May 19, 2016 - 9:41pm EST by
2016 2017
Price: 0.17 EPS 0 0
Shares Out. (in M): 207 P/E 0 0
Market Cap (in $M): 36 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 36 TEV/EBIT 0 0

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Investment Overview: FLYHT Aerospace Solutions (FLYHT), which is at a significant inflection point in its business model, is an attractive micro cap company for investors looking for a more speculative, higher risk/reward investment for their personal account or for micro cap managers. The attractiveness of the investment is underscored by the combination of: a very large addressable market with low penetration, a unique best in class solution with established IP, a strong competitive position with significant competitive barriers, a scalable high margin business model with a healthy recurring revenue component as well as a new management team and enhancements to the Board with strong industry knowledge. After years of frustrating delays and false starts in growing revenues, the company’s business model appears to be at an inflection point with revenue growth accelerating and operating EBITDA and cash flow now reaching breakeven. New government mandates are helping current growth, while the possibility of signing new airlines and/or additional OEM agreements with aircraft manufacturers represent future catalysts. Confidence in the business model at the start of a major inflection point is underscored by recent purchases of stock by management and the Board. With no sell-side analyst coverage and management beginning to take a more pro-active IR approach, the new FLYHT story is being re-introduced to the investment community. Given the improvement in fundamentals and profitability, the greater IR exposure and a number of potentially significant catalysts on the horizon, I believe the shares could be positioned to appreciate 2x-3x over the next 12-18 months.



Statistics: (CAD 000$’s)


Stock Price: $0.17


Symbol: FLY.T


Trading Volume (3 Month Avg.): 297,483


Shares Out. (fd): 207,388,081


MC: $36, 293


Net Cash/Debt: $200


EV: $36, 093


Revenue (ttm): $10,499


EBITDA (ttm): $(3,977)


EPS (ttm): $(0.03)


Note: numbers are adjusted for May 12, 2016 private placement.



Company Overview: Founded in 1998, and based in Calgary, Alberta FLYHT provides proprietary on-board avionics solutions designed to reduce costs, improve efficiency and enhance safety. The company provides next generation avionics systems that transmit information and aid communications between aircraft and ATC/ground staff in real time; improving communications and safety. In addition, FLYHT offers an extensive number of fleet management solutions to airlines to improve operational efficiency and asset utilization. The company is an emerging player in satellite based (satcom) airborne data and voice communications systems and a pioneer in next generation commercial avionics. Noteworthy, next generation airline communications systems, standards and mandates are increasingly transitioning to satcom based technology due to the large worldwide coverage gaps that exist with legacy VHF networks over the oceans, in northern latitudes, the poles and Africa.  




FLYHT’s core product is the Automated Flight Information Reporting System (AFIRS), which is a aircraft agnostic communications hub installed on an aircraft that provides data and voice communications (including live streaming of “black box” data) over the Iridium satellite constellation. This information is sent to the company’s UpTime ground service product, which stores and transfers the data to a customer in real time. The AFIRS product, coupled with a set of value added real-time fleet management software tools, provide continuous real-time monitoring of the essential systems on an aircraft for such uses as maintenance, OOOI reporting and scheduling, fuel management and routing. The tools are highlighted below.



FLYHT Fleet Management Tools






Monitors engine trend, exceedance & FOQA reports


Monitor & analysis of fuel usage for possible savings


Emergency "black box" data streaming


Movement messages & position reports


Aircraft Situational Display flight tracking


Text messaging


Satcom voice



The breath of product capabilities offered by FLYHT are unique in the industry, with no other competitor offering anything close. These fleet management tools offered by FLYHT reduce downtime, provide more efficient operations, reduce insurance premiums and save money; which based on a number of reports (confirmed by a discussion I had with one airline), translate into a ROI of only 6-12 months.




