Earnings call transcript: Innovative Solutions Q3 2025 revenue soars, stock tumbles

Innovative Solutions and Support (ISSC) reported its Q3 2025 earnings, revealing a significant revenue increase but a flat EPS compared to forecasts. Despite the robust revenue performance, the company’s stock experienced a sharp decline in pre-market trading, dropping by nearly 20%. The earnings report highlighted a 105% year-over-year revenue growth, driven by strong product sales, but investor sentiment was dampened by concerns over gross margin contraction and future revenue dips. InvestingPro data shows the company maintains impressive gross profit margins of 50.24% over the last twelve months, suggesting strong pricing power despite recent pressures.

Key Takeaways

• Revenue surged 105% year-over-year to $24.1 million.
• Earnings per share matched forecasts at $0.14.
• Gross margin dropped significantly to 35.6%.
• Stock price fell nearly 20% in pre-market trading.
• Anticipated temporary revenue dip in upcoming quarters due to F-16 transition.

Company Performance

Innovative Solutions and Support showcased a strong performance in Q3 2025, with revenues reaching $24.1 million, marking a 105% increase from the previous year. The growth was primarily fueled by a substantial rise in product sales, which climbed to $16.6 million from $5.1 million. However, the company’s gross margin declined to 35.6% from 53.4% a year ago, reflecting increased production costs and integration challenges.

Financial Highlights

• Revenue: $24.1 million, up 105% year-over-year
• Earnings per share: $0.14, up from $0.09 last year
• Net income: $2.4 million, up from $1.6 million
• EBITDA: $4.3 million, a 62.7% increase
• Gross margin: 35.6%, down from 53.4% last year

Earnings vs. Forecast

Innovative Solutions’ earnings per share of $0.14 met the analysts’ forecast, with no surprise factor. However, the company exceeded revenue expectations, reporting $24.1 million against a forecast of $17.23 million, a 39.87% surprise. This substantial revenue beat contrasts with the flat EPS performance, suggesting challenges in cost management or pricing strategies.

Market Reaction

Following the earnings report, Innovative Solutions’ stock price experienced a significant decline, dropping by 19.92% in pre-market trading. The stock, which was previously trading at $19.73, fell to $15.8. This movement reflects investor concerns over the company’s gross margin contraction and anticipated temporary revenue dips in the next quarters due to the F-16 transition. InvestingPro technical analysis indicates the stock was in overbought territory before the decline, with a remarkable 185% return over the past year. The company’s current market valuation appears aligned with InvestingPro’s Fair Value estimates.

Outlook & Guidance

The company remains optimistic about future growth, targeting revenue and EBITDA increases of over 30% compared to FY2024. However, it anticipates a temporary revenue dip in Q4 and Q1 due to the F-16 transition. The integration of Honeywell’s product lines is expected to complete by 2026, which could further bolster the company’s market position. InvestingPro’s comprehensive analysis rates ISSC’s overall financial health as "GREAT" with a score of 3.06, supported by strong profitability metrics and moderate debt levels. For detailed insights into ISSC’s growth prospects and peer comparison, access the full Pro Research Report, available exclusively to InvestingPro subscribers.

Executive Commentary

Sherem Asgharpur, CEO, stated, "We remain on track to deliver our goal to generate both revenue and EBITDA growth of greater than 30% when compared to fiscal year twenty twenty four." CFO Jeff DiGi Browne added, "We’re expecting nominal F-sixteen revenue for Q4 and Q1 potentially," highlighting the anticipated short-term challenges.

Risks and Challenges

• Gross margin pressure: Continued integration and production costs may affect profitability.
• Revenue dip: Expected temporary decline due to the F-16 transition.
• Market competition: Intense competition in avionics and navigation systems.
• Economic uncertainties: Potential impact from macroeconomic factors and tariff changes.
• Integration risks: Challenges in successfully integrating Honeywell’s product lines.

Q&A

During the earnings call, analysts inquired about the gross margin outlook and the impact of the F-16 transition on revenues. The management emphasized their target for gross margins to normalize in the mid-40% range and reassured that the integration strategy focuses on smaller avionics manufacturers, which could mitigate some risks.

