Mercury Systems Inc (MRCY) 2002 Q4 法說會逐字稿

Good day and welcome to the Mercury Computers, Incorporated fourth quarter and year-end fiscal 2002 earnings results conference call.

Today's call is being recorded.

At this time I would like to turn the call over to Mr. Jay Bertelli, president and CEO.

Please go ahead, sir.

Thank you and welcome everybody to our fourth quarter and year-end earnings conference call.

Before we get started with the details, we will repeat or recite the safe harbor statement.

I'm going to ask Gary Owen to do that.

During this conference call today, Jack and Jay will make several forward-looking statements, including those dealing with our future potential business performance.

Accordingly, the company wishes to take advantage of the safe harbor provisions.

Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated.

Factors that could cause or contribute to risks and uncertainties includes but are not limited to general economic business conditions, competition, changes in technology and methods of marketing, delays in completing various engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success and technological advances and delivering technological innovations, shortages in compliance, product delays due to performance quality issues with outsource components and various other factors beyond the company's control.

These risks and uncertainties include such additional factors are as described in the company's recently filed reports with the Securities and Exchange Commission of the U.S.A..

The company wishes to caution listeners that today's conference call not to place undue reliance upon any such forward-looking statements which speak only as of the date made.

If you're still awake, we can begin.

I want to talk about, before we begin the discussion of our financial results and the outlook for next year, I would just like to share a few of my thoughts with you on the recent developments that certainly have shaken investors' confidence in America's business culture.

I'm referring, of course to the so-called CEO and accounting scandals that have led to several resignations arrests and recasts of past results.

While I'm certainly not in a position to comment on the behavior of the other CEOs, and the performance and reporting of their company is, as one of the members of the business management community, I feel obligated to speak for myself and for Mercury specifically.

Our finance and accounting practices, our books are as about as transparent as you can get.

We do not have any off balance sheet items.

And because we sell to OEMs and defense contractors our revenue recognition is fairly straightforward.

Our auditors, Price Waterhouse Coopers, are very thorough and the audit committee of our board of directors is comprised entirely of independent directors.

None of our directors have any investment banking or consulting agreements or relationships with the company.

Jack and I will both willingly and with good conscious certify our upcoming 10-K and all future SEC reports as required by recently enacted legislation.

In fact, today we signed a 10-K and have since we became a public company.

And we also have to sign the reps that we provide to our accounting firm and we believe that the requirements for us to certify the financial statements will be no more onerous than signing the reps to the auditors today.

The management team has always believed in growing the company organically by strengthening its core markets first and chasing potential new opportunities second.

This does not mean we will not look at acquiring companies along the way.

We already have, but with the strategic purpose in mind, as the recent acquisition of Myriad demonstrates, rather than through a reckless pursuit of M and A to increase the numbers.

As a result the P and L and the balance sheet are fairly straightforward, allowing the investors to easily analyze the true operating performance of the company.

We believe that the P and L and balance sheet clearly indicate our financial strength.

When it comes to corporate valuations, Warren Buffet once said "Investors should value a company based on its ability to offer unique products that are surrounded by deep moats, protecting their differentiation and making that differentiation sustainable over the long haul."

This according, to Buffet, is a fairly good indicator of a worthy investment.

I strongly agree.

From the very beginning Mercury's culture has been geared towards fostering an innovative environment that ensures our customers current needs are met and future ones anticipated.

The strategy has served us well as we're in a leadership position in our core markets, offering our customers leading edge products.

We maintain a strong competitive barrier through consistent R and D investments that allows us to stay in this position while growing and developing other markets like the semiconductor imaging and specialty market.

We're going to continue this way because we believe it's the best for one our customers, our company's associates and investors.

Since I mentioned one his ideas, let me comment on one more current issue that Warren Buffet seems strong about, that's expensing stock options.

Like most high tech companies, Mercury has been able to attract very talented engineers and senior management talent, and maintains a very competitive position in world markets, in part because we have stock options to offer as a future reward for the hard work, personal sacrifice and long hours that are essential for success in high tech companies.

I fully support the position taken by the American Electronics Association and stock options and believe high tech companies like ours are in a very different position than a Coca Cola or a GE.

We will watch this initiative carefully, make sure we research all the aspects and of course follow whatever regulatory guidelines develop.

