MRCY

Mercury Systems Inc (MRCY)

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Mercury Computer Systems, Inc. (MRCY)

F1Q10 (09/30/2009) Earnings Call

October 27, 2009 at 5:00 pm ET

Executives

Bob Hult - Senior Vice President and Chief Financial Officer

Mark Aslett - President and Chief Executive Officer

Analysts

Steve Levenson - Stifel Nicolaus

Mark Jordan - Noble Financial

Jonathan Ho - William Blair

Tyler Hojo - Sidoti & Company

Ryan Rhyton - Barrow, Hanley

Presentation

Operator

Good day and welcome everyone to the Mercury Computer Systems Incorporated first quarter fiscal 2010 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Company's Senior Vice President and Chief Financial Officer, Bob Hult. Please go ahead, sir.

Bob Hult

Good afternoon, and thank you for joining us. With me today is our President and Chief Executive Officer, Mark Aslett.

If you have not received the copy of the earnings release, you can find it on our website at www.mc.com. We’d like to remind you that remarks that we may make during this call about future expectations, trends, and plans for the Company and its business constitute forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated.

Additional information regarding forward-looking statements and risk factors is included in the press release we issued this afternoon reporting the Company’s first quarter fiscal year 2010 results and in the Company’s periodic reports filed with the SEC.

We caution listeners of today’s conference call not to place undue reliance upon any forward-looking statements, which speak only as of the date of this call. We undertake no obligation to update any forward-looking statements.

I’d also like to mention that, in addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP during our call, we will discuss a non-GAAP financial measure, specifically adjusted EBITDA. Adjusted EBITDA excludes interest income and expense, income taxes, depreciation, amortization of acquired intangible assets, stock based compensation cost, and restructuring expense. A reconciliation of adjusted EBITDA to GAAP net income from continuing operations is included in the press release we issued this afternoon.

I am now pleased to turn the call over to Mercury's President and CEO, Mark Aslett.

Mark Aslett

Thanks, Bob. Good afternoon, everyone, and thank you for joining us. I will begin with an update on our business for the first quarter of fiscal 2010. Bob will review the financials and discuss our guidance for the second quarter, and then we’ll open it up for your questions.

Our priority for fiscal 2010 is driving the growth and profitability in the business, and the first was an excellent start in that direction. On a continuing operations basis, revenue and GAAP earnings both exceeded the high-end of our guidance range, coming in at $47.4 million and $0.19 per share respectively.

Total defense revenue in the first quarter including ACS and Mercury Federal grew 2% sequentially and by 22% year-over-year to $40.8 million. We’re also continuing to demonstrate the operating leverage we have in the business with adjusted EBITDA margin coming in at 16% for the quarter, against a longer term pro forma target business model of 17% to 18%.

Inventory was down again both sequentially and year-over-year and Mercury is continuing to generate positive free cash flow. Total bookings for the first quarter increased 4.8% from Q1 of fiscal 2009 to 48.6 million. Bookings declined sequentially by 24.5% from the fourth quarter of fiscal ’09 reflecting the typical seasonality we see in Q1. Including both Mercury Federal and ACS, defense bookings were up 11% year-over-year to $37.9 million.

We closed the first quarter with a book-to-bill in defense of 0.93 down from 1.49 in sequential fourth quarter and 1.02 in Q1 of last year. If you look at the past three fiscal years bookings and revenue in our defense business, including both ACS and Mercury Federal have grown at a compounded annual rate of 28% and 14% respectively. This growth reflects the work we’ve done to strengthen our core defense business while expanding our presence in emerging high potential growth areas within the overall defense electronics market.

As a result, we have a diversified installed base of defense business encompassing a wide range of high priority military platforms and programs at various stages of development and deployment. This creates a low potential risk profile for us as we pursue additional programs and platforms to drive future growth.

In reference to the governments OCI rulemaking, as I mentioned last quarter, we’ve reached two conclusions based on the thorough review of the existing rules. First, Mercury is not currently involved in any projects or planning any new business, that would trigger the OCI rules as based on today. Secondly, we believe that the relationship between Mercury and Mercury Federal does not trigger any of the existing rules.

In terms of the legislation that may have an impact on current best practices or existing rules, the National Defense Authorization Act and the Weapon Systems Acquisition Reform Act, we anticipate that the government is likely to focus more on the large primes under the definition, as well as potential conflicts associated with being classified as the lead systems integrator.

In our view, neither Mercury nor Mercury Federal would currently fall under that category. In terms of the procurement landscape overall, we agree with the general sentiment projecting only flat-to-modest DoD budget growth over the next several years. Therefore, it is important to be in the right areas; clearly ISR is the one such area for us. Mercury's ACS business is also well positioned on key programs and platforms in three other areas which should see increased funding over time.

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