MRCY

Mercury Systems Inc (MRCY)

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Mercury Computer Systems (MRCY)

F1Q2011 Earnings Call

October 26, 2010 05:00 pm ET

Executives

Robert Hult - Senior vice President, Chief Financial Officer

Mark Aslett - President, Chief Executive Officer

Analysts

Mark Jordan - Noble Financial

Tyler Hojo - Sidoti & Company

Jonathan Ho - William Blair

Steve Levenson - Stifel Nicolaus

Jim McIlree - Merriman

Presentation

Operator

Good day and welcome, everyone, to the Mercury Computer Systems first quarter fiscal year 2011 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the Senior Vice President and Chief Financial Officer, Mr. Robert Hult. Please go ahead, sir.

Robert 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 press 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 as that term is defined in the Private Securities Litigation Reform Act of 1995. You can identify these statements by the use of the words may, will, should, would, plans, expects, anticipates, continue, estimate, project, intend and similar expressions.

Such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. These risks include but are not limited to general economic and business conditions including unforeseen weakness in the company's markets, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, continued funding of defense programs, the timing of such funding, changes in US government's interpretation of federal procurement rules and regulations, market acceptance of the company's products, shortages in components, production delays due to performance quality issues with outsource components, inability to fully utilize the expected benefits from acquisitions and divestitures or delays in realizing such benefits, challenges in integrating acquired businesses and achieving the anticipated synergies and difficulties in retaining key customers.

Additional information regarding forward-looking statements and risk factors is included in the company's periodic reports filed with the SEC. We caution listeners of the today's conference call not to place undue reliance on any forward-looking statement 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 several non-GAAP financial measures, specifically adjusted EBITDA and free cash flow.

Adjusted EBITDA excludes interest income and expense, income taxes, depreciation, amortization of acquired intangible assets, restructuring expense, impairment of long-lived assets, acquisition and other related expenses in stock-based compensation costs. Free cash flow excludes capital expenditures from cash flows from operating activities.

A reconciliation of adjusted EBITDA to GAAP net income from continuing operations and our free cash flow to GAAP cash flows from operating activities are 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 thanks for joining us. I'll begin with an update on our business for the first quarter, Bob will review the financials and discuss our guidance and then we'll open it up for your questions.

Mercury continued to perform well in Q1. Revenue and GAAP EPS both exceeded the high end of our guidance range. Bookings and 12-month backlog were up 6% and 45% year-over-year respectively. Adjusted EBITDA for Q1 increased 13% year-over-year and was well above our guidance. Finally, operating cash flow grew to $9.4 million, an increase of 259% year-over-year.

Looking at our defense business, total defense revenue, including ACS and Mercury Federal, was in line with our expectations of $37.7 million, down 7.6% from Q1 of last year. Our commercial business more than made up the difference, however, as revenue grew nearly 120% year-over-year to $14.4 million.

Defense bookings for the first quarter were up 9% year-over-year. Our book-to-bill in defense was 1.09, up substantially from Q1 of fiscal 2010. With 45% growth year-over-year in our 12-month backlog, Mercury's on track to deliver solid organic growth on the top and bottom lines in fiscal 2011.

Our major defense bookings this quarter include an order for the Taiwan Patriot System through Raytheon, continued business on the Aegis platform through Lockheed Martin and additional orders for the ASIP airborne signals intelligence package with Northrop Grumman.

Q1 bookings in our commercial business were roughly flat with Q1 last year. Although backlog-driven revenue from KLA-Tencor will be winding down during the year, Q1 was our fourth consecutive quarter of increased revenue from ASML. Overall, we still expect roughly flat revenue in commercial for fiscal 2011 as compared with FY10.

In our defense business we focused mercury on key markets that continue to look promising in terms of DOD funding as well as foreign military sales. These include ISR, ballistic missile defense and electronic warfare. At the same time, we have and continue to position Mercury to succeed in the defense markets driven by budget constraints and procurement reform.

We've evolved our business model to align with the needs of the primes in an increasingly challenging environment. At a macro level, the major change is that Mercury is transitioning to being a best-of-breed commercial item ISR subsystem company. This means getting involved in programs earlier with an eye toward winning services [and] engagements that will generate long-term, production-based revenue annuity streams through the sale of ISR subsystems to the primes.

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