In addition, the company’s FLYHTStream product provides emergency data streaming (that can be programmed to automatically trigger on pre-determined events) capable of transmitting in real-time data and voice equipment status, global positioning and other flight data recorder “black box” information to ground based personnel anywhere in the world. The issue and current limitations of aircraft flight tracking have gained notoriety, and opened up a discussion in the industry relative to current technology limitations with the legacy, circa 1978, ACARS (aircraft communications addressing and reporting system) communications system and the use of outdated 1950’s “black box” technology, in the last few years following the tragic events of Air France 447, Malaysia 370, Air Asia 8501, German Wings 9525 and most recently Egypt Air 804. Noteworthy, had any of these aircrafts had AFIRS installed with monitoring, we would have know instantaneously when an event occurred, details as to what was happening and would have been able to track and monitor the aircraft in real time. This capability is unique in the industry and not offered by any other company. The following link is to a easy to understand video on the company’s website which provides an overview of the AFIRS technology, fleet management tools and FLYHTStream product:



Getting to where the company currently is positioned, has been a very slow, and for investors a somewhat frustrating process, but has created significant competitive barriers and a platform for accelerating growth. The company has spent the last decade: getting the required secondary type certificates (STC’s) that are needed for any after-market equipment to be installed on any aircraft (now 95% of all commercial aircraft); installing, flight testing, improving its technology, establishing relationships with an impressive list of key industry partners such as Jabil Circuits (manufacturing), L-3 (retro-fit instillation) Airbus and Bombardier (OEM factory installations on new aircraft) as well as distribution channels (Sky Blue in China & Sierra Nevada Corp. for military/defense markets) to reach new fast growing markets, in geographies such as China and Southeast Asia.



AFIRS is currently installed on over 800 aircraft, which have logged over 2 million flight hours. Thus, AFIRS is not a developmental technology, but a field tested, proven next generation product offering that offers airlines tangible savings and, relative to outdated legacy technology, fills a big hole in aircraft communications.



FLYHT’s revenues are generated by the sale of AFIRS hardware (~ $45,000 per aircraft, recurring annual data/voice services (~$12,000 per year, per aircraft) as well as thru parts and service fees. The company’s marketing strategy is to use a combination of its own direct sales complemented by a number of partners to reach certain geographic and vertical market sectors.



Key Investment Points



A Large Addressable Market, With Growing Demand for Flight Tracking: The combination of the high ROI cost saving features of the AFIRS technology coupled with the growing demand for global flight tracking, makes it well positioned to sell into a very large addressable market. Based on latest data compiled by FLYHT (using data from Boeing, Airbus and Bombardier), the size of the global commercial and business aircraft fleet was 19,685 and 15,735 planes in 2013. Assuming projections from the major aircraft manufacturers for deliveries and retirements the net installed base of commercial and business aircraft are expected to rise to 40,136 and 22,910 respectively by 2033. Noteworthy, the fastest growing geographies for new aircraft are in China, Southeast Asia and other developing countries, where current legacy ACARS communications capabilities are relatively weak. Assuming the previously mentioned ASP’s for AFIRS hardware and data services communications, the addressable market for hardware sales is in excess of $2 billion and over $700 million in annual recurring revenue. Noteworthy, there is also a significant opportunity available in military market (FLYHT has already installed AFIRS units on C-130 Hercules transports), however, it is very difficult to quantify the market potential in this area.



The recent spade of tragic events in recent months, including Air France 447, Malaysia 370, Air Asia 8501, German Wings 9525 and most recently Egypt Air 804, have opened up a conversation in the industry regarding the need for better flight tracking and better industry standards. The need for flight tracking has helped drive new sales opportunities for FLYHT to discuss the various solutions it can offer aviation customers. The strongest opportunity is likely among the second tier airlines (that are without legacy ACARS and/or any data communications capabilities), carriers operating in China and Southeast Asia or those airlines operating in more remote areas of the globe. Noteworthy, there is a very significant near-term opportunity currently available, and beginning to be realized, tied to a government mandate for flight tracking in China. Thus, FLYHT’s initial game plan is to first focus on the second tier international carriers, regional airlines and more specialized transporters not equipped with ACARS; a market estimated at roughly 4,500 aircraft.


Penetrating the major tier-1 airlines has been more challenging, with the game plan to focus on marketing the cost savings attributes of its fleet management product portfolio, which have a longer selling cycle. Management’s goal is to sign a top tier-1 airline in the next year, which if successful, would represent a significant milestone and could prove to be a catalyst to penetrating other major carriers.



An argument could be made to take a more conservative stance relative to the potential size of the near-term addressable market opportunity for FLYHT given that all large tier-1 aircraft that fly domestic only routes (where legacy VHF coverage is good) may not have a need for flight tracking and that it make not make economic sense to install on a percent of the installed base nearing retirement. Nonetheless, if one conservatively estimates only about 25%-50% of this previously mentioned $2 billion/$700 million market for hardware and services is tangible in the near term, it would still be huge relative to FLYHT’s FY 2015 revenues of ~$10 million.



