Mercury Systems Inc (MRCY) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to the Mercury Systems fourth quarter fiscal 2016 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 Company's Executive Vice President and Chief Financial Officer, Gerry Haines. Sir, please go ahead.

Thank you, operator. Good afternoon, everyone, 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 press release we issued earlier this afternoon, you can find it on our website at mrcy.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, could, should, would, plans, expects, anticipates, continue, estimate, project, intend, likely, forecast, probable, possible, potential, assumes and other similar expressions.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, continued funding of defense programs, the timing of such funding, 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 advantages and delivering technological innovations, changes in or in the US government's interpretation of federal procurement rules and regulations, market acceptance of the Company's products, shortages in components, production delays or unanticipated expenses due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, changes to export regulations, increases in tax rates, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-priced product, service and system integration engagements, and various other factors beyond our control.

These risks and uncertainties also include such additional risk factors as are discussed in the Company's filings with the US Securities and Exchange Commission, including in our annual report on Form 10-K for the fiscal year ended June 30, 2015, and in our prospectus supplement on Form 424B5 filed on April 4, 2016.

The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which such statement is made.

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, adjusted income from continuing operations, adjusted earnings per share, or EPS, and free cash flow.

Adjusted income from continuing operations excludes several items from GAAP income from continuing operations. The excluded items are amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, and stock-based compensation expense, as well as the tax impact of those items. This yields adjusted income from continuing operations, which is expressed on a per-share basis as adjusted EPS, calculating using weighted average diluted shares outstanding.

Adjusted EBITDA excludes depreciation, interest income and expense, as well as income taxes in addition to the exclusions for adjusted income from continuing operations. Free cash flow excludes capital expenditures from cash flows from operating activities. A reconciliation of these non-GAAP metrics is included in the earnings press release we issued this afternoon.

Finally, we'll be discussing the Company's financial results, comparisons to prior periods and guidance on both a consolidated and organic basis. The organic results we're reporting today are non-GAAP and include the LIT business we acquired in Q2 of fiscal 2016, but exclude the Microsemi carve-out business we acquired in Q4.

With that, I'll turn the call over to Mercury's President and CEO, Mark Aslett.

Thanks, Gerry. Good afternoon, everyone, and thanks for joining us. I'll begin today's call with the business update, Gerry will review the financials and guidance, and then we'll open it up for your questions.

Mercury concluded a strong fiscal 2016 with a very busy fourth quarter, and we're positioned well as we head into the new fiscal year. During the quarter, we closed the largest acquisition in the Company's history, we successfully completed equity and debt financing to support this and future transactions, and, at the same time, we delivered strong growth in both revenue and profitability while finishing the year with record backlog.

For fiscal 2016 as a whole, including the businesses acquired from Microsemi, Mercury's revenues grew 15% year over year. GAAP income from continuing operations for fiscal 2016 increased 37%, and adjusted EBITDA was up 29%. Bookings grew 11%, and the year-end backlog increased 38% to a new Company record of nearly $288 million. Our 12-month forward revenue coverage remains strong, positioning us well for fiscal 2017.

Fiscal 2016 was a strong year for us organically, also. We continued to scale the core business. At the same time, we delivered above industry average growth and profitability, in line with our target business model. Excluding the results for the acquired business, revenue for fiscal 2016 grew 8% year over year, exceeding the top end of our guidance. Bookings were roughly flat with fiscal 2015, while our backlog achieved a new record high for the third year in a row, growing 8% year over year. Adjusted EBITDA was up 18%, also exceeding our guidance.

Fiscal 2016 concluded on a high note last month. Our advanced microelectronics center in New Hampshire was named a winner of the prestigious James S. Cogswell Outstanding Security Achievement Award. Receiving this award for the defense security service validates the work we've done internally to protect our technology and data in the interests of national security. We're very pleased to be recognized for doing so.