In the meantime, we plan to continue to describe in detail the dilute active impact of our options program as a footnote within our 10-K as required by SFAS No. 123.

Now let me move to the earnings report.

I'm pleased to report that we concluded our 26th consecutive quarter of profitable company performance.

Our revenues were 43 million dollars.

And EPS was 24 cents on a diluted basis.

So we're quite pleased and encouraged that we completed the quarter on this high note and pretty much where we had indicated in our previous guidance.

For the full year fiscal 2002 revenues were 150.1 million and EPS was 69 cents diluted.

While the year fell significantly shorter than where we had projected back in July of last year, and while I cannot say I'm pleased with the performance, I can say that in light of the continued economic and political turmoil affecting global markets and the significant losses experienced by many of our high tech colleagues, the strength of our business strategy has pulled us through a very challenging period.

We're cautiously optimistic that the worst is behind us at this point.

Looking briefly at our business units: Defense business in the quarter was up sequentially in year over year, and importantly we continued the trend for the last two quarters with another good quarter of bookings that continued to fill the pipeline of defense business.

Medical imaging was down in the quarter as we indicated, putting it down five percent from last year, due primarily to reduction in orders from CT customers as they began shipping their next generation CT systems that we're not designed into.

In addition, we experienced some reduction in revenues resulting from customers migrating to our new higher performance products, allowing them to process algorithms with smaller configurations, thus resulting in reduced average revenue per system and [inaudible].

During the year we secured three new design wins in medical imaging, expanding our penetration in MRI, securing a design win for next generation pet system, and capturing a design win for new digital angiography system.

These designs wins will be expected to transition through a typical development cycle and should begin moving into production in the 12 to 18 month time frame.

The [inaudible] Solution revenues were down in the quarter for the year primarily due to the continuing slump in the semiconductor capital equipment manufacturers market.

However, we secured another new design win within that market during the quarter, bringing the total to 13 across multiple OEM customers spanning start-ups to first tier OEMs.

And we experienced a strong bookings quarter that a semi conductor OEMs continued to move their developments towards production.

In addition, included in the significant orders for the quarter were orders from invision technologies valued at approximately 1.3 million dollars, for invision's high end CTX 9,000 DSI explosive detection systems to be installed at airport baggage systems.

What are we doing in wireless?

Well, while some progress was made with the current financial situation in wireless markets, time to revenue for Mercury to ship significantly to the right.

I don't want to guess how far to the right but it's likely measured in years and not months.

Therefore, while the team will continue to pursue business within the commercial wireless space station market, we have begun to refocus several warehouse sources into adjacent telecom application areas where there's a greater potential for revenue in the nearer term.

Also, within the defense communications area, there's significant opportunities in the Signet [ph] And Carment market space and software defined radio for Mercury's products and competencies.

There's increased focus in these application areas since September 11th and Mercury plans to capture significant share of the opportunities anticipated over the coming years.

So we are focusing some of our wireless resources and investments into this market opportunity.

Now, before I start talking about next year and beyond, let me ask Jack to review the rest of the financial details for Q4 and the fiscal year.

He'll give you the company's initial financial outlook for Q1 and also for fiscal 2003.

Then I will share with you some final comments then we'll take your questions.

Jack, you're on.

Thank you, Jay.

Good afternoon.

We had a very strong Q4, ending the fiscal year on a positive note.

Before reviewing the details of the quarter and the year and discussing the outlook for next year, I want to highlight a few points.

Q4 revenues were 43 million, 12 percent below the fourth quarter last year but 23 percent above Q3.

Operating income for the quarter was five and a half million dollars, although that's a significant decrease from Q4, 2001, our operating income was a very respectable 13 percent of revenues.

Earnings per share for the quarter, 24 cents, compared to 37, in Q4, 2001.

Both revenue and EPS results for the quarter were within the guidelines we established at the beginning of the quarter.

For the year revenues declined to 150 million, a decrease of 17 percent over the previous year.

And our earnings per share for the year decreased from a dollar 33 to 69 in 2002.

Turning to the specifics that are fourth quarter and fiscal year 2002, I'll summarize revenue by business unit, then discuss the operating performance and finally the balance sheet and cash flow highlights.

