ISSC targets over 30% revenue and EBITDA growth amid Honeywell integration and facility expansion
Aug. 14, 2025 12:35 PM ET
AI-Generated Earnings Calls Insights
Earnings Call Insights: Innovative Solutions and Support, Inc. (ISSC) Q3 2025
Management View- CEO Shahram Askarpour opened by highlighting that "during the third quarter, we delivered revenue growth of 105% compared to the third quarter 2024, driven by continued momentum from new military programs, including significant growth from our F-16 program." He noted revenue benefited from a pull forward of F-16 revenues ahead of the integration into the Exton plant.
- Askarpour stated, "Our business momentum remains strong with a backlog of approximately $72 million as of June 30, 2025." He acknowledged near-term margin volatility due to integration and investments but reiterated confidence in margin improvement once transition and cost efficiencies materialize, specifically citing expectations for improved margins in latter quarters of fiscal 2026.
- He emphasized strategic progress: "We have made further progress on the expansion of our Exton 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 threefold."
- Askarpour indicated the company is "on track to deliver our goal to generate both revenue and EBITDA growth of greater than 30% when compared to fiscal year 2024."
- CFO Jeffrey DiGiovanni reported, "We generated net revenues of $24.1 million 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-16 product line from Honeywell, which contributed $12.6 million."
Outlook- Management reiterated expectations to deliver revenue and EBITDA growth of greater than 30% versus fiscal 2024.
- Askarpour stated, "We anticipate the integration to be completed during our first half of fiscal 2026, and we are excited by the opportunities from this acquisition."
- DiGiovanni clarified, "Our expectation is in the mid-40s what we said before, depending on the mix of our products. As you look at military, it's lighter gross margins so it really depends on the mix, but we're gauging in the mid-40s."
- Management expects a temporary dip in F-16 related revenue in Q4 as the transition to the Exton facility completes, with a ramp-up anticipated in fiscal 2026.
Financial Results- Net revenues for the quarter were $24.1 million, with product sales of $16.6 million and service revenue of $7.5 million.
- Gross profit for the quarter was $8.6 million, representing a gross margin of 35.6%, down from 53.4% in the same period last year, attributed to lower-than-anticipated gross margins on the F-16 line from Honeywell.
- Operating expenses rose to $5.1 million, driven by higher depreciation, employee costs, and acquisition-related expenses, but operating expenses as a percentage of revenue declined to 21% from 36.1% last year.
- Net income was $2.4 million, with GAAP earnings per share of $0.14. EBITDA was $4.3 million, up from $2.7 million, reflecting growth but also margin pressure.
- Cash flow from operations for the nine months ended June 30, 2025, was $10.3 million, and free cash flow was $4.8 million despite increased capital expenditures related to the Exton expansion.
- The company entered a new 5-year $100 million committed credit agreement, replacing its previous $35 million line, providing "an additional $65 million in expanded liquidity" and flexibility for strategic growth.
Q&A- Jeffrey Wallin Van Sinderen, B. Riley Securities: Asked about normalized gross margin rate post-F-16 impact. DiGiovanni responded, "Our expectation is in the mid-40s what we said before, depending on the mix of our products."
- Van Sinderen inquired about targeted net leverage ratio. DiGiovanni replied, "We're comfortable around a net leverage ratio around 3."
- Van Sinderen probed the acquisition pipeline. Askarpour shared, "Yes, we do have a pipeline. Some of them are acquisition that we're looking at potentially doing from Honeywell. Those are typically auctions. We also were looking at a number of smaller avionics companies that we're engaged in dialogue with."
- Gowshihan Sriharan, Singular Research: Sought clarification on the F-16 pull-forward revenue and outlook for Q4. DiGiovanni explained, "We're expecting nominal F-16 revenue for Q4 and Q1 potentially because the equipment has got to be set up, it's got to be certified, it's got to be calibrated."
- Sriharan asked about gross margin trajectory. DiGiovanni reiterated, "We're gauging in that 45% range for gross margins. That's kind of the target we're focused on."
- Sriharan questioned defense budget impacts. Askarpour responded, "We're seeing an increased level of interest from all aspects of the government and the military side of the business. Very encouraging."
- Sriharan asked about utilization of the $100 million credit facility. Askarpour replied, "Organic growth is a significant part of our growth strategy...certainly a lot of that capacity will be taken with our organic growth."
Sentiment Analysis- Analysts pressed on margin normalization, revenue outlook post-F-16 transition, acquisition pipeline, and defense market trends, signaling a slightly cautious but constructive tone. Repeated focus on margin trajectory and F-16’s impact indicated concern over near-term volatility.
- Management maintained a confident and forward-looking posture, explicitly reiterating revenue and EBITDA growth targets, and emphasizing strategic facility and acquisition progress. Quotes like "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" reflected this confidence.
- Compared to the previous quarter, analyst tone shifted from congratulatory to more detail-oriented and probing, with management sustaining its positive, strategic messaging but adding more explicit caution regarding near-term margin volatility.
Quarter-over-Quarter Comparison- Guidance for revenue and EBITDA growth of over 30% relative to 2024 remains unchanged.
- Margin pressures became more pronounced this quarter, with gross margin dropping to 35.6% from 51.4% in Q2 due to F-16 safety stock and transition costs, while management provided more granular forward guidance on normalized margins.
- Backlog decreased from $80 million to $72 million, reflecting order timing and near-term program transitions.
- Management’s tone continued to be upbeat but addressed margin lumpiness and transition impacts in more detail.
- Analyst focus shifted from general congratulations and growth strategy to more pressing questions about margin normalization and revenue timing.
Risks and Concerns- Management highlighted near-term volatility in margins due to Honeywell acquisition integration and the F-16 transition.
- There is potential short-term impact from foreign-based customers reducing production forecasts due to tariff uncertainty, but management does not expect this to be material.
- Analysts expressed concern over the magnitude of revenue dips from the F-16 pull-forward and the timing of margin normalization.
- Management’s mitigation includes ongoing integration efforts, facility expansion, and targeting operational efficiencies post-transition.
Final Takeaway
ISSC management emphasized strong revenue growth driven by recent acquisitions, particularly the F-16 line, and expressed confidence in their ability to deliver over 30% revenue and EBITDA growth for 2025. While acknowledging near-term margin volatility and a temporary dip in F-16 revenues, the company underscored its expanded manufacturing capacity and access to new credit facilities as foundations for continued growth and profitability. Strategic integration and organic growth remain central, with management reiterating expectations for margin improvement as transitions complete and efficiencies are realized.
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