Moving to Q4, we delivered another strong quarter with all of our organic metrics coming in at or above the high end of our guidance. Our largest revenue programs in Q4 were Eagis, SEWIP, F-16 SABR and Filthy Buzzard. For the full year, our largest revenue programs were SEWIP, Aegis, Patriot, F-35 and Gorgon Stare.

Total bookings for the fourth quarter, including the acquired business, were up 26% year over year, driving a 1.2 book-to-bill ratio and record backlogs. Organically, bookings were down 10% from a very strong Q4 last year, yielding a book-to-bill of 1.07 for the quarter.

Our largest booking in Q4 was for SEWIP from Northrop Grumman. We also received large orders related to the first full-rate production of a naval signals intelligence program as well as Gorgon Stare. Our largest Q4 bookings in the acquired business were orders for various guided missile and munitions programs. For fiscal 2016 as a whole, our largest bookings programs were SEWIP, LRDR, E2D Hawkeye, and Filthy Buzzard.

International defense bookings for Q4, including foreign military sales, were 16.3% of total bookings. This compares with 16.4% in the fourth quarter last year. Our revenue and bookings demonstrate that we're strongly positioned on a great set of franchise programs. These programs appear to be well-funded, are currently in or moving into production, and are precisely aligned with the DoD's roles and missions.

Over the past few years, we've leveraged our relationships with the primes, as well as our sales strategies, internal R&D investments and acquisitions, to build a best-in-class portfolio of products and capabilities targeting the right segments of the market.

Entering fiscal 2017, we continue to see significant and growing opportunities associated with radar and electronic warfare modernization. We've made substantial investments in our RF and microwave business while also positioning Mercury as the defense industry's largest commercial embedded secure processing company. Our strategy is paying off, and our pipeline of opportunities continues to grow.

Our success with major EW programs, such as SEWIP and Buzzard, demonstrate the strength of our strategic relationships and our competitive advantages in RF, microwave and digital. We've invested not only in the technology, but also in the manufacturing assets we need to continue profitably growing our radar and EW revenues. At the same time, we're clearly seeing the impact of the government's increasingly stringent mandates with respect to program protection security for domestic and foreign military sales.

Through internal R&D investment in our industry-leading secure intel server-class product line as well as our fiscal 2016 acquisitions, we've created a unique and differentiated set of capabilities in the embedded security demands. These capabilities are becoming increasingly important to the DoD and our customers. We've pioneered a next-generation defense electronics business model, one that aligns well with the industry conditions today and what we expect to occur in the future.

The LIT and Microsemi carve-out transactions extend a series of strategic deals that began more than five years ago when we acquired Micronetics and Core Electronics. These multiple acquisitions have positioned Mercury to provide pre-integrated secure processing subsystems while also creating substantial synergies and opportunities for future growth.

The most recent acquisition will add key capabilities and exposure to new markets, like guided missiles and munitions. These markets have seen increased funding, was some of our largest four quarter bookings, and appear to be an area of future opportunity.

Going forward, we intend to remain active and disciplined in our approach to M&A. We will continue to look for deals that have the potential to be accretive in the short term and drive long-term shareholder value.

Our M&A capabilities will strengthen with Chris Cambria as part of our team. As we recently announced, Chris has joined Mercury as our new General Counsel. This follows many successful years at L-3, where he managed their IPO and completely more than 100 M&A transactions and related financings. Most recently, Chris was General Counsel at Aerojet Rocketdyne. We're excited to have Chris onboard as we work to extend our record of organic and acquisition-driven growth.

As we do so, we'll continue to target acquisitions that scale the technology platform that we've built. We will remain focused on the key pillars of the business -- RF, microwave and secure processing -- while working to assemble critical and differentiated solutions for sensor and mission processing.

We'll also remain focused on smaller capability-led tuck-in acquisitions similar to LIT while building a pipeline of larger opportunities, with the recent carve-out being a good example.

During fiscal 2016, we demonstrated our ability to complete a large acquisition and a complex set of financing transactions quickly and with great results. We have built strong internal corporate development integration teams that are skilled in executing complex business combinations. Finally, as a buyer, we are diligent (inaudible) swift and discreet execution.