All comparisons we go through will be to the comparable period last year unless otherwise noted .

Defense electronics increase eight percent to 34 million which represents 79 percent of total revenues during Q4.

A recent acquisition the IO center of excellence, contributed three million in revenue in the quarter, which is consistent with our expectations.

From year defense electronic revenues decreased 18 percent to 98 million for 65 percent of the total revenue.

Year-over-year decline is addressed in detail in the Q3 call resulted from the protracted transition and administration, the defense replanning and prioritization process, as well as the shipping of priorities to the operational necessities of the war on terrorism.

For the quarter, medical imaging revenues decreased 52 percent to 6.6 million which represented 15 percent of total revenues during the quarter.

For a year medical imaging revenues decreased five percent to 41.4 million or 28 percent of total revenues.

Through the first three-quarters of this year, medical imaging revenues were higher than the corresponding quarters in 2001, due primarily to strength in magnetic resonance and digital immanualing systems as expected as Jay summarized earlier the fourth quarter imaging revenues declined due to lower sales of the CT systems.

Our commercial revenues decreased significantly, 31 percent, to 2.2 million, in the quarter.

For the year commercial revenues decreased 37 percent to 10.5 million, or just seven percent of total revenue.

The decrease in the other commercial revenues was due primarily to the down turn of the semi conductor manufacturing segment.

Turning to gross margin, the gross margin percent was 64.4 percent for the quarter just ended, and that's consistent with the margin in Q4, 2001.

For the year, gross margins were down slightly to 65.2 from 66.Nine in fiscal year 2001, and that's due to business mix, higher inventory reserve requirements, and also lower margin development programs.

SG and A expenses decreased slightly to 12.9 million or 30 percent of revenues for the quarter.

For the year, SG and A decreased to 48.9 million or 33 percent of revenues.

Decrease in expenses quarter-over-quarter as well as year over year was primarily due to the rededuction in expenses associated with the completion of the implementation of the new financial manufacturing and administrative computer system which was completed at the end of Q1.

R and D expenses increased 20 percent to 9.3 million for the quarter, representing 22 percent of revenues.

For the year, R and D expenses increased 13 percent to 34.4 million, or 23 percent of revenues.

Engineering expenses this quarter were higher 10 last year, primarily due to the addition of new development programs with required increases in head count and direct project costs associated with these new programs.

The increase in R and D expenses as a percentage of revenue was due to the combined effect of the lower sales volume and the higher R and D spending.

Operating income for the quarter was five and a half million dollars.

It was a respectable 13 percent of revenue.

But it was off 49 percent from the Q4, 2001 levels due primarily to the lower sales and higher R and D spending.

For the year, operating income was 14.6 million, representing 10 percent of revenues.

Nonoperating income for the quarter was two million, down slightly from Q4, 2001.

For the year, nonoperating income was 7.4 million, up from 5.6 in Q1.

I'm sorry.

In 2001.

The primary drivers here were the elimination of losses in our joint venture beginning on Q3, 2002 and lower net interest income.

The effective tax rate for the year ended June 30, 2002 was 28 percent.

That compares to 32 percent in the previous year and decline in the tax rate was primarily attributable to the reduced profit levels .

Net income decreased by 38 percent to 5.4 million or 13 percent of revenues for Q4, 2002.

For the year, net income decreased by 48 percent to 15.8 million or 11 percent of revenue from 30.7 or 17 percent of revenues in FY 2001.

Turning to the balance sheet and cash flow highlights, our DSO increased to 67 days as of June 30th up from 64 days in June 2001.

And slightly higher than our typical range in the low 60s.

This increase in DSOs is due primarily to the distribution of revenue within the quarter.

The accounts receivable balance of 31.8 million at June 30th is lower than last year due to lower sales.

But it is substantially higher than Q3, 2002, ending balances due to the substantial increase in revenue from Q3 to Q4.

Inventory at year-end was 14.5 million.

That compares to 15 million at the end of March and 12.8 million at June 30th, 2001.

As a result of the increase in inventory and reduced revenue levels inventory turns decreased to 4.2.

It was down from 5.4 reported a year ago.

The increase in inventory balances reduced inventory turns was due to inventory requirements to support a number of development programs and also due to the fall off in revenues over the last 12 months relative to the company's original projections.

