Mercury Systems Inc (MRCY) 2003 Q1 法說會逐字稿

This is Premier conferencing. please standby. Good day and welcome , everyone, to the Mercury Computer Systems, Incorporated first quarter fiscal 2003 earnings Earnings Results conference call. Today's call is being reported. At this time, I would like to turn the call over to the CEO Jay Bertelli. Go ahead, sir.

Thank you, Kelly. Good evening, ladies and gentlemen, and welcome to our first quarter fiscal 2003 conference call. We had another great quarter. A, as you know, our 27th consecutive quarter of profitable performance. I'm going to turn the call over to Jack, in a minute, who will review the performance of the quarter as well as our outlook for the second quarter and then I will make comments on the business.

Before we begin this evening's call, we need to remind you of the risks associated with making forward-looking statements. Since we don't have me to put you to sleep here anymore, I'm going to fill the role of reading the Safe Harbor Statement. During this conference call, we may 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 of all risks and uncertainty that could cause actual results to differ materially from those projected or anticipated. Factors that could cause a contribute to such risks and uncertainty include, but are not limited to, general economic and business conditions, competition, changes in technology, and methods of marketing, delays in completing various engineering and manufacturing programs, changes in customer auto patterns, changes in product mix, continued success in technological advances and delivering technical innovations, production deliverance due to quality issues and outsourced components and various other factors beyond the company's control. These risks and uncertainties include such additional factor as are described in the company's recently -filed reports with the Securities and Exchange Commission in the USA. The company wishes to caution listeners of today's conference call, not to place undue reliance upon any such forward-looking statements which speak only as of the date made. With that, I will turn it over to Jack.

Thank you, Jay. Good afternoon, all. We did have a strong first quarter increasing revenues by $4.5 million, or 13%, and our earnings per share by 12% year over year. Before we reviewing the details of the quarter and discussing the outlook for next quarter, I will highlight a few key points. First quarter revenues were 39.4 million, up 13% from the same quarter last year. Our operating income for the quarter was 4 million, which represents a respectable 10% of revenues. Earnings per share for the quarter was 19 cents and that compares to 17 cents in the same quarter last year, and finally, both revenue and EPS for the quarter were within the guidelines we established at the beginning of the quarter.

Turing to the specifics for the first quarter, I'll first summarize the revenue by business unit, discuss the overall operating performance, and then review balance sheet and cash flow highlights. All comparisons are of the comparable period last year that is the first quarter last year unless otherwise noted. Defense electronics revenues increased 18% to $25.5 million, which represents 65% of our total revenues during the quarter. The increase year over year is the result of strong bookings in Q3 and Q4 of last year and also to the inclusion of our i/oI/O center of excellent [inaudible]ENS, IOCE in Q3. To give you a feel of the relative contribution of the IOCE that company did $1.8 million in revenue in a comparable period last year as a stand-alone enterprise.

For the quarter, medical imaging revenues were essentially flat at $9.8 million, which represents about 25% of our total revenues during the quarter. This reflects the continued trend of lower sales into ct systems which was offset by increased sales for use in MR and digital X-ray systems. OEM solutions sales increased 21% to $4.1 million and that represents 10% of our total revenues for the quarter. The increase in revenues was due primarily to the increased sales of airport baggage and, scanning systems. However, the segment continues to be negatively impacted because of the depressed state of the Semiconductor market.

The backlog of the total company covering the next 12 months is $64 million. Our book-to-bill ratio for the quarter was slightly less than 1, but that follows an extremely Q4 2002. I would also point out that this ratio was consistent with the book-to-bill ratio that we had in the first quarter of 2002. Looking at gross margins, our percentage was 65.1 for the quarter consistent with recent experience and also our expectations. Compared to Q1 of last year, margins are down about 3.7%. That's primarily due to the inclusion of IOCE revenues which carry lower margins than our traditional business.

SG&A expenses increased to $12.6 million for the quarter compared to 11.9 million last year. The increase in expense was primarily due to the acquisition of IOCE, which includes the amortization of intangibles of about 200 k. SG&A expenses were down slightly from the preceding quarter. R&D expenses increased 15% from a year ago to $9.1 million, or 23% of revenues for the quarter. The increase from Q1 of last year resulted from the increase in development programs that ran throughout 2002 and to a lesser extent, the inclusion of IOCE. Again, R&D expenses were down absolutely from the preceding quarter.