The Microsemi transaction demonstrates all of these capabilities. It's been less than 90 days since the closing, and everything is going extremely well. We feel good about the diligence that we did in our assessment of the business. We really like the new team. The team is thrilled to be part of Mercury, working in the mainstream of a business that shares their mission. We're making good progress on integrating the acquired business, and we're looking forward to harvesting the synergies that we've previously discussed.

Our planning for the manufacturing efficiencies is under way and on track. We've already begun shifting the business from a distribution model to direct sales through Mercury, and we're beginning to see the cost synergies we expected. Our plans for realizing purchasing efficiencies are also on track.

Also well under way are the migrations to Mercury's business systems, infrastructure and security platforms. We are on track to have 100% of the infrastructure and security migrated in four to six months from close, and 100% of the legacy ERP applications within six to nine months.

The feedback that we receive from customers has been exceptionally positive. The primes are looking for a fewer number of more capable suppliers that can invest in new technology and capabilities while bringing greater scale. Our customers can see that the acquired businesses are additive to what we currently have, that we've scaled the business, particularly in the RF and microwave domain, and that we've combined two suppliers that independently were viewed as going strong, but together are even stronger.

In summary, fiscal 2016 was a great year for Mercury. The strategy we're pursuing is resonating with our customers. It's also consistent with the government's defense priorities and goals for (inaudible). As a result, we believe that we're well-positioned to continue delivering important new program wins, robust bookings and above industry average growth in revenue, GAAP operating income and adjusted EBITDA.

We look forward to another strong performance in fiscal 2017. Gerry will take you through our guidance for Q1 and the full fiscal year. So with that, I'd like to turn the call over to Gerry. Gerry?

Thank you, Mark, and good afternoon again, everyone. Before we go through the financial results, I'd like to remind you that, unless otherwise noted, I'll be discussing the Company's financial results, comparisons to prior periods and guidance on a continuing operations basis.

In addition, based on the way we now operate the combined business, we are reporting Mercury's financial results as a single segment. This eliminates the historical distinction between Mercury commercial electronics and Mercury defense systems. Our business has become more highly integrated around the technologies we have developed internally and acquired in recent years, as well as through our centralized and integrated go-to-market strategy and corporate support functions. This process was solidified by our Q4 acquisition. Reporting as a single segment reflects this integration.

As Mark discussed, Q4 was a period of extraordinary activity for Mercury. We completed the largest acquisition in the Company's history in conjunction with completing two significant financing transactions. In the process, we maintained a strong balance sheet and flexible capital structure to support future growth. Along with all of this, we also put together a very solid fourth quarter, delivering a strong finish to a successful fiscal 2016.

On a consolidated basis, including the recently acquired Microsemi carve-out businesses, fiscal 2016 marked another year of double-digit growth in both revenue and backlog. Our book-to-bill ratios were positive, coming in at 1.22 for Q4 and 1.11 for 2016 as a whole.

Our record backlog of $287.7 million on a consolidated basis was up $79.7 million, or 38%, from $208 million a year ago. Of this total backlog, approximately $224.9 million relates to the organic business, which is also a record. Approximately $239.2 million of the backlog, of 83% of the total, is expected to be shipped within the next 12 months. Our fiscal 2016 bookings and backlog growth positioned us very well as we entered fiscal 2017.

Turning to our financial results for the fourth quarter, on a consolidated basis, total revenue increased $21.3 million, or 33%, from Q4 last year to $85.4 million. This includes organic revenue of $68.8 million, ahead of our guidance of $65.5 million to $68.5 million for the organic business.

On a consolidated basis, international revenue, including foreign military sales, was 17.6% of total revenue, up from 16.1% in Q4 last year. Revenue from radar and electronic warfare accounted for 67% of consolidated total revenue, compared to 85% a year ago. The lower proportion reflects the larger and more diverse revenue mix for the quarter as a result of the acquisition. Radar revenue was down 14% year over year, while electronic warfare revenue was up 75%.

