A few thoughts on the information conveyed to shareholders at...

A few thoughts on the information conveyed to shareholders at yesterday’s AGM:

*Adacel has recorded a first quarter operating profit. Management expect the company to be profitable for the full year but, in keeping with new management policy, are being publicly cautious and are refusing to give any quantum forecasts at the present time. As always, Adacel's numbers will be determined in large part by the timing of expected contracts – something that the company has little control over.

*In the past, Adacel has surprised to the downside because expected contracts did not materialise. This FY, as a new North American CEO takes control, contracts seem to be coming in at a steady clip and the company may well surprise to the upside. And because Adacel is so dramatically oversold, there is plenty of upside potential in the medium term. For example, a $5mill NPAT could see the SP trading North of $1 by Sept 2006.

*The company is optimistic that US armed forces (and possibly the FAA) will soon issue a single source contract to Adacel to provide on-site support for each of its MaxSim tower simulators. Under this contract, each simulator would generate approximately US$40k annually in on-site support income. This is revenue that entails no development costs, so it basically goes straight to the bottom line. In addition to on-site support annuity revenue, Adacel will also derive annuity revenue from software upgrades.

* Adacel presently has an installed base of 137 MaxSim systems. According to the AGM notes, the company thinks it could sell a further 180 systems to the FAA and the US Navy over the next few years. This would bring Adacel’s installed base to >300 systems.

* While Adacel’s MaxSim pricing is confidential, my analysis of past contracts indicates that MaxSim units, depending on their configuration, typically sell for between A$1mill and A$2mill each. If we multiply $1mill by expected FAA/US defence force sales of 180 MaxSim units over the next 2-3 years, Adacel is looking at generating at least A$180mill in MaxSim sales revenue (but possibly $200mill+) from the FAA/US defence forces over this time period. Additionally, the annuity revenue on an installed base of 300 systems would be in the order of A$16mill. That’s $16mill of essentially cost-free annual revenue that goes straight to the bottom line.

* The company is optimistic that its simulation software will eventually become standard in top of the line FFS (Full flight simulators). Already the company has a firm contract with Airbus, and is presently negotiating additional contracts with Lufthansa and the UK Royal Air Force (Helicopter Training). The upside potential for this new area of Adacel’s business is enormous.

*The company is already in discussion with Lockheed Martin for a new security simulation contract. The company has not disclosed the details of this contract, but it may have something to do with the new security upgrade for the New York Subway (a contract which Lockheed Martin is managing).

* Gulfstream and the Canadian Air Force have recently let significant voice control contracts which Adacel is bidding for. Adacel’s main competitor for these two contracts is Smiths Aerospace (UK). News on these two significant contracts is due sometime during 2006. Already, Adacel’s voice control technology is being used in the new Joint Strike Fighter – a contract in which Adacel beat Smiths Aerospace. Revenue from the JSF contract is expected to start flowing during FY07, and should run till around FY14.