Operating income posted $4 million, representing 10% of revenue for the quarter. Non- operating income for the quarter was essentially flat with last year and reflects lower interest earnings driven largely by the decrease in the cash balance offset by the elimination of losses from our investment in Agile Vision, which as you recall was sold in 2002. Non-operating income includes $1.6 million deferred gain on the sale of our former SSBU. These payments will continue through the third quarter of this fiscal year. The effective tax rate for the quarter was 31%. That compares to 32% in the same quarter last year.

Net income was essentially flat at $4.1 million, or 10% of revenues for the quarter. Our EPS increased to 19 cents from 17 cents in Q1 '02.

Turning to the balance sheet and cash flow highlights, our days sales outstanding decreased to 54 days at quarter end, which is substantially better than our expected range. This decrease in DSOES is primarily due to initial progress in our revenue process improvements during the quarter. AR balance at 23.5 million at September 30th was significantly lower than our June 30th balance of 31.8 million due to the lower shipments in Q1 and also the increased attention. This decrease in AR resulted in a significant contribution to free cash flow in the quarter. Inventory increased to $14.8 million during the quarter compared to $14.5 million last quarter and $12.5 million a year ago.

A number of factors contribute to the inventory growth including the inclusion of IOCE and also the lack of visibility, predictability of revenue that we experienced in 2002. While our inventories turned increased to 3.7 from 3.5 turns reported a year ago, we continue to see a significant opportunity for improving many aspects of the supply chain and inventory management. This will be a focus of the team over the next several quarters. Cash and investments increased $14.8 million through an excess of $86 million as of September 30th, and that's from $71.4 million at June 30th, 2002.

A quick summary of the cash flow for the first quarter is as follows. Net income of 4.1 million. Depreciation and amortization, 2.0.

We have capital expenditures of $1.4 million. And we had a decrease in operating capital of $10.2 million due largely to that outstanding performance in acan'ts Accounts Rreceivable. This resulted in free cash flow of $14.9 million for the quarter, and again, the strong free cash flow has primarily resulted in significant decrease in accounts receivable. Our head count increased to 601 at the end of Q1. That's up from 593 at year- end and 535 a year ago. The increase over last year includes Associates, about 30, from the acquisition of the IOCE, and the remainder of the increase is largely in R&D and selling personnel.

Also would like to highlight press release that went out this morning on the stock re- purchase program. We did announce that our board approved a share re-purchase program with an initial authorization to re-purchase up to $12.5 million worth of the company's stock. The primary objective of the plan is to re-purchase shares for general purposes including the issuance of shares in connection with our employee stock option and purchase plans. The current share re-purchase program is expected to continue through December 31st, 2003, unless amended by the board, and I would point out that the company completed its previous share re-purchase program during Q4 of last year. For the second quarter of 2003, we expect revenues in the range of $40 to 43 million. The mid-point of this range would represent 11% growth over the same period last year, and at these revenue levels, we would, again, expect operating income to approximately 10%, and we would estimate EPS in the range of 18 to 22 cents per share.

Again, the mid-point of this range would put us at 25% year-over-year growth. We are maintaining our full-year outlook for revenues of 170 and 175, and EPS at 90 cents to a dollar.

In summary, I would say that Q1 Q3 was a good quarter. Revenues, margins and expense levels all approximated expectations. We did make progress in managing accounts receivable and had outstanding free cash flow for the quarter. We'll continue to closely monitor bookings trends given the broad economic and geopolitical uncertainty that we face, and finally, we will continue to focus more attention on improving our inventory management. Jay?

Thanks, Jack. We're going to our defense electronics business, the post-September 11th global environment is driving governments to increase their requirements for more advanced ISR intelligence and reconnaissance capabilities and to improve domestic security. Mercury typically drives somewhere between 40 to 50% of its revenues from development programs. Many of which are funded from the RDT & E budget, which is the research development test and engineering development. The rdteRDTE, if you have been following the latest goings on in Washington, is projected to be the highest ever in the $45 billion plus range. That bodes very well for new development activities in various segments that we participate in.