We continued to translate our revenue growth into solid profitability in Q4. For Q4 fiscal 2016, Mercury's total gross margin was approximately 45%. On an organic basis, Q4 gross margin was in line with our organic guidance at 46%. This compares with gross margin of nearly 49% in Q4 of the prior year.

Fiscal 2015's fourth quarter had strong gross margin due to the product sales mix, while in Q4 of fiscal 2016, total gross margin was negatively affected by an inventory valuation step-up driven by purchase accounting for the Microsemi transaction. This purchase accounting impact will also affect Q1 of fiscal 2017, but will start to diminish in Q2 and should be largely immaterial in Q3 of 2017.

Q4 consolidated operating expenses were $30.5 million, compared with $23.3 million for the same period of last year. This includes organic operating expenses of $24.6 million, which was roughly in line with our organic Q4 guidance and includes $0.5 million of acquisition-related expenses.

Consolidated GAAP income from continuing operations for the fourth quarter of fiscal 2016 was $8.5 million, or $0.22 a share. This consolidated figure compares with $6.1 million, or $0.18 per share, in Q4 last year. Consolidated GAAP income from continuing operations for Q4 of fiscal 2016 includes approximately $3.7 million, or $0.06 a share, in the amortization of intangible assets, $2.3 million, or $0.04 a share, of stock-based compensation expense, $0.7 million, or $0.01 per share, of acquisition and financing costs, $0.3 million, or less than $0.01 per share, of restructuring expenses, and $1.4 million, or $0.02 per share, of fair value adjustments from purchase accounting.

In Q4 of this year, we also received a benefit of $1.9 million, or $0.05 a share, related to a favorable settlement of a claim related to the Core Electronics acquisition in 2012. We also received a $1.1 million, or $0.03 per share, benefit resulting from adoption of the new accounting standard for the treatment of share-based compensation. While these litigation and tax items positively impacted our GAAP results, they are excluded from adjusted EBITDA and adjusted EPS.

Our GAAP income from continuing operations for Q4 last year included approximately $1.7 million, or $0.03 per share, for amortization of intangible assets, $0.7 million, or $0.01 per share, of restructuring and other charges, $0.3 million, or less than $0.01 per share, of acquisition and financing costs, and $2 million, or $0.04 a share, of stock-based compensation expense.

Mercury's Q4 adjusted EBITDA increased 29% to $18.3 million on a consolidated basis, from $14.2 million in Q4 of last year. This includes $13.6 million of adjusted EBITDA from organic operations, above the high end of our organic guidance range of $12 million to $13.5 million and, at approximately 20% of organic revenue, near the midpoint of our existing target business model.

Consolidated adjusted EPS for the fourth quarter increased to $0.29 a share, up 11.5% from $0.26 per share in Q4 of fiscal 2015. Of this amount, $0.25 per share was attributable to the organic business, exceeding the high end of our guidance range of $0.20 to $0.22 per share for the organic business.

Turning to the balance sheet, Mercury ended fiscal 2016 with cash and cash equivalents of $81.7 million, up 5% from $77.6 million a year earlier. Operating cash flow of $15.1 million, driven by cash earnings, was partially offset by approximately $3 million of capital expenditures. This yielded approximately $12.2 million of free cash flow during the fourth quarter, compared with $10.2 million in Q4 of last year.

In addition, we added $92.3 million of net proceeds from the follow-on equity offering completed in April and $192 million of net proceeds from the term loan A financing. These amounts were more than fully offset by the $300 million purchase price and expenses associated with the acquisition completed on May 2, 2016.

For fiscal 2016 as a whole, our consolidated operating cash flow was $36.9 million, while free cash flow was $29.1 million, compared with $32.2 million and $26.2 million in fiscal 2015, respectively.

I'll turn now to our financial guidance for the first quarter and full fiscal year 2017. This guidance reflects the positive outlook that Mark discussed. We believe that Mercury's market opportunities and backlog position us to continue delivering solid revenue growth in Q1 and fiscal 2017 on both a consolidated and organic basis.

