Good day and welcome to the Innovative Solutions and Support First Quarter 2019 Fiscal 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 Geoffrey Hedrick, Chairman and Chief Executive Officer. Please go ahead sir..

Good morning. This is Geoff Hedrick. I'd like to welcome you this morning to a conference call to discuss our performance of the first quarter of fiscal 2019 current business conditions and our outlook for the coming year. Joining me today are Shahram Askarpour, our President and Relland Winand, our CFO.

Before I begin, I like Relland 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 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 from 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, Rell. The new fiscal year has responded positively to the cost controls and marketing refocus put in place at the start of this fiscal year. Both revenues and backlog were up. We reported a long-awaited profit for the first fiscal quarter of this year. I believe that the foundation for a growth year is now in place.

Shipments of displays for retrofit programs of commercial air transport rolled first quarter revenue growth, an encouraging sign that this market is rebounding. In general aviation, the highly successful PC-24 UMS program is now in full production mode and expectations of steady stream of orders is in place.

Orders for the Autothrottle have started delivery and installation. PC-12 flight deck orders will be delivered this quarter. In the military market, the development of the new air data computer for the F5 is in final stages of pre-delivery qualification testing. We are pursuing applications of our technology into the drone market as well.

As previously discussed in the last earnings call, we have been concentrating on our resources on few, but potentially more lucrative opportunities. We have reorganized the company proved resources and focused our research efforts on developing new innovative products with clear performance and cost advantages.

The principal result of our efforts is our ThrustSense integrated PT6 Autothrottle. We are notified that the ThrustSense Autothrottle is the first FAA certified Autothrottle for turboprop aircraft. ThrustSense protects the engine from exceedance damage and helping to protect against over-and-under speed loss of control.

We understand that there are over 10,000 vulnerable PT6 powered airplanes that do not include the potential and that does not include the potential of other markets such as drones and remote generators.

Consequently, because of its lightweight, easily installed, high value and low cost, we are experiencing expanding interest in a broad spectrum of applications. This is the first FAA certified Autothrottle. Traditionally Autothrottles have been expensive unnecessary of automotive like cruise controls.

The ThrustSense brings [PAYDAC] authority, digital engine control like protection to a very large market of hydro mechanical engines with demonstrated reliability of hundreds of millions of hours of operation.

Both the Pilatus PC-12 Classic and NG have been certified and an STC for the King Air is expected shortly delayed only by recent federal government shut down. We are in the midst of a ramp up of our full-scale marketing campaign.

Our efforts are being led by our recently hired Director of Autothrottle Programs Tom Grunbeck, our seasoned professional with ten recent experiences in this market alone. We are successfully raising market, our interest and awareness of the compelling safety features and low installed cost.

The interest is expanding and increasing and that orders are starting the low-cost Autothrottle and PC-12 NextGen 2015 large panel cockpit. That is the new cockpit for the PC-12 and will start deliveries this quarter. I am encouraged and gratified by the results of our restructuring efforts. Let me turn it over to Rell for discussion of financials..

Thank you, Geoff and thank you all for joining us this morning. Revenues for the first quarter of fiscal 2019 were $4 billion, a 29% increase from the first quarter of fiscal 2018.

Well most of the increase was in product sales primarily air transport, we did recognize 200,000 of engineering revenue in the quarter related to the F5 development contract. Gross margins for the quarter were 54%, an increase from 48% a year ago.

Gross margins reflect the increase of first quarter revenue from product sales as well as the impact of the workforce reduction implemented in the third quarter of fiscal 2018. Total operating expenses for the first quarter of fiscal 2019 were $2.1 million down $500,000 compared to approximately $2.6 million in the first quarter a year ago.

Research and development expense were down $300,000 while selling, general and administrative expenses were down approximately $200,000. Each of these decreases reflects the impact of the third quarter fiscal 2018 workforce reduction.

Keep in mind that our more focused business strategy enables us to do more with less R&D spending as we invest in fewer, but more promising technologies. We reported quarterly net income of 139,000 or $0.01 per share, a significant improvement from the net loss of $882,000 or $0.05 a share a year ago.