China Represents a Significant Opportunity, And Is A Near Term Growth Catalyst: One of the biggest near-term opportunities for FLYHT, and a recent catalyst behind the acceleration in the company’s recent revenue growth, is tied to the market opportunity in China. Faced with the combination of explosive growth in air travel, increasingly crowded skies and a somewhat spotty safety record, the Chinese government decided to address the problem with a number of actions. In October 2012 the Civil Administration of China (CAAC), the government regulatory agency that overseas commercial aviation in Chinese airspace, drafted a proposal requiring all aircraft operating in Chinese airspace to have satellite voice communications between the pilot and its air traffic control in areas where legacy VHF service is not available and as a back up system. This mandate was officially implemented in 2013 and calls for 100% of the fleet to be equipped by 2017. Compliance with these mandates have been slow and the government has been somewhat lax in enforcing the regulations. However, after years of frustration, the major airlines appear to begin compliance, resulting in a significant pick-up in AFIRS order activity in the region.



China is one of the largest and fastest growing commercial aviation markets in the world. Currently there are approximately 200 airports that are active or under construction, with estimates that this could grow by about 50 additional in the next 4-5 years. Commensurate with this, is the growing list of new airlines operating in China, especially on domestic routes. Noteworthy, on FLYHT’s Q4 FY 2015 conference call the company’s new CEO, Tom Schmutz, commented that since he joined the company in October 2015, the number of airlines operating in China has increased from 46 to 53 in just five months. 2013 estimates place the installed base of aircraft currently operating in China at about 2,200. As most of the travel and growth in the Chinese market is for domestic travel, with narrow body aircraft (which normally do not have factory installed ACARS satcom equipment, this is a target rich market opportunity for FLYHT to capture.




The potential market opportunity for FLYHT in China alone tied to airlines complying with the CAAC mandate is very large, especially when compared with the company’s ~$10 million annual revenue run rate. Noteworthy, FLYHT offers one of the few options for Chinese airlines to comply with the government mandate. My analysis, illustrated below, shows the retrofit sales opportunity over a two year compliance period to be approximately $36 million for just the initial hardware sales.




Potential New Revenue Opportunity in China From CAAC Mandates

Hardware Only - Not Including Revenue From Communications




Year 1

Total number of commercial aircraft in China *


Assume: 10% of fleet to be retired in 3 years


Assume: 5% increase in fleet from new deliveries






CAAC Requirement: 40% of fleet needs to have sat/com




Assume: 75% of fleet is narrow body (not Sat/com equipped)




Units already installed




Potential new units in 2015




Assume 50% use AFIRS








Estimated Year 1 Revenue Opportunity







Year 2

Total number of commercial aircraft in China *


Aircraft equipped with sat/com in 2015


Aircraft need to equipped to meet CAAC requirements




Assume: 10% of fleet to be retired in 3 years


Assume: 5% increase in fleet from new deliveries






Assume: 75% of fleet is narrow body (not Sat/com equipped)




Assume 50% use AFIRS








Estimated Year 2 Revenue Opportunity






* = Using March 2013 data

Note: Model assumes contract signings & deliveries in the same year, which may not occur and delay revenue impact.




Note, I have used last available 2013 data for the total Chinese fleet (which is very conservative given the growth in travel in the country) and assumed: 25% of the fleet already having some factory installed ACARS satcom (mostly on wide body aircraft flying international routes), eliminated 10% of the fleet that may be nearing retirement in the next three years and that FLYHT achieves only a market share of about 50% of the net installed base. Just to emphasize, this is the projected market opportunity for just hardware, and does not include any amount for FLYHT’s data services. Any instillations from Chinese airlines to comply with the government mandate, provide FLYHT a springboard to sell it data communications and its fleet management tools in the future. Noteworthy, FLYHT expects to have its first data communications customer within the Chinese fleet in Q2 of this year. Thus, any way you look at it China represents a very significant potential market opportunity for FLYHT that could be 3x its current revenue run rate, over the next couple of years.



FLYHT has focused its efforts for a number of years on the growth opportunity in China. Direct sales efforts have been complemented with government backed partner SkyBlue Technology Development Ltd. Currently, FLYHT’s AFIRS product is one of the very few solutions that has approval to comply with the government mandate for flight tracking. To gain the necessary approvals and provide introductions to the major airlines. More recently, the company is currently establishing a maintenance repair depot, which appears to be the last major hurdle to signing new Chinese airlines.



