Innovative Solutions and Support Q1 Earnings Call Highlights

Innovative Solutions and Support (NASDAQ:ISSC) reported a strong start to fiscal 2026, citing broad-based organic growth in the first quarter driven by commercial aftermarket demand and higher services activity, alongside improved profitability and cash generation.

First-quarter results and drivers

Management said first-quarter revenue increased 37% year over year, supported by increased commercial aftermarket demand and service activity. CFO Jeff DiGiovanni reported net revenues of $21.8 million, up 36.5% from the year-ago quarter, with product sales of $13.6 million (up from $10.0 million) and service revenue of $8.2 million (up from $6.0 million).

On the commercial side, CEO Shahram Askarpour said growth reflected demand for new products the company certified roughly last year that are gaining traction in air transport markets. In response to an analyst question, Askarpour pointed to sales of the ICAT system for the 757/767, LPV for the 757/767, and software upgrades to update magnetic variations as contributors to the quarter’s aftermarket strength.

DiGiovanni noted that revenue was partially offset by two transitional headwinds:

• F-16 manufacturing transition: First-quarter F-16 revenue was down modestly by approximately $1.2 million year over year, which management attributed to the production transition.
• Pilatus platform migration: The company saw about a $1.0 million decline in business jet market revenue as it prepares to migrate Pilatus to a new UMS-2 platform.

Margin expansion and earnings growth

Profitability improved sharply in the quarter. Gross profit was $11.9 million, up from $6.6 million a year earlier, and gross margin expanded to 54.5% from 41.4%. DiGiovanni attributed the improvement to higher revenue and a more favorable mix, particularly within the commercial aftermarket business. He added that the company still expects gross margins to be in the mid-40% range over the full year, with quarterly fluctuations based on mix as military and OEM revenue grows.

Operating expenses were $5.6 million, up from $5.3 million a year ago, which DiGiovanni said reflected investments to support growth, including additional headcount in engineering, sales, and services. Operating expenses declined as a percentage of revenue to 25.6% from 33%.

Net income was $4.1 million compared with $700,000 in the prior-year period, with GAAP diluted EPS of $0.22 versus $0.04. Adjusted EBITDA rose to $7.4 million from $3.1 million, a 140.9% increase that management said was driven by revenue growth and the improved revenue mix.

Program updates: F-16 and UMS development

Askarpour said the company completed required recertification and resumed full-scale production of the Digital Flight Control Computer supporting the F-16 program at its Exton facility during the quarter. DiGiovanni said the recertification and resumption of production of the Improved Programmable Display Generator is planned for the current quarter.

On the expected ramp in F-16 revenue, management described a staged integration process. Askarpour said the company delivered a “full load” of Digital Flight Control Computers to Lockheed in the first quarter and expects revenue growth as the Improved Programmable Display Generator is integrated and deliveries begin. He also referenced comments from Lockheed about building another 300 F-16 aircraft and said the company is seeing RFP activity from Lockheed and the U.S. government for subassemblies and full units, which he characterized as an indicator of future growth opportunities.

Askarpour also said the company still expects to begin insourcing F-16 product line subassemblies in late 2026, which he said should contribute to improved and more consistent margins for those products.

Beyond the F-16, management said it is seeing “a fair amount of opportunities” in defense, including RFPs for upgrades across various platforms, though it declined to provide program-specific detail for competitive reasons. Askarpour added that on some platforms the company is bidding with multiple prime integrators, which he said could provide content regardless of which prime wins.

In product development, Askarpour discussed progress on the company’s Liberty next-generation flight deck and its UMS aircraft systems management platform. He said the company completed test flights of the new UMS platform on the Pilatus PC-24, has begun unit production, and expects to begin delivering the new version to Pilatus in mid-2026.

Backlog, cash flow, and balance sheet

DiGiovanni reported new orders of approximately $19 million during the quarter and backlog of approximately $75 million as of December 31. He described backlog as the value of contracts and purchase orders less revenue recognized to date, and said it includes committed purchases while excluding potential future sole-source production orders tied to products developed under engineering development contracts.

The company posted strong cash generation. Cash flow from operations was $8.2 million compared with $1.8 million a year earlier. Capital expenditures rose to $1.1 million from $300,000, which DiGiovanni said was primarily related to a building expansion. Free cash flow was $7.0 million, up from $1.6 million in the prior-year quarter.

At quarter-end, the company had total debt of $23.8 million and cash and cash equivalents of $8.3 million, resulting in net debt of $15.5 million. DiGiovanni said total cash and availability under the company’s credit line was approximately $83.3 million as of December 31, 2025, and net leverage was 0.5x.

Outlook and acquisition commentary

Looking ahead, DiGiovanni reiterated the company’s expectation that organic revenue will be essentially flat year over year for fiscal 2026, citing a prior “pull forward” of revenue related to F-16 production and service revenue from fiscal 2026 into fiscal 2025 that the company discussed last quarter. For the second quarter, he said the company expects revenue in the range of $20 million to $22 million and anticipates building steadily on a sequential basis through the year.

In the Q&A, management also addressed M&A, with Askarpour saying the company expects “a couple of things in the near term,” while emphasizing discipline. He said the company walked away from some prior opportunities that were not fully aligned with strategic objectives, particularly as pricing moved higher.

Askarpour said the company remains focused on its “IA Next” long-term value creation strategy, which prioritizes profitable growth, operational excellence, and disciplined capital allocation. He reiterated the company’s longer-term target of $250 million in revenue and adjusted EBITDA margins of 25% to 30%, supported by a combination of organic and inorganic growth.

About Innovative Solutions and Support (NASDAQ:ISSC)

Innovative Solutions and Support, Inc (NASDAQ: ISSC) is a provider of technology solutions and mission support services to U.S. federal government agencies, with a focus on defense, intelligence, and national security programs. The company delivers integrated program management, systems engineering, and advanced IT infrastructure support designed to enhance operational readiness and maintain secure, scalable environments for mission-critical operations.

Its core service offerings include systems integration, custom software development, data analytics, cybersecurity, and logistics management.