Full transcript - Innovative Solutions and Support (ISSC) Q3 2025:

Conference Operator: Good day, and welcome to the Innovative Solutions and Support Third Quarter Fiscal twenty twenty five Financial Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Paul Bartolai. Please go ahead.

Paul Bartolai, Investor Relations, Innovative Solutions and Support: Thank you. Welcome to Innovative Solutions and Support’s third quarter twenty twenty five results conference call. Leading the call today are our CEO, Sherem Asgharpur and CFO, Jeff DiGi Browne. This morning, we issued a press release detailing our third quarter twenty twenty five operational and financial results. This release is publicly available in the Investor Relations section of our corporate website at www.innovativess.com.

I would like to remind you that management’s commentary and responses to questions on today’s conference call may include forward looking statements, which by their nature are uncertain and outside of the company’s control. Although these forward looking statements are based on management’s current expectations and beliefs, actual results could differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of our latest reports filed with the SEC. Additionally, please note that you can find reconciliations of all historical non GAAP financial measures mentioned on this call in the press release issued this morning. Today’s call will begin with prepared remarks from Sherem, who will provide a review of our recent business performance and strategic outlook, followed by a financial update from Jeff.

At the conclusion of these prepared remarks, we will open the line for your questions. And with that, I’ll turn the call over to Sherem.

Sherem Asgharpur, CEO, Innovative Solutions and Support: Thank you, Paul, and good morning to everyone joining us on the call today. Let’s begin with a high level overview of our third quarter financial performance. During the third quarter, we delivered revenue growth of 105% compared to the third quarter twenty twenty four, driven by continued momentum from new military programs, including significant growth from our F-sixteen program. As Jeff will discuss in more detail, our results did benefit from a pull forward of F-sixteen revenues ahead of the upcoming integration into our ExDOM plan. Our business momentum remains strong with a backlog of approximately 72,000,000 as of 06/30/2025.

Our adjusted EBITDA increased only by 43% from last year as our strong revenue growth was impacted by lower than anticipated gross margins received from Honeywell on the F-sixteen product line due to additional costs associated with building safety stock prior to transition. As we have discussed, we fully expect our integration efforts and investments for growth to create some near term volatility in our margin results. However, the actions we have taken are important strategic steps in advancing our long term growth strategy, and once the transition is completed and cost efficiencies are realized, we expect improved margins in latter quarters of fiscal twenty twenty six. We were pleased with our third quarter results and we are encouraged by the continued progress on the expansion of our Exterm facility and the integration of our acquired lines from Honeywell. We are excited by the long term opportunities that will result from these investments.

We continue to make progress on our key strategic objectives during the quarter and we are confident these measures have strengthened our foundation for future growth. To that end, I would like to shift the discussion to an update on our progress on the IS and S NEXT, our long term value creation strategy. As a quick refresher, our strategy centers on a combination of targeted commercial growth within high value markets, improving operating leverage and a disciplined returns driven approach to capital allocation. I would like to take a moment to highlight just a few of our key achievements during the quarter. Early in the quarter, we received a new engineering development and production contract for a derivative of a radio management unit we acquired as part of our first acquisition under our long term growth strategy.

We have made further progress on the expansion of our External facility with construction having wrapped up during the third quarter. We expect the fit out to be completed in early fall, at which time we can begin to take advantage of our expanded manufacturing capacity, which will increase by more than three fold. As a reminder, we manufacture 100% of our products in our Exelon facility and this expansion is the key element of our long term strategy to achieve revenues exceeding $250,000,000 over the next few years. With the ongoing trade uncertainty and priorities of the current administration, it should be in an enviable position to give the likely significant push for reshoring of manufacturing and an America first mentality. Additionally, as it relates to tariffs, we are not directly impacted by the uncertain tariff environment given our U.

S.-based manufacturing and vertically integrated strategy. However, we could see some impact from our foreign based customers that are reducing their production forecast due to potential tariff implications. Meanwhile, we don’t expect a meaningful impact on our results and view this to be a short term measure while political negotiations are at play. During the third quarter, we continued with the integration of our most recent acquisition from Honeywell. As we have discussed in the recent quarters, much of the spending and integration activities are being done ahead of the expected growth from these platforms.