We're going to focus significant attention in improving our operating and supply chain processes and expect to improve on these measures in 2003.

As reported last quarter, we completed the acquisition of Myriad Logic, a leading developer of IO technology based in Silver Springs, Maryland.

The total sales price of 7.5 million consisted of 7.5 million cash payments and 400,000 of transaction costs.

The purchase price accounting is summarized as follows and is consistent with the preliminary purchase price disclosed in the 10-Q.

12.3 million of networking capital in fixed assets, 3.4 million intangible assets.

Those intangible assets have a useful life of four years.

4.2 million of goodwill. 1.3 million of deferred tax liabilities and .3 million of other.

Annual amortization of the intangibles will be 850 K. Goodwill under the rules as you know is not amortized but is subject to an annual impairment test.

As expected, the IOC operated at near break even for the quarter on a GAAP basis including the amortization of the intangibles.

We also completed our share repurchase program in Q3.

During 2002, the company purchased 1.1 million shares of common stock for 35 million and an average acquisition cost of 30.50.

As of June 30th the company the 21.1 million outstanding net of the treasury stock.

Cash in investments at June 30th were 74.1 million compared to 95.6 million at the end of last year and 96 million at the end of Q3.

This decrease was the result of the factors just reviewed.

A recap of the significant cash flow items for Q4 is as follows.

Free cash flow in the quarter, net income was 5.4 million.

Depreciation and amortization, including the 850 resulting from the IOC acquisition, was 2.3 million.

We had cap ex of one million and operating capital increased by 8.7 million, primarily due to the increase in accounts receivable.

This resulted in negative free cash flow for the quarter of two million.

The negative free cash flow is primarily the result of the increased increase in accounts receivable due to the revenue increase Q4 versus Q3.

Additional cash outflows during the quarter include 17.5 million for the repurchase of stock and the 7.9 million paid for the acquisition of Myriad Logic.

Free cash flow for total F Y 2002 will approximate 15 million dollars.

In terms of our outlook for FY 2003, because you all know we continue to be in a broad economic and geopolitical environment with a great deal of risk that limits predictability of operating results.

As a result, we've developed a conservative based plan for revenue for 2003 and structured investments and expenses in order to achieve a solid financial return while continuing to invest in critical programs for the future.

We will of course revise our planning and guidance as we progress through FY 2003.

Should business conditions and or forward visibility change.

In addition we've improved our short term forecasting process specifically in forcasting revenue levels in the near term.

Based on a review of our manufacturing and delivering lead time and a look back at history, it's clear that Mercury typically requires 75 to 80 percent of the next quarter's shipments and beginning backlog.

Book ship [ph] Returns business typically doesn't exceed 20, 25 percent of our shipments in a given quarter.

Therefore we're placing a lot of reliance on the backlog position and will only predict turns businesses at the levels experienced by the company over time.

For fiscal 2003, we expect revenues to grow about six to 10 percent, excluding a contribution from the acquisition of IOCE, including the full year contribution of the acquisition we expect revenues to grow between 13 and 17 percent, which represents 170 to 175 million in revenue.

Some specifics by business: We expect that the defense business will grow 10 to 15 percent in 2003.

Excluding the contribution from IOCE.

We expect EEG to grow 20 to 25 percent including the full year contribution of the acquisition.

In the medical business, we expect revenue to decline approximately 15 to 20 percent next year due to continued fall off of revenues in the CT modality and due to the lower revenue per system and the other modalities that Jay mentioned.

For the OEM group we expect significant growth here, nearly double the 2002 levels, based on the ramp of new semi conductor systems currently in development and to a lesser extent due to shipments of systems for use in explosive detection systems.

As far as wireless goes, our base plan for FY 2003 does not include any base station revenues.

There's a small up side potential for revenue in the adjacent telecom areas that Jay had identified.

Operating margins are expected to be 12 to 14 percent of sales for the full year, with some variability as we've experienced in the past during the year, depending on revenue levels and business mix.

Gross margin as a percentage of revenue will approximate the levels achieved in FY 2002.

For the full year we expect SG and A to run about 30 percent of sales and R and D in the low 20s as a percentage of sales.

Nonoperating income will decrease in 2003 reflecting the following factors: First, we've eliminated the losses on our Agile Vision joint venture which we sold in Q3.