We expect to translate this growth into even stronger operating and earnings performance. We are also lifting our target business model by 400 basis points at the adjusted EBITDA level to a new range of 22% to 26% of revenue from the prior 18% to 22%. Even with this significant step up, we once again expect to achieve performance within our new target business model for the full fiscal year 2017.

For purposes of modeling and guidance, we have assumed no restructuring-, acquisition- or financing-related expenses in the period discussed.

With that as a background, for the first quarter of fiscal 2017, on a consolidated basis, we're forecasting revenue in the range of $82 million to $87 million, of which roughly 70% is expected to come from the organic business. We expect consolidated gross margin for Q1 to be in the range of approximately 44% to 45%. This includes a $2.1 million negative impact of inventory fair value adjustments resulting from purchase accounting and the anticipated mix of program activities and product sales for the quarter.

Consolidated Q1 operating expenses are expected to be approximately $33 million to $34 million. The Q1 expenses include $0.3 million of non-cash expense attributable to the lease of our new headquarters location as work commences on the buildout of that facility. This non-cash charge is driven by lease accounting under GAAP. This duplicative expense will end in May of 2017, when actual cash-front payments commence for the new site and the lease for the current site has expired.

Q1 GAAP income from continuing operations on a consolidated basis is expected to be $1 million to $2.3 million, or $0.02 to $0.06 per share. Adjusted EPS for Q1 on a consolidated basis is expected to be in the range of $0.19 to $0.23 per share. These estimates assume approximately $4.5 million of amortization of intangible assets, $2.1 million of fair value adjustments from purchase accounting, $3.8 million of stock-based compensation expense, and an effective tax rate of approximately 35% for the quarter.

Adjusted EBITDA for the first quarter is expected to be in the range of $17 million to $19 million, representing approximately 20% to 22% of revenue at the forecasted revenue range. The improved year-over-year consolidated profitability that we're forecasting for Q1 reflects the impact of sales growth and continued gains in operating leverage in the organic business as well as margin accretion associated with the Microsemi carve-out businesses.

Against that backdrop, we anticipate growth and profitability in the organic and acquired businesses, consistent with our original expectations. The integration efforts are progressing on schedule and as anticipated.

For the full fiscal year, we currently expect consolidated revenue to be in the range of $368 million to $376 million for fiscal 2017, again with roughly 70% of that attributable to the organic business. We currently expect fiscal 2017 GAAP consolidated income from continuing operations to be in the range of $15.5 million to $18.1 million. We currently expect adjusted EBITDA for all of fiscal 2017 to be approximately $82 million to $86 million, an increase of 43% to 50% from fiscal 2016 on a consolidated basis.

Finally, we expect to continue generating strong positive operating cash flow in fiscal 2017, driven primarily by cash earnings and offset in part by an increase in capital expenditures compared to last year. The increase in fiscal 2017 CapEx will be driven by our investments in equipment and infrastructure improvements, supporting the achievement of anticipated acquisition-related synergies, the tenant paid portion of the buildout of our new headquarters location, and to support continued organic growth in a consolidated business.

In summary, our continued success in growing our top and bottom lines in today's defense environment demonstrates that our strategy is working well. We believe that Mercury's fiscal 2017 will be another year of solid revenue growth, higher operating income and stronger profitability.

With that, we'll be happy to take your questions. Operator, you can proceed with the Q&A now.

Thank you. (Operator Instructions). Sheila Kahyaoglu, Jefferies.

-- about the new outlook and how we should think about the core business performing and maybe decelerating growth rate in that business a little bit, and maybe if you could give some color with the top five programs and the expected direction of those.

So we missed the first part of your question, Sheila. I think you might have been on mute when you asked it. Could you just repeat it, please?

