Wednesday, 17 November 2010

The Trials and Promises in AMA's Q3 Results

AeroMechanical Services Ltd. (TSX:V-AMA)
Basic Shares: 103.6 million
Fully Diluted: 115.4 million

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(AMA will be presenting its Q3 2010 results via webcast and live conference call beginning at 2:30 p.m. MT (4:30 p.m. ET) today, November 17. To follow instructions to join that webcast, please click here.)

On those quarterly results, it's interesting to note that an accountant's dream can often be an investor’s nightmare.

Thus was the case with AeroMechanical's Q3 results where the company's GAAP revenue - which it must report - showed a drop in Q3 this year compared to the same quarter last year.

But on the measure that counts most to people, namely cash, AMA showed an increase in Q3 this year compared to the same quarter last year.

Cash revenue for Q3 2010 was $1,361 million while it stood at $1,133 million in Q3 2009.

GAAP is an accounting standard that doesn't allow AMA to recognize cash coming in its door for the sale of one of its blue boxes until the technology is installed and activated to generate monthly recurring revenue.

As such, GAAP revenue for Q3/10 stood at $1,081 million compared to the higher GAAP revenue in Q3/09 of $1,512 million. This was further distorted due to the unusually high spike in GAAP revenue in last year's Q3.

Another factor that puts AMA's finances into an odd category is research and development spending (R & D) on its next generation blue box, the afirs 228.

AMA Chairman and CEO Bill Tempany has been warming the market for many quarters that R & D spending this year and next was going to be extraordinarily high at something like $4.5 million.

R& D for a technology that management says will put AMA into a whole new league of business, dramatically skewed the same quarter-by-quarter loss comparisons

For example, the Q3 loss this year was $2.5 million compared to a far lower loss of $717 thousand in the same quarter last year when dramatically less was spent on R & D.

The quarterly results also screen the big picture.

It costs AMA approximately $5 million per year for operations, exclusive of R &D.

AMA President Richard Hayden wrote in his quarterly Letter to Shareholders that there are 303 blue boxes that have been shipped or are awaiting delivery. He said that each unit should generate top line revenue of between $350 and $500 thousand over the service life of each aircraft.

It's our understanding a little more than half of that number are generating revenues. When the day comes that all units are activated, annual recurring revenues should be in the range of $7 million - well over AMA's currrent operating costs of roughly $5 million annually. That's the meat and potatoes of AMA's business. The company hopes the gravy will come from partners like L-3 Communications, Sierra Nevada Corporation, GuestLogix and more.

And as Mr. Hayden wrote in his shareholder's letter there's another form of gravy AMA is after - business aircraft operators.

He wrote that "the largest operator of business aircraft in the world" completed a study on AMA's blue box technology and found the technology will give the operator a "solid return on investment."

"We are expecting publication of these results soon," Mr. Hayden added.
Just after the quarter end, AMA’s first aircraft manufactuer – Hawker Beechcraft Corporation – agreed to install a blue box on one of its demonstration corporate jets and offer the technology to its customers around the world.

To view the quarterly results news release, please click here.