After progressing at a glacial pace over the last decade, the opportunity from China is now beginning to be realized. A major portion of the acceleration in sales over the last few quarters has come from successfully penetrating a number of Chinese carriers. Noteworthy, to date FLYHT has received orders from about seven airlines in China. These relationships represents significant future sales opportunities as they fill out their fleets with sitcom equipment, they take new aircraft deliveries and if FLYHT can sell added services and monitoring.



A Strong Competitive Position, Backed By Established IP, With Substantial Barriers To Entry: Since FLYHT’s AFIRS product was first introduced in 2004, it has been certified, field tested and improved a number of times. With over 2 million fight hours logged AFIRS is a proven solution. During this time period, FLYHT has developed a significant amount of proprietary IP in the area of satcom communications and data analytics. The quality of FLYHT’s IP is underscored by the December 2015 signing of a $2.5 million agreement, granting a non-exclusive license to a undisclosed technology company to use certain of its intellectual property outside the scope of the company’s core markets. In addition, FLYHT’s early focus on the technology has given the company a first mover time-to-market advantage. Currently no other product offers the breath of solutions as FLYHT’s of ARIRS, including its real-time flight data management, fuel management, automated OOOI’s and FLYHTStream emergency data streaming modules. Importantly AFIRS is more than just a flight tracking product. While there are competitors who offer various satcom communications products (including some with holes in their worldwide coverage), no one offers the depth of real-time data analytics and data streaming capabilities of the company’s FLYHTStream technology. This is something that I have confirmed in my discussions with a handful of FLYHT’s customers and strategic partners.



In addition to FLYHT’s best-in-class technology, proprietary IP and its lead time advantage, which combined act as a healthy competitive barrier, the company has reinforced its entry barriers by accumulating a very extensive list of 75 supplemental type certificates (STC’s) obtained (and 17 either in progress or pending) over roughly the last decade. A full list of these STC’s can be viewed on page 5 of FLYHT’s Q1 FY16 report, which can be accessed using the following link:



STC’s are airworthiness certifications, issued by various government regulators, that are required in order to modify any aircraft from its original design. Separate STC’s are required by aviation government regulatory agencies in Canada (TCCA), US (FAA), Europe (EASA), China (CAAC) and Brazil (ANAC) and need to be completed for every aircraft type and variant. Securing an STC’s is a strenuous due diligence process that takes up to six months and costs as much as $75,000. Currently FLYHT has STC’s for its AFIRS product for about 95% of all commercial aircraft. Thus, if a competitive product were to emerge out of the woodwork today, it would still take may years and cost over $5 million just to obtain the necessary STC’s before it could be installed on any aircraft. This represents a significant competitive barrier for any new start-up looking to enter the market.



On a separate note, the cost of obtaining these STC’s over the last decade, which is included in R&D expenses, has been a drag on FLYHT’s profitability. With STC’s already obtained for 95% of major aircraft, this financial burden will begin to ease, adding to the company’s financial leverage in the future.




Attractive, Scalable Business Model, With High Margins and Recurring Revenue Stream: FLYHT’s revenues are basically derived from four sources: 1) sales of AFIRS hardware units, 2) monthly voice and data service fees and 3) parts and 4) services. Revenues from retrofit AFIRS upgrades on aircraft already in service are accounted for in the first category run and about $35,000-$50,000 per plane. These sales directly reflect the contracts the company has signed; the timing of installs are tied to an aircrafts maintenance schedule (instillations are done during major overhauls, called C-checks). FLYHT gets a healthy gross margin of 50%-60% on hardware sales due to the high value added technology content of the product and its short 6-12 month ROI. Note, revenue recognition occurs only upon full instillation of the product, with a portion of deposits recorded as unearned revenues prior to instillation. In the parts category the company includes royalties from factory instillations on new aircraft from FLYHT’s OEM partners; Boeing and Bombardier. Royalty revenues have recently experienced a healthy bump as FLYHT’s OEM partnerships are beginning to kick in.