The company remains in a strong financial position despite a very modest use of cash in the quarter. At December 31, 2018, we had over $20 million of cash on hand and no debt. We believe the company has sufficient cash to fund operations for the foreseeable future. Now I'd like to turn the call over to Shahram..

Thank you, Rell and good morning everyone. As Geoff mentioned the new fiscal year is off to a good start with an increase in revenues, an increase in backlog and a return to profitability. Let me provide a little more insight to what is driving our progress.

Recently, we have been receiving orders from our air transport dealer network in both domestic and international markets as our strategy is beginning to take effect. We are starting to see a return on that investment, a growing interest in our portfolio of cockpit technology.

As Rell mentioned, most of our revenues in the first quarter were from product sales with an uptick in sales of existing products such as flat panel displays for the Boeing 757 and 767. In addition we are generating revenues from a number of ongoing programs such as the Pilatus PC-24 which has achieved steady rise in production levels.

With $4.3 million in orders booked over the course of last 12 months, we see an increase of approximately $1 million from the last quarterly annual orders reported. The PC-24 program is going well as the aircraft has been enthusiastically accepted by the aviation market.

Very little of our expected PC-24 revenues are in backlog although orders may exceed 40 shift sets per year while the plane is in production. And we are now generating both product and engineering revenues in the military market.

Our KC-46A program continues to trend well and we are responding to Boeing for additional requests from international customers. Our development contract for a new F5 data computer for the U.S. Navy is nearing completion and we expect that the production orders will commence shortly after.

This is essentially a replication of a product we built for the A-10 that has shown remarkable performance and reliability. By adapting that technology to the F5, we’re minimizing its cost and accelerating its time for development.

We believe that there are further opportunities to adapt this data computer to a variety of other military platforms as a new design, as more versatile capabilities that are past products.

While the revenues and backlog is certainly rewarding neither of these measures adequately capture the opportunities that has us most excited and that of course is a ThrustSense Autothrottle technology. With STC now in place and others eminent, we’ve begun to ramp up our comprehensive marketing plan.

The infrastructure to ensure that we can support this launch continues to strengthen. Utilizing our PC-12 and King Air aircraft, we're making numerous on-site demonstrations of the technology with manufacturers, installers, fixed base operators and others.

The new orders in hand and deliveries already commenced for the PC-12 standalone Autothrottle of full cockpit configuration, we are beginning to see a payback of our investment in this unique and exciting product line that has been prayed in leading industry publications.

Furthermore, since we believe this patented technology to be unprecedented, our expectation is that this initial STC especially the sophistication of a twin engine STC would pave the way for a much easier path to additional STCs in the space.

Finally, we are pleased to observe that last year's reorganization is beginning to produce expected results by improving efficiency and providing the return to profitability in this first quarter.

Over the last few quarters we have provided a fair and balanced look of our business by anticipating a gradual market acceptance of our Autothrottle based products.

As we are experiencing positive response to our marketing efforts of ThrustSense and receiving orders for our certified PC-12 product line, we believe this reception is an early indicator of market acceptance of our product strategy for general aviation with ThrustSense being in the center of that strategy.

Let me turn the call back to Geoff for some closing remarks..

Thank you, Shahram. Over the past few years we have been returning to our roots pursuing products where we bring real product innovation that leads to better performance and reliability as well as potentially lower cost.

That is why we are focusing on products such as the Autothrottle and utility management systems never previously designed or conceived. Through patent set or other controlling uniqueness of technology, we establish special strength in the marketplace and create real value for our stockholders.

So in conclusion, I appreciate your attention today and we'll open the call up for questions.

Operator?.

We will now begin the question and answer session. [Operator Instructions] The first question comes from Charlie Pine of Van Clemens & Company. Please go ahead..

Thank you. Good morning everyone..

Good morning..

Congratulations on your return to GAAP profitability in the quarters..

It's a long time between Grinch..

Yes it has been. But looking forward to the next round a couple questions, it’s obviously well known that due to the shutdown of the FAA that is pretty much out of commission for a month.

So that being known, how much of an effect did that have on the processing of what was going on with the STC for the ThrustSense for the King Air? What does that could be, right now?.