Sure. So in terms of the fiscal 2017 revenue outlook, the implied guidance with the Microsemi asset implies the organic business is about -- the core business is about flat organically. Can you just give us an idea why that's decelerating from a robust fiscal 2016? And also if you could give us some color in terms of the top five programs.

Sure. So I think overall, we typically tend to start the year out somewhat conservatively, and I think it's probably likely the case in fiscal 2017, particularly given what we expect to occur, which is another budget continuing resolution. That said, we do expect, I think as we said in the prepared remarks, growth in both the organic as well as the recently-acquired business, and the opportunity pipeline really looks pretty good for next year.

We're expecting growth to be driven by radar modernization as well as electronic warfare, as well as growth in C4I. The C4I piece is largely tied to the activity set -- or the opportunity set that we see occurring in the intel server class products that we've been bringing to market. We also expect growth across pretty much all of our major product lines, which I think are doing quite well.

Overall, next year, from a revenue perspective, we anticipate that our top revenue programs will be SEWIP, Aegis, LRDR, F-35 and Filthy Buzzard.

And just a slowdown, I guess, in Patriot is the only one that falls off for 2016.

Yes, so Patriot -- it was actually our third largest revenue program in fiscal 2016, clearly a really important program for the Company. We don't expect that the revenues in fiscal 2017 will be as high as what they were this year. That being said, we do expect very strong growth in bookings year over year based upon various foreign military needs, national sales, including likely the Japan upgrade as well as potentially Poland.

Okay, perfect. Thank you very much for the color.

Sure. Thanks, Sheila.

Jason Gursky, Citi.

You touched on part of my question in your response to Sheila there, but I was wondering if you could address what you view to be the opportunities and risks to the guidance that you just issued. I think you suggested that there might be some conservatism. At this point in the year on the organic side of the business, there might be some opportunities to outperform this initial cutting guidance, but if you could talk a little bit about what you think would get you there and then what are the risks to the guidance, what's got to happen in order for you to hit your guidance rates this year.

Yes, so, look, I think the guidance that we gave is kind of balanced just given where we are in the year and what we see right now. We do anticipate, as I just mentioned, another budget CR, and of course, we're actually in an election cycle. I think the risks that we see are largely due to the timing of specific programs. As an example, during fiscal 2016, we did experience some order delays on the Aegis program that we expect to recoup in fiscal 2017, and Aegis is likely going to be a significant revenue contributor as well as bookings contributor this fiscal year.

With respect to what is kind of going up and down, I kind of went through what we see happening from a market segment perspective. We see strong growth opportunities in radar and EW modernization. As well, we see strong opportunity pipeline with respect to program protection, the advanced embedded security capabilities that we have.

The top revenue growth programs in fiscal 2017 are likely going to be LRDR, F-35 and Aegis and probably Filthy Buzzard, and we do expect and have taken into account in our guidance some declines in revenues year over year, Patriot being one of them. So we think that, in summary, the guidance is appropriate based on where we are in the year and based in terms of what we see happening in the environment.

And one follow-on, if I might?

Please, Jason, yes.

Yes, good. Thanks. I just want to talk a little bit about the cash cycle and whether you see are any risks or opportunities both on the payables and the receivables side of the ledger. We've heard some of the OEMs, some of your customers, suggesting that they're getting some slow payments out of DoD. I'm just trying to get a sense of whether this is becoming a widespread industry phenomenon and whether it's also impacting suppliers like yourself. Thanks.

Sure. So we haven't really seen what we could call any direct impact from some of I think what you're talking about that's happened across -- which isn't to say that we never would, but I think more of what we're seeing in our cash flow cycle is simply a little bit of transition to more services-led engagements, which are bringing more services work to the front end on some of the newer program opportunities.

That will tend to cycle through with some buildup of receivables, some of which will be unbilled as we reach milestones and so on, and then those convert over time. But we've seen what we consider to be appropriate levels on timing to those conversions as we go forward, and it's something that we continue to watch and look for opportunities to manage as effectively as they can be.