The real exciting part of the company’s business model is the recurring revenues within the voice and data services segment. These revenues are tied to five year renewable contracts signed with customers. These fees average a very health $1,100 per month and have gross margins of about 80%. Management indicates that once customers turn on FLYHT’s data communications services, there are very few aircraft that remain in operation, that don’t continue the service. While sales on AFIRS units have been somewhat volatile in the past and are dependant on new contract signings, the recurring revenue nature of FLYHT’s data/voice communications service, makes these revenues more predictable. One of the key goals of management is to convince customers who are adding new OEM factory installed AFIRS kits with new aircraft deliveries from Airbus and Bombardier to begin using FLYHT’s portfolio of services and data communications.




FLYHT’s overall gross margin has increased from 54% to roughly 70% over the last 5 years tied to the increased mix of data communication services and more recently, the royalties on OEM factory instillations. These margins have the potential to increase in the future as both of these elements continue to increase as a percent of sales. Noteworthy, these high margins, tied to the annuity-like recurring revenue stream from data communications, differentiate FLYHT from typical aerospace/defense product companies and highlight the uniqueness of the company’s business model. Noteworthy, FLYHT’s healthy monthly communications fees and high product margins are more representative of software companies with SaaS-type business models.



The company has a operating cost structure that can support a significantly higher revenue base without commensurate additions to operating costs. Note, manufacturing is outsourced to Jabil Circuits, and can be significantly ramped up in a relatively short period. In addition, FLYHT is complementing its own direct sales team by partnering with outside sales groups (Sky Blue in China, Tri-Wing Aviation Resources Pte. Ltd. In Southeast Asia and Sierra Nevada in the military/defense market) to reach new and fast growing markets without adding significant costs. Additionally, despite spending a healthy amount on securing STC’s (which should be more moderate in the future), total operating expenses over the five years have expanded only about 12%, relative to the more than doubling in sales over the similar time period. This highlights FLYHT’s variable operating cost structure. Thus, the combination of flat to growing product margins, coupled with a scalable cost structure that can support significantly higher revenues, should translate into healthy margin and profit growth during a period of accelerated revenue growth.



Boeing & Embraer Represent Realistic Future OEM Opportunities; While A Tier-1 Airline Would Be A Showcase Win: FLYHT has successfully established OEM partnerships with both Airbus and Bombardier to install AFIRS units (L-3 Communications does the instillations) on new aircraft when customers ask for the product. While FLYHT receives a healthy royalty payment on these new OEM factory instillations, the real opportunity is tied to the recurring revenues tied to convincing these customers to turn on the products services and use the company’s data communications. So far, these partnerships have enhanced overall revenue growth over the last 12-18 months.



Nonetheless, FLYHT goal is to create relationships with all the major airframe manufacturers. Among those that are still outstanding, Boeing represents the major wildcard opportunity, followed by Embraer. Noteworthy, FLYHT has various STC’s, to install AFIRS in various Boeing models (including the 737, 747, 757, 767 and 777 series) as well as Embraer models (including 135, 145, 190 and legacy 600 series) and has already installed AFIRS as a retrofit on some of these models.



FLYHT management has been in discussions with both OEM manufacturers about establishing an relationship for factory instillations. Driven by increased customer usage of the product, there is a real likelihood that a relationship with one or both of these OEM’s could be established in the next 12-18 months. Such a partnership would help further legitimize the AFIRS product and aid in new factory installs of kits; initially driving royalty revenues and possibly follow on data communications recurring revenues.



Separately, one of FLYHT managements goal is to sign a tier-1 airline as an AFIRS customer. While the large major airlines are not the primary focus of the company, management has stated there are some opportunities for them to use the AFIRS technology and that they have been in discussions with a couple for a possible sale. Success in signing a leading tier-1 airline would be a showcase win for FLYHT from a PR and marketing perspective, give greater credibility to the technology and could illicit interest from other major and smaller airline, especially from any sitting on the fence relative to deciding on using the product. 



Upgrades To Management & The Board; The New Motto Is Not The Same FLYHT: Recently there have been a number of exciting changes and additions to FLYHT’s senior management team and the Board of Directors. These changes appear to address the frustration of many investors that the company did not have the right strategy to capitalize on its leadership technology and the large market opportunity. My read on these changes is that they significantly increase the quality of the leadership of the company with very highly skilled individuals with strong resumes that have the skill set to take FLYHT to the next level from an entrepreneur-like company to a more seasoned and focused corporate enterprise, and one capable of scaling the business to a high growth very profitable company. They also have knowledge of the industry landscape and strong relationships with the leading aerospace vendors to help establish partnerships, or at the proper time, to evaluate alternative strategic opportunities for the company. Consistent with my view, in its recent investor presentation the company states: The “New” FLYHT –Not the same story.


