Mercury Systems Inc (MRCY)

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Mercury Computer Systems, Inc. (MRCY)

F2Q10 Earnings Call

January 26, 2010 5:00 pm ET


Bob Hult - Senior Vice President & Chief Financial Officer

Mark Aslett - President & Chief Executive Officer


Mark Jordan - Noble Financial

Steve Levenson - Stifel

Tyler Hojo - Sidoti & Co.

Jonathan Ho - William Blair

Michael Ciarmoli - Boenning & Scattergood



Good day, and welcome everyone to the Mercury Computer Systems, Inc. second 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, Mr. Bob Hult; please go ahead, sir.

Bob Hult

Good evening and thank you for joining us. With me today is our President and Chief Executive Officer, Mark Aslett. If you have not received a copy of the earnings release, you can find it on our website, We would 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 second 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 would 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 EBIDTA.

Adjusted EBIDTA excludes interest income and expense, income taxes, depreciation, amortization of acquired intangible assets, impairment of long lived assets, stock-based compensation costs 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’m now pleased to turn the call over to Mercury’s President and CEO, Mark Aslett.

Mark Aslett

Thanks, Bob. Good afternoon, everyone, and thanks for joining us. I will begin with an update on our business for the second quarter. Bob will review the financials and discuss our guidance for the third quarter and then we will open it up to your questions. This was another quarter of very solid progress for Mercury. On our Q1 call, I noted that we expected a large missile defense radar order to push from Q2 to Q3.

I’m pleased to report that the receipt of this $28 million order during the quarter led to a very strong bookings performance. Defense bookings combining ACS and Mercury Federal grew year-over-year by 43% to $47.8 million. Total revenue for the second quarter exceeded the high end of our guidance range by more than $3 million. We reported GAAP earnings of $0.10 per share compared with guidance ever a $0.04 to $0.08 loss.

Our adjusted EBIDTA margin increased from 8% in Q2 of ‘09 to 13% this quarter and operating cash flow grew to $5.2 million. Total bookings for the second quarter were up 37% from Q2 of fiscal 2009 and 15% sequentially to $56.1 million. This included the missile defense booking I just mentioned which was the largest single purchase order in Mercury’s history.

Although we have the PO in hand, the timing of deliveries for this booking is still being determined with our customer. This uncertainty will be reflected in our guidance, which Bob will cover in his prepared remarks. Our book-to-bill in defense for the second quarter of fiscal 2010 was $1.37 up from $0.93 in the sequential first quarter and $0.99 in Q2 of fiscal 2009.

Year-over-year, our total backlog is up 47% to $110.4 million, and our defense backlog increased to 55%. In addition, as we expected, our 12 month backlog reversed the decline we have seen for the past few quarters, rising 41% sequentially from Q1 and 33% year-over-year to $88.2 million. Total defense revenue in the second quarter, including ACS and Mercury Federal, declined 15% sequentially and grew by 3% year-over-year to $34.8 million.

Looking at our results for the first half of the fiscal year, our defense revenues and bookings grew 12% and 27% respectively, evidence of the progress we’ve made in strengthening and growing our core business.

For the first half of fiscal 2010, Mercury’s total bookings were up 20% year-over-year and total backlog is up 47%. Our results for the first half also demonstrate our success in improving Mercury’s underlying operations. Revenue for the first half grew 3% year-over-year reflecting the weakness in our commercial business, but gross margin is up a full two percentage points from the first half last year, driven mainly by a favorable business mix.

GAAP earnings were up from $0.01 per share in H1 of fiscal ‘09 to $0.30 per share for the first half this year. Our adjusted EBIDTA margin has improved from $8.6 million, or 10% in the first half last year to $13.8 million, or 15% against a longer term pro forma target goal to 17% to 18%.

We’ve developed our strategy for driving growth and profitability in the business with an eye toward the fundamental changes taking place in defense procurement. Against an expected backdrop of essentially flat overall spending for the next several years, the DoD is clearly shifting its priorities from major new weapon systems development to upgrades of existing programs and platforms.

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