Secondly, the lower net interest income due to reduction in cash balances to an extent lower interest rates and finally the deferred gain on our SSB business amounting to 1.6 million per quarter will end in Q3, 2003.

Our tax rate next year is expected to be 30 percent.

We expect earnings per share of 90 cents to a dollar.

At the mid point of that range that represents a 35 percent increase over the results for 2002.

In terms of balance sheet and cash flow trends, we expect modest improvement in DSO and inventory turns reflecting our emphasis on operational effectiveness.

We're looking at capital expenditures in the range of seven to eight million and depreciation and amortization of about eight million, including the amortization of the intangibles on the recent acquisition.

Based upon the above, expected net income and capital requirements to support the increased sales levels, we'll expect to generate free cash flow of approximately 20 million in fiscal year 2003.

For Q1 we expect revenues in the range of 37 to 40 million.

The mid point of this range would represent 10 percent growth over 2002.

But these revenue levels, operating income will approximate 10 percent and we'd estimate EPS will be in the range of 16 per 20 cents per share.

At this point I'll turn it back over to Jay.

As you see we're projecting some growth over the business over the next four quarters.

All current indications suggests we'll see increased worldwide military investment and enhanced ISR or intelligence surveillance reconnaissance capability.

That should benefit Mercury in the coming quarters and years.

To provide increased focus and responsiveness to customers, we've recently restructured our worldwide defense team.

But the goal of increasing our market share in all target segments of the defense electronics market, we've transformed the organization from a single horizontal sales force selling all products for all applications to all defense customers into a group of vertical or market or application segment focused teams.

Each market segment team is responsible for understanding or responding to its specific target customer requirements, and profitably growing the business from the assigned segment.

Initial segments include radar, Signet/comment [ph].

Sonar and smart weapons and image exploitation.

As I stated earlier, while we continue our activities in the telecom market, we will refocus some of our investments in favor of the promise is defense applications in Signet [ph] And software defined radio, where the same skill sets and technology are applicable.

Continuing with our FY operating plan are those investments in both product development and market development that are anticipated to significantly expand the company's served market potential.

The company's sustainable competitive advantage will continue to be rooted in superior product innovation.

While components of our system is based on standards and will be available from third parties, for example, Lennox and chips with rapid IOA connect on them, the architecture of our multi computer system, and our unrelenting focus on delivering the optimal performance solution for each customer's unique requirements will continue to provide Mercury Computer systems with a strong competitive advantage.

AS I stated, we're optimistic, but the worst is behind us, there remains a cautious optimism to continue that certainty throughout the market.

Therefore we've taken a conservative view as we start the new fiscal year.

We'll control our expenses and investments accordingly and we'll adjust them as the plan develops.

However, we're not going to sacrifice our future by cutting the investments that will maintain our market leadership.

We'll continue to make what we believe are the right strategic product development and market development investment decisions to keep the company in a favorable position to capitalize in a growing demand for high performance multi-computer solutions for demanding applications.

Thank you and we'll now take your questions 00:00:00

If you have a question or would like to ask a question, simply press star one.

To ask a question press star followed by digit 1.

There will be a brief pause.

Once again that's star one to ask a question.

Our first question will come from Don Young with UBS Warburg.

Yes.

Thank you.

I'm wondering, Jay, if you could comment on the amount of your backlog, that is likely to be turned into revenue in 90 days or less.

If we could get an idea how that backlog compares with a year ago.

And the other thing I wanted to ask you a little bit about is the whole financial model of Mercury.

It looks like with the revenue outlook that you're projecting you'll be below 2001 revenues but you're going to be far above 2001 in a number of expense areas, really all of them, engineering, SG and A, both.

I'm wondering if some of - if there's a structural change in how you see your financial model?

Is this a temporary thing that you're consciously running with a higher expense structure than you need longer term and you're hoping to recover the revenues or is the business model of Mercury changing?

I'll ask Jack to answer the backlog question, Don.

He's got the data sitting there in front of him.

Yeah, in terms of the backlog, as I mentioned.

We look back historically, Don and have seen that the company is successful in operating a reasonable level of efficiency if we count on having 75 to 80 percent over the next quarter shipment in backlog.