From a management perspective, in October 2015, FLYHT announced a number of changes to its senior management team. Most importantly, Tom Schmutz has brought on as CEO. Tom brings to FLYHT 30 years of experience and strong knowledge and contacts in the aerospace and telecommunications telecommunications industries and the experience to manage a large organization. Most recently, Mr. Schmutz spent nine years with L-3 Communications in the Aviation Recorders division. Previously, Mr. Schmutz was with Airnet Communications Corporation as Vice President Engineering and with Harris Corporation as Principal Investigator, Advanced Digital Signal Processing and lead engineer. Tom succeeds Bill Tempany as CEO. Bill is one of FLYHT’s founders, has a background is a serial entrepreneur and had the vision to see a need in the industry for product with the AFIRS capabilities. 



Tom Schmutz’s appointment follows the addition of two other senior executives with experience at larger companies. In July 2015 of David Perez has joined FLYHT as VP Sales & Marketing. Dave has a background of over 25-years in the aviation industry and most recently he served as Director of Travel and Transportation at Hewlett-Packard, where he leveraged his industry expertise to secure many strategic aviation agreements. Additionally, Nola Heale joined FLYHT as its new CFO in September  2014. Nola has 30 years financial management and reporting experience on three continents in diverse industries, including manufacturing, services and transportation logistics industries.



Separately, there have been three noteworthy additions to FLYHT’s Board of Directors. I believe that combined, these individuals increase the quality of FLYHT’s Board by bringing a wealth of industry and regulatory knowledge as well as experience in scaling a business and managing a larger organization. The new additions to the Board are:








  • Barry Eccleston (added in August 2014) is President of Airbus Americas, where he oversees all efforts of Airbus in North America. Prior to Airbus, Barry ran a $1.4 billion aviation division of Honeywell and was President and CEO Rolls-Royce Canada and President and CEO of International Aero Engines, in which Rolls-Royce was a major shareholder.




  • John Belcher (also added in August 2014)  was formerly Chairman and CEO of ARINC Inc. (growing the company from $200 million to over $1 billion and orchestrated its sale twice during his tenure. John was also President & CEO of Hughes Aircraft of Canada.




  • Mark Rosenker (added in June 2015) is a member of the Aerospace Industries Association’s Board of Governors, President of the Transportation Safety Group and was a past Chairman of the National Transportation Safety Board.





Management & Board Recently Buying Stock, Shows Better Alignment With Shareholders and That They Believe: On May 15th, FLYHT closed a $5.1 million private placement, with helped sure up its balance sheet (discussed further below). One of the notable aspects of the private placement was the participation by senior management and some members of the Board in purchasing roughly 2.5 million shares of FLYHT stock. Leading the pack was new CEO, Tom Schmutz, who purchased 1.5 million shares followed my CFO, Nola Heale, who purchased 670,000 shares. In addition, former CEO, Bill Tempany, other senior executives and two new Board members also participated in the transaction. Given that this is the first real broad based purchase by management in quite a while, it both better aligns management with shareholder interests as well as showing their overall confidence in the future of the company.



Turning The Corner To Profitability, With Healthy Future Margin Leverage Likely: From a financial perspective, FLYHT has recently begun to see an acceleration in its sales momentum and Q4 FY 2015 marked the first time that the company posted a slight EBITDA profit on an operating basis. As previously discussed, the pick up in sales is tied to the increased recognition in the industry of FLYHT’s products to both provide efficiency cost savings and for flight tracking. Noteworthy, the increase in sales has been aided by the OEM partnership with Airbus and Bombardier beginning to kick in as well as accelerating order momentum in Chinese airlines complying with the CAAC mandate for flight tracking.



The table below shows FLYHT’s P&L statement over the last five years.



FLYHT Aerospace Solutions Ltd

CAD $'s (000)








FY 2011

FY 2012

FY 2013

FY 2014

FY 2015

Voice & Data Services












Parts Sales












  Total Revenue












Cost Of Goods Sold






  Gross Profit


















S&M Distribution Exp.












G&A Administration Exp.












R & D Exp.












Total Operating Expenses


















  Operating Income




































  Net Interest & Other Exp.


