We anticipate the integration to be completed during our 2026 and we are excited by the opportunities from this acquisition. Importantly, we were pleased with the recent closing of our new credit facility, which Jeff will cover shortly. Deploying capital for strategic acquisitions remains a key priority and our new credit facility extended by Chase Bank provides us with expanded access to credit and more flexibility to accelerate our long term growth plan. Although our most recent acquisitions have been focused on complementary product lines from large avionics suppliers, we continue to evaluate opportunities to acquire smaller avionics manufacturers where we anticipate synergies will be realized by incorporating their outsourced production in our facility. Additionally, we are also evaluating opportunities in adjacent markets that are more developmental in nature, but offer unique long term growth opportunities.

Despite recent margin pressure due to impact of the F-sixteen safety stock, we expect EBITDA and profit margins to grow steadily. We are further establishing our company as a premier systems integrator in flight navigation and precision instrumentation with cutting edge technology. Our vertically integrated U. S. Based production provides a competitive advantage, fostering relationships with key aircraft manufacturers, operators and defense organizations.

In summary, we remain focused on the long term, so we are encouraged by the progress we have made on our strategic priorities and remain committed to taking strategic steps to further our growth objectives. We remain on track to deliver our goal to generate both revenue and EBITDA growth of greater than 30% when compared to fiscal year twenty twenty four. We are excited by everything we have accomplished and are confident we are strategically positioned to continue generating profitable growth for the future to come. With that, I’ll turn the call over to Jeff for his prepared remarks.

Jeff DiGi Browne, CFO, Innovative Solutions and Support: Thank you, Sharon, and good morning to all those joining us. Today, I will provide a high level overview of our third quarter performance, including a discussion of our working capital, balance sheet and liquidity profile at quarter end. We generated net revenues of $24,100,000 in the third quarter, more than double our revenues during the third quarter last year. The increase was driven largely by the contribution from the recently acquired F-sixteen product line from Honeywell, which contributed $12,600,000 Our revenues related to the F-sixteen products once again included some revenues that were pulled forward as Honeywell built safety stock ahead of the shift in the production to our Exton facility. As a result, we expect a temporary dip in revenues related to the F-sixteen product line during the fourth quarter as we complete the transition before revenues begin to ramp back up in fiscal twenty twenty six.

Product sales were $16,600,000 during the third quarter, up significantly from $5,100,000 last year, driven primarily by the recently acquired military product line. Service revenue was $7,500,000 owing largely to customer service sales from the product lines acquired from Honeywell, including $1,000,000 associated with the F-sixteen program. Gross profit was $8,600,000 during the third quarter, up 37% from $6,300,000 in the same period last year, driven by the strong revenue growth, partially offset by lower gross margins on the acquired F-sixteen product line from Honeywell, as well as higher depreciation expense resulting from the Honeywell acquisitions, duplicate costs in support of the migration of the recent Honeywell acquisition and continued investments in growth initiatives as Sharon discussed. Our third quarter gross margin was 35.6%, down from 53.4% in the same period last year. The decline from last year was driven by lower than anticipated gross margins received from Honeywell.

As we have discussed, this is a gross margin of less than 25% in the F-sixteen revenues, which impacted our overall margins. As we have stated in recent quarters, the potential exists for our gross margins to be lumpy in the near term, as we continue to integrate the Honeywell product lines into our facilities. This can be due to a variety of factors including duplicate cost as we prepare to integrate these products, the hiring and training of engineers and staff to support these products. And as we saw this quarter, the cost to build stock to ensure a smooth transition. Additionally, as we discussed previously, as it relates to the product mix, generally military sales carry a lower average gross margin versus commercial contracts.

However, importantly, there is minimal operating expense associated with these contracts, so the incremental EBITDA margins are strong. Similar to last quarter, this dynamic was fully evident in our third quarter results as we saw very strong operating expense leverage in the quarter. Operating expense during the 2025 was $5,100,000 an increase from $4,200,000 last year despite the significant growth in revenue. The increase in operating expense was driven by approximately $200,000 of incremental depreciation and amortization, dollars 600,000 in employee related costs, and $100,000 of acquisition of one time expenses. Operating expenses represented 21% of revenue during the third quarter as a significant decline from 36.1% in the third quarter of last year, highlighting opportunity for improved operating leverage as the business scales.