So our outlook is consistent for 2001 with that.

That percentage would be consistent with where we were in setting guidance historically over FY 2002 we got more aggressive with that percentage and we're continuing on more book ship more turn activity.

We also had difficulty in making the short-term forecast.

What I was trying to get at Jack, is your short-term backlog the same?

Up or down versus a year ago.

It has improved over a year ago.

Thank you.

How about the other question on the business model?

We've got probably about 100 more associates on board this year than we had at the end of 2001.

I may have the wrong number there.

But I know we've added people.

I just don't exactly remember how many.

We did so consciously.

We looked at what we needed to do in terms of investments to make and certainly developing the semi conductor marketplace, for example, significant investment there in terms of people recognizing that that business isn't going to come to fruition for a while.

So while there's some revenue coming out that it's arguably break even at this point.

So that's an investment and it's a significant one.

The wireless business we certainly expected that to two years ago to be generating revenue by now.

That didn't happen.

But we continued to maintain both the development staff and the market staff in order to continue to pursue not only that but also tangential opportunities that we believe will result in our eventually generating some revenue there.

As I said earlier, I believe that the opportunity in hasn't gone away, it's just shift to the right.

The end users, the supervisors providers are going to need the capability that we've been able to generate to be able to increase the revenue that they're going to generate from that spectrum.

So I think the answer is that the business model - you may consider it to have changed, but I think that what we're doing is just making some heavier investments in times when the revenues are down slightly and we expect to get back on track.

It's not going to happen overnight.

So you wouldn't change your long-term view of the model.

You'll just see a more extended period in front of it.

If I look at three or four years, based upon the assessments we've done, that we can get back to a 20, to 30 percent annual compound growth rate, go through 2005 and 2,000 six

We'll now move to Steve Wartman with [inaudible] And company.

Couple of questions on the defense side.

You indicated that bookings were strong.

Can you give us the total for the quarter?

We booked just under 40 million in defense for the quarter.

Okay.

Also, can you indicate which areas you're starting to see some strength?

I mean is sonar starting to come back at all or is it just Signet and radar, starting to pump in?

We did see a good sonar basis last quarter.

I'm not ready to say it's a trend or that the sonar business is starting to come back.

But it was a good sized piece of business.

The strength is coming from our traditional areas.

We haven't seen activities from the homeland defense outside of this invision business.

I can't say that we've had any revenues from that area.

So basically the high end radar stuff is the principal contributor to the revenues.

Going forward, you don't see any reason why your defense business should exceed the rate of procurement growth and R and D growth in the budget going forward as is the case in 1999 through 2001?

I'm not sure I can answer that question

Thanks a lot.

We'll now move to Rob Stone with SG Cowen Securities.

Hi guys, it's nice to see the defense segment coming back.

We agree.

Given the momentum that you have there, I wonder if you could put a little more color around the projection for Q1 of fiscal 2003.

Is it continued decline in the medical and OEM segments that count for the sequential decline in revenues?

We typically have, when I look back in history seasonality where Q4 has been the strongest quarter and Q1 has been the softest.

So there's some part of that, Rob.

But I think the other thing we've seen our black log has increased as we mentioned in the release to a record level.

But expanded deliveries.

So we're seeing more coverage for total year FY 2003 and not as much proportion of coverage for Q1 revenues.

Okay.

That helps me understand what you're thinking about the aggregate revenues.

But does that mean you expect defense to be down sequentially?

In other words, are all the segments still on the same trend or is there some disconnect there.

We have to do a little research here, Rob.

Another mix related question.

I think in your prepared comments about the gross margin for fiscal 2003, you indicated that you expected the range to be similar to this year.

On the other hand, fiscal 2002 had probably an unusually low contribution from defense at times which has tended to be higher margins than OEM or medical.

And in particular if medical is going to drop off as a percent of sales this year, wouldn't that be a margin sweetener for fiscal 2003?

Yes, that would be a favorable trend.

There's also a mix inside the business units in terms of the development contracts versus the steady state shipments.

We'll have some additional development programs in FY 2003 which will press the margins to some level.

So net net you're expecting gross margins approximately the same year as the full year figure for this year?

That's correct.

Andrew Hong with CIBC World Markets.

Could you comment on your confidence in the defense backlog today versus the past three to six months?