Income Tax Expense






Net Income












Diluted EPS






Shares Out. (fd)









While total revenues have been on an upward trajectory over the last 12-18 months, with a number of record quarters reported, they have been somewhat volatile on a quarterly basis. The quarterly revenue volatility is due to the lumpiness of AFIRS contract signing and shipments relative to the size of FLYHT’s current sales base. Conversely, data communications sales have continually trended up, reflecting additions to the installed base of AFIRS instillations and the annuity-like recurring revenue nature of the contracts. Data communications revenues should continue to experience healthy consistent growth in 2016 and into the future. Additionally, part sales have shown a pick up in growth over the last couple of quarters tied to royalties from OEM installations.



Overall product margins now approximate a healthy 70%, due to the royalty payments from OEM partners and the high margin ~80% margins on voice/data communication sales. These high margins differentiate FLYHT from typical aerospace/defense product companies and highlight the uniqueness of the company’s business model. In the future, while an acceleration in ARIRS hardware shipments may pull down product margins temporarily, I would expect them to trend flat to up over the next few years driven by continued growth in voice/data communications revenues.




A key ingredient of the FLYHT investment thesis is potential scale benefits to operating margins tied to an acceleration in revenue growth. As discussed previously, the company’s operating expenses have grown considerably less than its revenues over the last five years due to its strategy of outsourcing some key operations, including manufacturing, instillation and some of its marketing to key partners. With capacity in place to support a significantly higher revenue base, this could translate into significant margin leverage on a higher revenue base.



To date FLYHT has not been profitable on an operating basis for a full year, however in Q4 FY 2015 the company was able to be slightly EBITDA positive (the first time in the company’s history) on an operating basis (x-severance and other one-time charges). Note, this milestone was achieved in the quarter on a annualized revenue run rate of ~$15 million. Given the recently announced order book, the growing demand from China to comply with the government mandate and OEM instillations during the remainder of FY2016, it is possible that FLYHT could reach breakeven EBITDA, or even post a small profit, this year.




Looking forward it is difficult to estimate quarterly financial performance with any precision given the lumpiness of AFIRS hardware instillations. Thus, using full year numbers provides a better metric to estimate the future earning power of the company. The key variable in the FLYHT investment thesis and in projecting earnings power comes down to the timing of an acceleration in orders. Given the combination of: the proven ROI of its products, the increased discussion surrounding flight tracking in the industry, the company’s unique competitive position, the size of the TAM, the neat-term Chinese opportunity and the possibility of new OEM partnerships on the horizon, I believe it is only a matter of time for FLYHT’s sales momentum to take off. The recent pick up in sales over the last couple of quarters provides some tangible evidence that this is beginning to occur.



Looking out to the next 12-18 months, I think FLYHT’s annual revenue base could expand to about $25 million, based on the previously mentioned factors. Assuming a modest increase in overall product margins to the low-to-mid 70% range and a low teens growth in operating expenses, EBITDA could run in the $6.5-$7.0 million range, which would translate into EPS of about $0.03 per share. Given the size of the TAM, over the following 2-3 years, the company can grow its revenues 20%-25%, with profitability growing at a faster pace.



Due To Recurring Revenue Model, FLYHT Should Not Be Valued Like An Aerospace/Defense Company, Upside of 2x-3x Possible In The Share Price: In valuing FLYHT, it is to simplistic and not correct to view the company as a traditional aerospace/defense company. While FLYHT does have a hardware component to its revenues (and one with very attractive margins) similar to aerospace/defense companies, the real exciting aspect of its business, and which differentiates the company from these comps, is its high margin recurring revenue data communications and fleet management software tools business. As previously mentioned, these revenues are derived from five year contracts that generate on average a very healthy $1,100 per month per aircraft and are very sticky. Thus, this business provides a predictable stream of revenue and solid profitability.



In comparing the valuation of FLYHT, I believe it is more appropriate to look at the stock valuation relative to a basket of machine-to-machine (M2M), wireless data communication mobile solutions management and Internet of Things (IoT) type companies. Listed in the table below is the P/E valuations of these companies.



Valuation Comparisons for FLYHT







P/E Multiple





BSM Technologies




CalAmp Corp.




Digi Int'l Inc.








ID Systems




Ituran Location & Control




Novatel Wireless




Numerex Corp.




Orbcomm Inc.




