administrative expenses in a year ago quarter, a result of the accounting for an impairment to unbilled receivable.

Research &Development cost for this quarter were nearly doubled those of a year ago and we continue to invest nearly 20% of our revenue in internally funded new product development. For the fourth quarter of fiscal 2016, we reported operating income of approximately $550,000 and net income of approximately $0.4 million or $0.02 per share.

Our tax rate for the quarter defer from the statutory rate due to the effect of a change in our deferred tax valuation allowance triggered by the company's profitability.

For the fourth quarter of fiscal 2015, we reported an operating loss of $2.9 million which includes a $1.3 million impairment charge as a result of the accounting associated with an agreement to terminate an existing contract and replace it with a new contract.

At September 30, 2016, the company had $18.8 million of cash on hand, up over $2.5 million from the end of last year. For the quarter, we generated approximately $1.9 million of cash from operations of which approximately $550,000 was used to repurchase 190,000 shares of our common stock at an average cost of approximately $2.90 per share.

These purchases exhausted the Board's current buyback authorization. The company is currently debt free. We believe the company has significant cash to fund operations for the foreseeable future. Now I'd like to turn the call over to Shahram..

Thank you, Rell. Good morning, everyone. Let me provide an update on the progress achieved over the past year particularly the fourth quarter as well as our current strategy and plan. I'd first like to echo Geoff's comment in that we achieved significant financial improvement in fiscal 2016, increasing revenues, earnings and cash flow.

We ended the year on a high note with fourth quarter revenue doubled those of a year ago. With a significant improvement in earnings and cash flow all while nearly doubling our commitment to internal research and development investment and managing through a difficult ongoing litigation.

At the same time, we transitioned the way from large scale proprietary engineering contracts for a single customer with emphasis on diversification of products, customers, geographic concentration and end market.

These changes will improve our performance in the near term, prepare us for the challenges of this fiscal year as well as help us respond to the long term trends we see emerging in our industry.

New technology developments have continually broadens our product line with a strategy which we believe has consistently proven its metal increasing the value of our franchise. And we believe we can optimize the value of this strategy by developing new products, largely utilizing our internal resources.

Over the past year we believe we've employed this strategy most effectively in developing our new Autothrottle product. This will be a first of its kind product and accordingly we have taken a very deliberate approach to development by adding lots of innovative, new capabilities to its functionality.

Let me bring it to market which is now most likely to be in our fiscal 2017 which is broadly extremely feature rich. Initially, we are targeting the PC-12 market which according to trade sources represents more choice opportunity of more than 758 aircraft with a market cap in excess of $150 million.

We are very optimistic about the prospects for this new product over the balance of our current fiscal year, it is a great decision to the flight deck developed for the PC-12 as it includes many desirable NextGen features such as ADS-B in, ADS-B out, LPV and RNP capabilities as well as synthetic vision and enhanced vision.

On Pilatus PC-24 OEM program, we are now delivering production unit in a regular basis. Pilatus is building airplanes in anticipation of receiving certification from YASA in calendar 2017. PC-24 with a brand new aircraft for which we've been selected to provide the Utility Management System.

The PC-24 UMS is based on our UMS-100 family of Utility Management System and was derived from the development for other platforms. This is another example of our ability to adopt existing technology to new applications.

The system utilizes our latest technological breakthrough in avionic sector design providing the all net operator many benefits including reducing weight, power consumption, and maintenance and operation expense.

Based on its successful implementation on the PC-24, our Utility Management System is now receiving additional marketing interest from other major OEMs. Other significant accomplishment in the fourth quarter includes the FAA issuance of an SPC for the 737 integrated standby units.

In addition, the Canadian Civil Aviation Authority validated our 737 Flight Management System, flight display system and standby display which led to delivery of our equipment for a Canadian commercial 737 airline in the fourth quarter.

We see a growing interest and demand for our 737 flight management system, flight display system and standby display both domestically and internationally. Finally, we continue to sign up new distributors domestically and internationally in order to increase our product exposure.

As an example, we've recently signed another domestic distributor in the current quarter which I'll note has already placed initial orders. We see increasing our distributor channel as an effective sales multiplier.

As we have broadened our portfolio, innovative features and products that's have a growing list of customers, we are confident that the market will respond and support the continued growth of our business. I'd now like to turn the call back to Geoff..

Thank you, Shahram. We've made significant progress in 2016, returning the company to growth in revenues, earnings and cash flow while positioning the company for what we believe is going to be an exciting future.

I believe that we've adopted a strategy develop the technologies and build the financial strength based on existing and newly developed products like the patent pending Autothrottle and UMS. It will enable us to continue to create value for our shareholders. We thank you for joining us today. Operator, would you please open the call for questions..

[Operator Instructions] The first question comes from David Campbell of Thompson Davis & Company. Please go ahead..

Hi, good morning, Geoff, Shahram and Rell. Good to hear you as usual in your normal optimism. You are optimistic; you must have a target for fiscal 2017.

You usually have some kind of target for us here at a time in terms of revenue growth or at least the lucent target on revenue growth by product and you had new products line include the Pilatus aircraft I guess that's one of the biggest sources of growth and what else is there..