Net income for the quarter was $2,400,000 as compared to $1,600,000 last year. GAAP earnings per share of $0.14 increased from $09 EBITDA was $4,300,000 during the third quarter, up from $2,700,000 or an increase of 62.7%, largely due to our revenue growth and operating expense leverage, partially offset by the lower gross margins. Moving on to backlog. New orders in the 2025 were 17,000,000 and backlog as of June 30 was $72,000,000 The backlog includes only purchase orders in hand and excludes additional orders from company’s OEM customers under long term programs, including Caladis PC-twenty four, Textron King Air, Boeing T7 Red Hawk, Boeing KC-46A and the F-sixteen with Lockheed Martin. We expect these programs to remain in production for several years and anticipate they will continue to generate future sales.

Further, due to their nature, the customer service lines do not typically enter backlog. Now turning to cash flow. During the nine months ended 06/30/2025, cash flow from operations was 10,300,000 compared to $5,400,000 in the year ago comparable period due to our solid operating results. Capital expenditures during the nine months ended June 30 were $5,500,000 versus $500,000 in the year ago period. The increase in our capital expenditures related primarily to the cash outlays for the expansion of our Exton facility.

Despite the increase in spend of over $5,000,000 when compared to the nine months last year, we were still able to generate free cash flow of $4,800,000 during the nine months ended 06/30/2025, which is in line with our previous year. As of 06/30/2025, we had total long term debt of 23,300,000.0 and cash and cash equivalents of $600,000 resulting in net debt of $22,700,000 Net debt was down $3,500,000 from the end of the second quarter twenty twenty five, despite elevated capital expenditures related to the Exton Expansion Project, reflecting the strong operating results and disciplined financial management. As of 06/30/2025, IS and S had total cash and availability under its line of credit of approximately $12,300,000 Our net leverage at the end of the quarter was 1.1 times. As Sharon mentioned, on 07/18/2025, we entered in a new five year $100,000,000 committed credit agreement with a lending syndicate led and arranged by JPMorgan Chase. The credit agreement replaces our existing $35,000,000 line of credit.

The new facility provides an additional $65,000,000 in expanded liquidity and an option subject to certain conditions to request up to $25,000,000 in additional loan commitments under an accordion feature in the credit agreement. This improved flexibility better enables us to execute on our long term growth strategy. That completes our prepared remarks. Operator, we are now ready for the question and answer portion of the call.

Conference Operator: We will now begin the question and answer session. Riley Securities. Please go ahead.

Analyst, Riley Securities: Hi, good morning everyone. I just wanted to touch a little bit on the gross margin outlook given the F-sixteen impact. What do you think is a normalized gross margin rate for you?

Jeff DiGi Browne, CFO, Innovative Solutions and Support: So, hi, this is Jeff. So, when we look ahead, our expectations are in the mid-40s, what we said before, depending on the mix of our products. As you look at military, it’s letter gross margins. So, it really depends on the mix, both regauging in the mid-40s.

Analyst, Riley Securities: Okay. And then I realize you have a new facility. Just wondering what the targeted net leverage ratio you’re comfortable with at this point?

Jeff DiGi Browne, CFO, Innovative Solutions and Support: Overall, depending on size of the acquisition, we’re comfortable around a net leverage ratio around three.

Analyst, Riley Securities: Okay. And then as a follow-up to that, can you speak a little bit more about your acquisition strategy? Do you have a pipeline? How are you approaching targets? Are they typically more auction situations?

Are they mostly Honeywell? Just any other color on that would be helpful.

Sherem Asgharpur, CEO, Innovative Solutions and Support: So in terms of we do have a pipeline. Some of them are acquisitions that we’re looking at potentially doing from Honeywell. Those are typically auctions. We’re also looking at a number of smaller avionics companies that we’re engaged in dialogue with, and we’re looking at probably doing some acquisitions of that nature if we can agree on a price that suits ISNS.