Ruckus Wireless




Sierra Wireless




Trimble Navigation




















Note: MIFI is excluded in averages





Using the above table as a relative valuation benchmark, and using a discounted 20x P/E multiple to the $0.03 in earnings power expected in the next 12-18 months equates to a stock price of ~$0.60 per share, or greater than 3x the current share price. Thus, should FLYHT successfully accelerate its sales momentum as previously discussed, there is significant upside to the current share price. Noteworthy, the share price did experience a significant spike in price in March 2014, following the MH 370 disaster and the continuous media coverage, as retail investors bid up the stock looking for a way to capitalize on what they thought would be an immediate wave of business that did not materialize in short order. While these unsophisticated investors did not understand the slow pace of change surrounding new regulation changes in the airline business, it does highlight the opportunity once revenue growth does in fact accelerate.



While I believe the shares of FLYHT are attractive on a fundamental basis, I believe the end game for the company is likely to be an acquisition by one of the leading diversified avionics systems vendors, like a Honeywell or Rockwell, once the company begins to sign a couple of major airlines and/or additional OEM’s and scale its business model. Given FLYHT’s high product margins (~70%), it would be easy to see how the AFIRS technology could be integrated into the product portfolio of a leading avionics vendor, and by eliminating FLYHT’s operating expenses (which is what is holding back profitability), derive significant post acquisition synergies to make an acquisition highly accretive to a potential acquirer. With EV/sales acquisition multiples of 3x-5x not uncommon for high margin recurring revenue systems companies like FLYHT, this would translate into a significant premium to the current share price, and given post acquisition synergies, still likely translate into a significantly accretive acquisition for an acquiring company. Under this scenario, looking out 12-18 months, should sales accelerate from the $10-$15 million current range to $25-$30 million, the upside in the share price would be 2x-3x the current level.


Key Risks/Issues:


Will this finally be the year when revenue growth accelerates?: Admittedly, the biggest knock on the company and the investment thesis is that the FLYHT story has been taking off every year for the past 2-3 years, with only modest growth recorded and investor frustration growing. While most investors do not doubt FLYHT’s technology and competitive advantage (confirmed by my due diligence with industry participants), there have been some questions relative to the company’s sales/marketing strategy and effectiveness. While I agree there have likely been some internal sales/marketing issues at the company that have held back sales momentum in the past, some of the issues were outside of managements control. Noteworthy, there is truth to managements comments that major changes in the airlines business move at a glacier pace. In addition, contrary to what might have been expected at the time, post the MS 370 tragedy in March 2014, the market for flight tracking froze up, waiting for government standards to be set (which negatively impacted FY 2014 financial results), so any equipment would comply with the mandate. Those committee discussions and standards took well over a year to be finalized and produced less than the strict regulations many FLYHT observers were hoping for. Moreover, in hindsight, is likely that FLYHT probably focused too much of its marketing efforts on its flight tracking solution relative to focusing on marketing the cost savings attributes associated with its fleet management tools. I believe some of the senior management changes are in reaction to these past issues and should focus the company better on its target customers. For its part, management appears very optimistic that the current pick up in sales interest and order momentum is both real and sustainable and that revenues are well positioned to significant growth over at least the next 12-18 months. Given the combination of the recent orders, the China mandate, new marketing partnerships and OEM partnerships beginning to bear fruit, I have a fair amount of confidence this will also occur.



Cash Burn & Balance Sheet Issues: FLYHT’s operations have been unprofitable on an annual basis since inception as the company has invested in refining and securing STC’s for its AFIRS product as well as marketing its technology to customers, OEM’s and regulatory agencies, while awaiting an acceleration in sales momentum. As a result, the company has been burring cash every year. Over the last few years, FLYHT’s cash burn has come down, but has averaged about $4 million over the last 3 years. On a favorable note, with sales momentum finally starting to build, the cash burn was steadily reduced during the 2015 year and continued into Q1, where the company used only $400,000. At the end of Q1, FLYHT had $0.9 million in cash. However, in Q2 the company’s cash position should be bolstered by the combination of $5.1 million from the May 12th private placement and a total of $2.5 million from the proceeds from its IP licensing agreement. These funds should allow the company to fund its operations into future and pay off two debentures that come outstanding this year. In June the company has a $2.3 million debenture that is coming due, that it intends to pay off in cash. In December, the company has a $3.1 million debenture due, that the company will repay either in cash or equity.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.



  • New contract signings
  • Increased revenue momentum
  • Becoming EBITDA profitable
  • Establishing a partnership with Boeing and/or Embraer
  • Signing a major tier-1 airline


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