Good morning, and welcome to the Innovative Solutions & Support First Quarter 2018 Earnings Conference Call. [Operator Instructions] ..

Please note this event is being recorded. I'd now like to turn the call over to Geoffrey Hedrick. Please go ahead. .

Good morning, this is Geoff Hedrick. I'd like to welcome you this morning to our conference call to discuss the first quarter of fiscal 2018 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 and 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. .

Thank you. The first quarter was challenging, with revenues down 8%. However, improved margins mitigated operating losses and generated positive cash flow. We are looking ahead to the increase in this quarter's ending backlog, continued growth in the customer service revenue and pick-up in the bidding activity.

We are concentrating on internal new product development, which allows us to better control over operations while eliminating the inherent risk of large engineering contracts. We are making steady progress by enlarging our product portfolio and expanding our distribution channels, primarily through the creation of a global MRO network. .

For instance, we remain committed to the internal research and development with fully implemented cost and efficiency controls. The heart of this new product strategy has over $900,000, or 30%, of revenue invested this quarter.

With the success of our patent-pending fully integrated Autothrottle, we are now in the process of certifying a new standalone PC-12 and King Air Autothrottles. For owners and operators that have already updated their cockpits, our standalone Autothrottle offers an economical solution to put this groundbreaking technology in their aircraft. .

We expect Air Autothrottles for a number of other Turboprop aircraft, with much shorter timeframe through development and certification. The King Air Autothrottle is our next Autothrottle product that represents -- is the largest single pool of autothrottle candidates with over 5,000 aircraft.

Together with the anticipated receipt of broad-based intellectual property protection, we will enjoy a period as exclusive provider of FA -- of the only FAA-certified autothrottle for a market of close to 10,000 aircraft. .

Our Autothrottle is only the latest in the growing portfolio of products that meet the demanding specifications of impending NextGen candidates. Having transitioned resources off of large engineering programs, we are now focused on growing a portfolio of internally developed feature-rich and industry-leading price-performance products. .

We have also revamped our processes to reduce the time and cut the cost it takes to bring new products to market. With -- to help drive sales, we have strengthened our sales and marketing organization and are growing our network of MRO distributors. .

Leading into the balance of fiscal 2018, we are also in a strong financial position with almost $25 million in cash. This adds extra flexibility to remain optimistic in its -- in this rapidly changing market. I would also like to comment that over the past several years, we have received some interest in purchasing the IS&S.

That interest has been generally fielded dynamically, but we can no longer chance add living responses to these expressions of interest.

Therefore, I intend to talk to the board tomorrow on our scheduled Board Meeting to engage some professional counsel to deal with these responses, so that we will have a uniform and a consistent and a well-trained response. Now I'd like to turn the call over to Rell Winand. .

Thank you to Geoff, and thank you all for joining us this morning. For the 3 months ended December 31, 2017, net revenues were $3.1 million, down slightly from $3.4 million in the first quarter of fiscal 2017. So that's virtually all of our quarterly revenues were either production sales or customer service.

We maintained strong gross margins, 48% for the quarter. The effect of this favorable mix of higher-margin product sold in the quarter was partially offset by the impact of lower volumes that had to be spread across our fixed manufacturing cost. .

Total operating expenses in the first quarter were $2.5 million, down 19% from a year ago. Most of the reduction was the selling, general and administrative expenses, which were reduced by over $400,000, or more than 20%, from a year ago.

Our research and development investment was somewhat lower than a year ago as nearly 30% of first quarter revenue, consistent with our strong commitment to new -- to internal new product development. .

For the first quarter of fiscal 2018, we reported a net loss of $882,000, or $0.05 per share. Even though revenues were down from a year ago, the net loss for the quarter was less than a year ago. This reflects our disciplined focus on high-margin products, product sales and improved cost discipline. The company remains in a strong financial position.

For the quarter, we generated positive operating cash flow and ended the quarter with $24.7 million of cash on hand and no debt. Working capital was over $30 million at December 31, 2017. We believe the company has sufficient cash to fund operations in the foreseeable future. Now I'd like to turn the call over to Shahram. .

Thank you, Rell. Good morning, everyone. Since it has been a short while from when we last spoke, let me quickly provide an update on the progress achieved during that period. I would begin with some comments regarding our financial performance in the first quarter..

Revenues were slightly lower than the first quarter of fiscal 2017. However, due to reduced cost, we experienced a better financial outcome. This cost reduction is a direct result of our recently implemented product development and organizational improvements.

We ended the quarter with an increase of 10% in our backlog, what we believe marks the turning point of our declining revenues. .

With the upcoming new certifications, we believe -- we expect to realize new order momentum heading into the rest of the year. Our focus is on developing new products to capture an increasing share of the demand for impeding -- impending NextGen mandates.

We already have several products available to meet that need, and as these products are a key to our future success, I would like to provide some additional insight..

With imminent standalone single-engine Autothrottle certification for the over 1,400 PC-12s, we are amid twin-engine Autothrottle certification in the King Air series. This certification transfers will increase our market opportunity by over 5,000 aircraft.

We are experiencing increased interest in our standalone Autothrottle with the PC-12 King Air and other Turboprop platforms due to our targeted marketing efforts and the recognition we have received from the industry experts in several aviation publications, such as the recent Business & Commercial Aviation cover article in February 2018 issue. .

And by designing our standalone Autothrottle, controlled by our Integrated Standby Unit, we have the ability to quickly add certifications for other aircraft platforms beyond the approximate 10,000 Turboprops in service by adding certification for applicable turboprop-powered aircraft.

As we continue to strengthen our internal sales and marketing capabilities, we carry on with our efforts to pursue additional dealership agreements, as they become our sales multipliers. .

Pilatus PC-24 is now in commercial production, and we are in full-run production mode. This is a great long-term opportunity for us, being the sole source supplier of the Utility Management System. .

We are also aggressively marketing our products internationally. For instance, we just returned from a strategic trip to China, where an increased growth in air cargo markets is creating unprecedented demand for Boeing 737, 757 and 767 aircraft upgrades.

This is another area where partnering with local MROs will provide opportunities in the Asian market. .

In summary, we continue with our strategy to focus on the sales and marketing aspects of our current and newly developed products as a key to creating value for our shareholders. Let me turn the call back to Geoff for some closing remarks. .

Thanks, Shahram. Our fundamental strategy is to continue to introduce a broad portfolio of innovative products. We are shortening the time to market and reduce the cost of development, and we have freed up resources to focus these efforts by eliminating low-margin development contracts..

We are also involved in evolving our marketing strategy from one that was highly tactical to something that is more consumer-centric and friendly. Our entire company has been organized around this strategy which capitalizes on our competitive strengths. .

We believe that the first quarter results represent a trough in our business transition, and we should be able to return to a growth over the balance of the year. I appreciate your interest today, and I'm open for questions. Thanks. .

[Operator Instructions] And there is -- and that's the end of the [ present time, ] so I would like to turn the call George Hedrick for any closing comment. .

Thank you, this is Geoff Hedrick. Thanks again for listening in. We're always open for answer any additional questions. Contact Rell Winand. Thank you again for today. Bye-bye. .

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..