Confidence in the defense backlog.

We have it in the backlog.

We're very confident that we'll be able to ship it.

I don't know what kind of conference level do you want me to express, Andrew.

Maybe being on a scale of one 10 being the most constant, compared to when you reported, the March quarter results.

As we said the backlog is a lot higher than has been for a long time, if ever.

So we have a lot of confidence that the business is building and that we'll be able to produce the results that we're planning for on the revenue side as a result of the backlog that we have.

Can you comment maybe on the order trends for the defense business?

For the first or for the month of July.

Looking on at it on a one-month basis, it just doesn't compute.

Sorry.

Okay.

And our next question comes from Brad Muke [ph] With Invest Tech.

On the defense business, the 34.1 million in revenues in the fourth quarter, can you segment that between domestic and international.

We'll take a look and see if we can do that.

It's not a number I had at the top of my head here.

I was also going to ask the same question applied to the 40 million in new defense bookings.

Jay, can you discuss your relationship, development efforts on the telecom side, both wireless and some of the adjacent areas you mentioned in terms of cracking into that community?

We continue to believe we're doing the right things and making progress.

The bottom line is that we don't see how we're going to generate any revenue out of that for some period of time.

There's simply the service providers are in trouble financially.

They bought a lot of spectrum.

They're in debt up to their ears and over their ears trying to pay for it.

They don't have the money to invest in the infrastructure.

I'm no telecom industry analyst, but if you talk to your brethren they'll tell you what's going on there.

And all that says is they're not building from the equipment suppliers that we would sell to.

So we just don't see that anything is going to happen dramatically anyway for us within that space station market for some period of time.

So as I said there are other segments of the telecom business where there are opportunities to sell equipment.

The Ericssons and the Lucents and so forth are obviously still generating some revenue.

So they're selling some product and so we're targeting areas where they are in fact still selling some products and trying to get into areas that are maybe not traditionally Mercury in terms of the application, and also we're taking those resources and applying them into the defense space where there is a golden opportunity for short-term development contracts, if you will, funding that could be applied to building a product or products which can be used on both sides.

Our model for whether it's the commercial world or the defense world, is that of building a scalable communication computer.

And the functionality required will be pretty much the same regardless of whether you're on the defense side or the commercial side.

So we believe that the commercial markets will eventually benefit from the work we're going to be doing within the defense [inaudible] Intelligence space.

We continue to see a shift to the right and you're investing in an area.

Obviously we know what's going on in the telcom community.

I understand the application of the technology and how important it is.

The one missing ingredient is I haven't heard the customers provide the same validation by saying how important it is and they're going to sign up as soon as financial conditions start to improve.

I was looking for some indication with the Lucents and whatnot that you're actually gaining some traction internally and are seeing the technology being accepted.

Again, we're not making any investment decisions for our type of technology because they are telling us anyway that they're not working on the next generation base stations.

They don't see anybody out there to buy them.

It's the next generation base station.

It's not that they're not selling today's stuff, they certainly are.

It's the next generation stuff.

Moving on to the medical, there's some next generation CT systems that are going out don't have your technology in them.

Could you discuss a little bit what you're rectifying that so you can catch the next product cycle.

The business we've missed came as a result of not having the products that were required and it was a conscious decision we made a couple of years ago.

In one case one of the customers wanted us to continue the shark [inaudible] Which was based on the [inaudible] DSQ.

We made the decision we did not want to do that.

We did not think it was the right thing.

So they went off and are doing business for with a smaller start-up.

In the other case the customer decided that they were going to bring an in-house and go with sort of commercial off the shelf technology, which is Intel, products that are Intel based.

So we looked at that and decided at the time that we did not want to start investing into an Intel product family.

The customer made their decision both at the very lowest level, which is that at the semi conductor, the Intel microprocessor versus the Motorola microprocessor.

And they also made a decision at the very highest level which is that of deciding to go with what they considered to be the premiere supplier of again components, Intel.

So we're bounded by those two facts, if you will.

And we decided that at the time there wasn't a big enough market for us globally utilizing the tin tell products and we could only afford to invest in so many things.

That strategy has been reconsidered and we're looking at how we can cover those bases now not just for medical but for other opportunities, too.