And as we've pointed out before, we actually are pretty fond of those services-led engagements, because it's exactly that element that leads to the longer-term product sales cycle on the back end of those programs, which is where we tend to make the better money and where you see some of those build up and receivables tend to convert down to more desirable levels, I guess I would call it. And then, overall, we haven't seen anything related to collections that we've thought of as alarming.

Great. Thank you, guys.

Sure.

(Operator Instructions). Michael Ciarmoli, KeyBanc Capital.

Maybe just to elaborate or dig deeper on the revenue deceleration, you've got the top programs you just mentioned. I mean, are you seeing some of these grow at a slower rate as they just mature and flatten out? And then, maybe, could you also talk to us maybe about what the totally new bid program pipeline looks like, what big programs that are out there that we should be monitoring that could potentially help reaccelerate that top line?

Yes, so I wouldn't get too hung up in terms of the top line. Again, the guidance that we've given is kind of in line with what we see at this stage of the year and just what's happening in the environment. Our programs overall I think are performing pretty well. We went through Patriot. We do expect strong growth in bookings in the next fiscal year. There will be some revenue reduction, but, again, it's more just based upon just the timing of certain FMS programs.

Aegis is going to be another strong contributor. We're seeing more opportunity there, largely driven by the continued modernization of the domestic fleet. There are additional opportunities associated with FMS development and production. We're seeing additional opportunities associated with future tech insertions. We're expanding out beyond the sensor into other parts of the compute architectures onboard, as well as potential opportunities in the RF and microwave domain, so Aegis we feel really good about.

SEWIP continues to grow. We won another design win on the SEWIP Block 2 program this past quarter with Lockheed. Our largest booking in Q4 was actually with Northrup on SEWIP Block 3. So that program continues to do well also.

The F-35, in terms of our existing business, again, I think is doing well. We expect to see growth in that business next fiscal year. Buzzard, which is the major program that we had in our former MDS operating segment, is seeing good growth as well, largely because the program is moving into production.

So we feel really good about the position that we're in, the business that we just acquired. I think the thing that we're pretty excited about there is the opportunity in the guided missiles and precision munition domain. There appears to be an uptick in spending in that particular area, and we've consolidated together, between both businesses, a set of capabilities that we think will allow us to continue to grow that business longer term. So we feel pretty good about the position that we're in, Mike, overall.

Got it. That makes sense. And then just one more, if I may. Microsemi, the growth sort of implies, I guess -- I don't know if we have the exact trailing, but I think it was basically $100 million in 2015, so they're looking to be growing maybe at a 12% growth rate. Do you think -- is that rate being accelerated to some extent by synergy? Do you think that -- just trying to get a sense of how Microsemi is trending from a programmatic and top line standpoint.

Yes, so, overall, I think the business has been growing at kind of low single digits. We have said that, over time, we believe that we can inflect that growth rate northwards largely as a result of our channel. In terms of the early integration efforts, we've basically trained both sales forces. We've been doing joint calls together, and there's been a fair amount of, actually, activity in terms of the combined businesses together.

We've pursued a very large RF subsystem for our next-generation radar that, on a standalone basis, I think neither company would have been able to deliver, and it's a combined -- our combined RF capabilities, our mechanical packaging expertise, as well as the ability to manufacture these capabilities in the new Phoenix facility that really allows us to go after what is additive from an opportunity set perspective.

So we think that we will be able to inflect the growth rate over time, and we're seeing some of that during fiscal 2017, Mike.

Great. Thanks. And Gerry, I may have missed it. Did you give a gross margin for 2017?

Yes, we said that for -- well, we didn't give it for the full year. For Q1, we expect it to be 44%-ish, and, again, that's including the negative impact of the purchase accounting adjustment in that quarter.

Right. But you're not going to give us a full-year one?

No.

Okay, fair enough. Thanks, guys.

Thank you. Mr. Aslett, it appears there are no further questions. Therefore, I would like to turn the call back over to you for any closing remarks.

Okay. Well, look, thank you very much for listening in to the call. We look forward to speaking to you again next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone have a great day.