Analyst, Riley Securities: Okay, fair enough. Thanks for taking my questions.

Jeff DiGi Browne, CFO, Innovative Solutions and Support: Thank you.

Sherem Asgharpur, CEO, Innovative Solutions and Support: Thank you.

Conference Operator: The next question comes from Gaussie Shree with Singular Research. Please go ahead.

Gaussie Shree, Analyst, Singular Research: Good morning. Can you hear me? Yes. Yes. Good morning, guys.

My first question is, you mentioned the F-sixteen safety stock deliveries pulled forward into Q3, where it will reduce revenues from the line for the next two quarters. Can you help us frame the magnitude of that dip? And whether there are other programs in the backlog that are positioned to compensate for it? Also the Q3 product sales came in sequentially above Q2. Was this entirely due to the pull forward?

Or were there other program wins or price mix factors that lifted the product revenue?

Jeff DiGi Browne, CFO, Innovative Solutions and Support: Yes. So, can take a little bit of that. So, sequentially a lot of it was through the F-sixteen and the pull forward. When we look ahead, now as the equipment’s getting transitioned to IS and S currently right now in our factory, we’re expecting nominal F-sixteen revenue for Q4 and Q1 potentially. Because the equipment’s got to be set up, it’s got to be certified, it’s got to be calibrated.

So, we’re working through that process as we speak.

Gaussie Shree, Analyst, Singular Research: Okay. And my second question is, I know the management has emphasized EBITDA margins as the key profitability metric. But given the Q3 gross margins, could you provide some context as to how you’re thinking about the trajectory in gross margins over the next few quarters? Are there any structural or short term factors that could that we should watch out that might lead to further compression from here? Or do you believe that major headwinds have now played out?

Any color on how quickly operational efficiencies or mix changes might stabilize the margins would be helpful in modeling? Thank you.

Jeff DiGi Browne, CFO, Innovative Solutions and Support: Sure. So when we look at our gross margins, that’s why we’ve been guiding conservatively throughout the year due to the lumpiness of the product mix, importantly the F-sixteen. So, we look forward, we’re engaging in that 45% range for gross margins. That’s kind of the target we’re focused on.

Gaussie Shree, Analyst, Singular Research: Okay. Are you seeing any changes in defense budgets that might impact backlog execution over the next six to twelve months?

Sherem Asgharpur, CEO, Innovative Solutions and Support: I think what we’re seeing is a lot of feedback that we’re getting from our defense contractors. As I just mentioned, we we recently received the contract that was partially partially a military program, which is based on a commercial platform. But but we’re we’re seeing an increased level of interest from all aspects of of the government and the military side of the business. Very encouraging.

Gaussie Shree, Analyst, Singular Research: Okay. Any any breakdown into that backlog whether whether some of that contains any multiyear military commercial, multiyear military retrofits?

Sherem Asgharpur, CEO, Innovative Solutions and Support: So, obviously, that backlog includes some of the f 16 backlog that that that we inherited from Honeywell, but there’s a small amount of it for these multi year programs because typically we only put things in a backlog where we have a purchase order with a delivery date on it. And some of the long term agreements don’t they kind of forecast and that we we don’t put in a backlog.

Gaussie Shree, Analyst, Singular Research: Okay. And just one last question. With that $100,000,000 credit facility giving significant headroom, are you prioritizing acquisitions to fully leverage your external facilities? Is that how we’re supposed to think about it?

Sherem Asgharpur, CEO, Innovative Solutions and Support: Organic growth is a significant part of our growth strategy. It’s obviously acquisitions, you see quick results when you do an acquisition. Organic growth, it’s more of a long term objective, But, know, certainly a lot of that capacity will be taken with our organic growth.

Jeff DiGi Browne, CFO, Innovative Solutions and Support: Gotcha. Thank you. Thank you, guys. That’s all I had.

Gaussie Shree, Analyst, Singular Research: Okay. Bye.

Conference Operator: I would like to turn the conference back over to Sherim Asghapur for any closing remarks.

Sherem Asgharpur, CEO, Innovative Solutions and Support: Thank you, operator, and thank you all for your time and interest in ISNS. Have a good day.

Conference Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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