Well, Pilatus is starting, they have been a terrific program and a great customer and an amazing airplane by the way.

But that actually was a foundation for a very unique and new product line which really offers the OEMs a huge improvement to try to maintain 20 or 30 independent computers on their airplane and then integrating them all as we replaced with these universal computers.

I am going to show a rare case of being a little circumspect and not predict the future. But I'll be shortly as we reform the plan for the -- continuation of this fiscal year. We have good products, the margins are in approx we can see that now and the business profile and plan is consistent with the kinds of margins and earnings we had historically..

As far as the December quarter is concerned do you expect the usual seasonal slump in business? So you shouldn't be looking for anything unusually growth in the first quarter..

No. For one of its worth it tends to be pretty consistent with past performance even in our best times, the second -- the first quarter was consistently a far smaller quarter that build up towards the end of the year. And we did that in best of times as well..

What's the status of the FedEx and America airlines agreements to install systems, their flat panel, are they still producing revenues in this year?.

Yes. We did. We improved, continue to produce revenue for that flat panel systems. And we see other opportunities as we expand. Our MROs, the business is also changed toward the MROs as well. The reduction from a macro sense, reduction in fuel cost has really affected the view of the industry.

Fuel prices are high, the investment in $70 million airplane it burns 20% less fuel is a valid investment when except when a fuel is as low as it is now, it's very hard to justify that investment and therefore many of them are upgrading their fleet you can hear that's actually happening where you are seeing more and more those upgrades and again we are positioned ideally to service that market..

And what's the status of the Delta dispute and were there any charges in the fourth quarter for legal cost there?.

You can't comment on that. I mean I just, look, I am satisfied we are doing the right thing. That's all I can say. Beyond that I can't comment on the litigation or suit itself..

Including no disclosure of the cost? Legal cost for it..

No. We are not prepared to do that. They are significantly less than I would suspect people would speculate. Just correct answer we are still making money every quarter and generating cash. So it can't be too bad..

Then finally what about the Eclipse or the new name for that aircraft now.

What's the status of those deliveries?.

One aviation and yes they are working on their new airplane, in the meantime there are over probably 150 aircraft left, it need to be upgrade that means another set of hardware and software for those airplanes as a market opportunity. So that's good especially since we have now a good solution for the NexGen and ADS-B out..

[Operator Instructions] The next question comes from Scott Lewis of Lewis Capital Management. Please go ahead..

Thank you. Congratulations on a nice quarter..

Thank you. I said thank you and it sets the bar up and we are going to keep pushing the bar so --.

That's great..

Certainly the good reasonable start..

Yes. Couple of questions on your Autothrottle product for the PC-12.

Was that work with a say regarding our cost and flight deck or without --would the person have to install your flight deck for the Autothrottle?.

They would probably -- they would be better off installing our flight deck for the Autothrottle. It is one of the key features that our systems provide that's difference in the existing systems out there..

Okay. And then on the --.

By the way applicable to a broad range of aircraft including turbo fan aircraft, it is quite breakthrough and it's typically integrated into the display system..

Okay. And then on the UMS, you said it's been some interest, would that only be for the newly designed aircraft or could that be retrofit say giving a block hand still in existing against aircraft..

It could. They could be used for existing aircraft. You would probably -- you would do that only if you were inclined -- you had a major modification to as an example that the environmental control system or something like that where it would justify replacement. But as a retrofit item, it might have a more limited use.

We looked at, we continue to look at because we can integrate and providing systems into the UMS to give you some sense of it. UMS consist of multiple computers that are linked through a serial line so you can add up to six or eight of them.

And handle thousands literally thousands of signals and manage them and have it completely integrated solution in that all the system talk to one another. It's really quite remarkable and we are-- we touchwood we have had an incredibly smooth transition into volume production..

Okay, good. And then one more question. In your press release Geoff you call out some particular optimism regarding your Flight Management System, interest in a flight management system.

Can you talk a little bit about what you are seeing its price, what type of customer or what type of aircraft you are seeing that interest in?.

So regards our Flight Management System, we've so far we've got it installed on others on the classic Boeing 737.

We have it installed in the military platforms such as C-130 as Zorpia 100 and then on the business aviation side of course the Eclipse and the PC-12, so we also see much, much broader spectrum of aircraft including watercraft and that they receive lot of interest comment from those markets for our Flight Management System.

It is very capable yet reasonably priced piece of equipment.

For example when we go into 737 classic Boeing we provide feature as well as advantage that provides features like LPV which I think you look at your -- look at a commercial and transport aircraft and out of the 787 out there, you don't see that many aircrafts out there that have that kind of capabilities.

And you get that all as part of this package as well as ADS-B out. So it's very well thought product that meets a lot of the niche features that are desired now as well as caters for their future manage..

Right. I know it is a very feature rich product you guys are excited about, just wondering if you really seeing some kind of pick up in interest by certain operators or something more concrete--.

Yes. We are getting as I talked about in the fourth quarter we had our first commercial operator of 737 a Canadian company that took delivery of our system which included the Flight Management System. And we are seeing a lot of interest domestically and internationally for the product right now..

[Operator Instructions] There are no questions at this time. This concludes our conference for today. Thank you for attending today's presentation. You may now disconnect..