As a result of changes in the technology and changes in the landscape for and you say for our customers, there may be more opportunity now to capitalize on technology coming out of an Intel as an example.

So we missed that cycle but we expect we'll be back in for the next one.

Any luck on the segmenting of revenues and bookings?

International revenues as opposed to a percentage of total revenues in defense were about 10 percent.

And was the percentage of the bookings comparable, the 40 million?

I'm going to say yes.

Thank you.

And as a reminder if you have a question press star and the digit one.

We'll now move to Paul Slets [ph] With Capital Flows.

Two questions, really.

One is you mentioned the semi conductor imaging area.

First of all, historically just a very brief comment that's all that's necessary.

But historically you've been very dependent on radar as a big piece of your revenue stream from the defense area.

And I'm wondering how the tone of business and the radar area is presently, and the second question is you made some positive comments about the semi conductor imaging area and I wonder if you could make a few comments about what the actual specific application is and who you're partnering with there.

I'll answer the radar one first then you'll have to come back for the semi conductor one.

Radar is the major component in our defense business.

It covers the spectrum.

When I say the spectrum, that's probably the wrong word to use.

We cover everything from radar systems that are flying wide-bodied to tactical radar systems which is something relatively new, whether it's part of the F 16 upgrades or potentially into the F22 joint strike fighter.

That's all relatively new.

The technical part of it.

It's kind of exciting because we'll have more technical platforms than there are of the wide bodied.

On the other hand, on the wide body takes hundreds and hundreds of and processors and the tactical aircraft, you don't have room for more than several.

In one case you have shipment of boards, the other one you have a large shipment of processors in one or two boxes.

Nuclear waste, we have the basis pretty well covered, Paul, but I suspect to see the radar business to continue to grow, continue to be the main stain of our business.

There's wonderful opportunities there boast DRA domestically and internationally.

And I would be surprised to see if there were over 100 million dollars in a few years.

The other question was simply you made some positive comments about the semiconductor engineering area.

I'm wondering if you could talk about the specific application in this case and who you're partnering with.

Well, we have design wins that range from start-ups to the premiere semi conductor inspection suppliers.

We're not at liberty - I think we put in our press releases, one or two of them, probably the most important ones we're not at liberty to disclose.

As far as the application is concerned, it's basically to detect defects in wafersand the ability to do that is obviously important.

It becomes more extremely difficult as the line gets a lot finer as the wafer get larger.

So it needs a lot more processing power.

It also needs new algorithms, and the reason we've been able to crack into this marketplace is because the customers now realize that they need programmable systems in order to be more quickly implement new algorithms that are the key to finding the defects.

Jay, are these symptoms aimed at the production area or aimed at the Q and A area.

Both.

It starts at the R and D area with high resolution relatively low speed devices and then you move into production where you've gotta do higher speeds but probably don't capture as much data or do as much processing on it.

Thank you.

We will now hear from Glen Primack [ph] With Broadview Advisors.

Good afternoon.

Let me give a little more detail on the software defined radio market and how that applies towards military.

I can't understand the communication side.

It seems like it lowers the cost for an operator on delivery of services but what's the military application there.

Well, there's sort of a long story associated with that, Glen.

And I think the best way to get the details of software defined radio since it's probably about an hour's presentation to understand it, is to come to our annual list conference which we're holding in September.

I'll be happy to share the details.

However, let me say this, since you asked a question, there is not much overlap today between the software defined radio as the military views it and the commercial world use it.

They really are somewhat different priority because the military is looking for software defined radios to be applicable from the handled held walkie talkie, if you will, all the way up to command level base stations and we're not involved in hand-held walkie talkies, certainly on the hardware level.

But we are doing a number of things from a standards perspective working with one of the government agencies and that's sort of the interesting part of it, is the influence that we think we can have by working at the levels that we are.

And defining areas that will eventually be able to utilize our technology.

You can help form the standards, then?

Yeah.

Okay.

Anything further?

No.

That's fine.

I'll wait until the analysts call.

I look forward to seeing you there.

There are no further questions.

I'll turn it back over for closing remarks.

Thank you all.

I appreciate your spending the time here.

And we're looking forward to an excellent year and looking forward to talking to you again in October.

That's it.

Good night

That will conclude today's conference.

We do thank you for your participation.