It was significant, but we are happy, it looks like it's either over or close to over. I understand that we've broken some very new ground especially in the area of the King, the Pilatus PC-12 or both have STC’s issued modifications to those may be delayed, but that's less critical.

The King Air STC incorporates a new technology, a safety technology that's unheard of except in a rudimentary form used by the 787 Boeing airplane. So this new technology is a serious out of control condition that can occur when you lose an engine.

That technology is so new and revolutionary that it's taking special time almost a year to understand and evaluate it by the FAA. Happily we've demonstrated it both to the manufacturers and the FAA and they've gotten great reviews. So we believe it's a matter of time.

They have to get through their process because it's never been done before, they don't have anything to base it on and that's probably the biggest impact..

On the last call you had talked about that you were scheduling with the FAA was going to be scheduled in test flight and I believe also I had asked you just kind of roughly when you thought you might be able to get through all of this and get the paperwork filed, the large amount of paperwork that was going to be necessary? And what you’re kind of a guesstimate of when you thought that you could conceivably get the STC and at the time a couple months back you thought there was a good chance that you might have it by the end of Q1.

But now like of course, assume with the shutdown there's been some pushback.

Do you feel that you've got, the process is moving forward in such a way now that the lights are on at the FAA and you can move this that there's a good chance and you'll have this before the end of the second quarter?.

Well I don't know. I think that may be a little premature. Remember what happens when you shutdown, the pileup of all of that information that has come in over the month typically has a three month or four month impact.

So considering the uniqueness of our application, I believe there's an opportunity, a possibility but it's more likely going to be not in the second quarter but in the third quarter..

Well, I appreciate that clarification. Can somebody talk a little bit more about what sort of orders that you are, I mean, maybe I've missed this a little bit.

But if you could talk a little bit more about the characterization of the orders that you are currently getting for the ThrustSense on the PC-12?.

Shahram, you want to do that?.

What we are seeing actually is, we are seeing orders for both full cockpit configurations, which obviously has much, much larger number in terms of revenue and profit as well as the individual installation of that is standalone Autothrottle. We've done deliveries. We've got installations.

I mean one installation is about to get completed today and we are seeing a tremendous amount of interest coming in for both of those, not just within the U.S. but also internationally which is very promising..

I would comment that what you know that originally the Autothrottle was conceived as an addition and enhancement to the flight deck not simply as a standalone device but to enhance the value of the flight deck.

It enables us to provide really what we call fourth dimension control of the airplane and that is to say that increasingly there is a demand by flight up their traffic control to have arrival times precisely defined so that they can control the flow of aircraft into a field and get much more efficiency.

In order to do that that requires some very detailed speed control hitting way points at very specific times. To do that manually is almost impossible. So our Autothrottle coupled with our flight deck allows you to have a required time of arrival.

You can take off, fly three hours or four hours and land or arrive at a way for it within less than 60 seconds of the defined time. So it's quite an achievement and it's now strongly enhancing a much more valuable product line of flight decks..

Like two other things I'd like to ask.

First, could you expand a little bit more on the renewed business that you mentioned regarding what's going on in the air transport segment?.

Shahram?.

So, I guess, we've invested and putting together kind of a larger dealer network rather than hiring a bunch of sales guys internally to go after the general aviation and essentially what we've seen now is that is paying off. We're also pursuing some larger aircrafts for customers utilizing our own sales guys.

But getting the orders from some of the dealer network is something that’s beginning to take effect and we're pleased to see that happening..

How much of a contribution to the business do you think it will constitute going forward over the next several quarters? What on a segment basis would you say?.

We should be able to, I mean, kind of when we look at our internal revenue targets on the air transport side, we're meeting those targets. So that's usually a good sign..

And the last one, about a year maybe a year and a half ago the company put out some press releases talking about relationships with so-called MROs. We haven't heard much discussion about those relationships for some time.

Can you talk a bit about that or are you now actually seeing some benefit from some of the ground work that was done with that?.

Exactly that's on the aircraft, but we are getting these orders that we are getting it through some of those MROs..

Well, thank you very much for that and once again congratulations for being back in the black..

We're delighted..

[Operator Instructions] This concludes today's Innovative Solutions and Support Earnings Call. Thank you for attending today's presentation. You may now disconnect..