However, I wouldn't expect to see it in the next quarter or two. In a recent memorandum in military departments and related agency heads, the U.S. secretary of defense, Mr. Rumsfeld, indicated, quote, the war on terrorism does not supplant the need to transform dodDOD. Instead, we must accelerate our organizational operational business and process reforms. End of quote. Included with the memo was a draft of the DOD's DOD's top 10 priorities for the next 12 months. While successfully pursuing the global war on terrorism was number one in priority, the second highest priority was developing a joint concept of operations to integrate air, land, and sea Intelligence GNS surveillance and reconnaissance and translate this new joint concept into an acquisition strategy.

Again, while it will take some time for these initiatives to impact Mercury's defense business, we are well positioned to capitalize as the DOD implements this new joint strategy. Looking for a moment at our medical segment, we see our medical imaging business as a solid steady, long-term contributor driven primarily by the timing of design winds. The health care market, while not totally immune to general market fluctuations fluctuation, is typically less volatile and more predictable than consumer business or the defense business. There is a constant drive for better any CalCare and medical imaging systems provide diagnosis, less invasive surgical treatment options, thereby, lowering the overall cost of getting better. As a result, we expect this market to continue its steady growth, and we would continue to work to achieve new design winds in each of the major modalities.

The Semiconductor industry continues one of its worst-ever down cycles. The continuing down winds for Mercury remains at 13. Our customers continue their development activities so we see business, we're shipping product into that industry as a result of the development programs that they have. And so while we've been successful in achieving many design winds over the last couple of years, the company's future performance in this market is directly related to the timing and magnitude of this market's recovery.

We continue to work closely with our customers to be positioned to meet their requirements. We are had increased revenues from shipments for the high-end value-scanning systems during the quarter. We expect to see good performance in this obligation area as more imports integrate high capacity baggage scanning systems directly into their baggage handling conveyor systems. We continue business and product development efforts for both commercial and defense applications in the wireless communications business.

There are significant synergies between the two markets. T, the commercial and the defense markets allowing to us leverage our investments across the company. We are directing our investments and resources to their applications that are for the shorter time revenue to opportunity. Clear differentiators for Mercury as an investment are the mix of businesses in our portfolio and the strength of our business model. A percentage of the senior management's compensation each year is based upon how well we perform from a group selected from the Russell 200 index.

For the last couple of years while our revenue and earnings growth rates have been essentially in the middle of the pack, our profit before taxes as a percentage of revenues has placed us among the top 25% or better of the companies in the group. Management is committed to being among the best in all three categories being measured. With the strength of our business mix and the sound business model, we have been able to continue to investment in future while running a profitable operation.

We continue to focus on increasing the skill depth and experience of our associates. We added just over 60 new associates to the company during the last fiscal year with about half of them coming with our acquisition of Mmerilogic [ph] last spring, and in addition, we expect to add another 30 associates this fiscal year with about 30 of them being engineers. We're proud of the progress we're making we are confident of the future. Thank you, and with that, Kelly, we will take questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing star followed by the digit one. Woe will proceed in the order that you signal us and will take as many questions as time permits. If you would like to ask a question, press star one. We'll take our first question from Don Young of UBS Warburg.

Thank you, good evening. I wonder if you would describe what happened with the CT business. It seems like in your release, you were surprised by the level of business and could this trend continue -, or are we still looking at a significant reduction in the volumes with the CT sign?

One of our vendors didn't to order as quickly as they anticipated so they had to order additional systems from us.

Is that going to continue for a while, Jay, or is this a temporary wind for you?

I would not expect it to be anything but temporary. We see business next quarter, could be. It depends upon whether or not they're successful in getting their system to ship.

Thank you.

We'll take the next question from Andrew Hong.

Congratulations on a great quarter in a tough environment.

Thank you.

The first question goes to the book to bill. You said it was less than one for the quarter. I was wondering if you would give us maybe the orders for the defense business, specifically during the quarter.

Yeah. Andrew, we're not going to provide too much detail on the order rate for each of the business units. Defense was -- well, I will give you a sense of where they stand relative. Defense was the lighter of the businesses in the quarter in terms of book to bill, and medical was the strongest for the quarter, but, again, defense had a very strong fourth quarter of bookings last year, so I think when we look at the first quarter and the fourth quarter combined, we see a very strong six-month look back on bookings. .

Great. Okay, and in terms of some of the development programs that you're talking about on the defense side of the business, I mean, can you give us a sense of what kind of timeframe it would be before we expect to see any revenues from those programs?

That's where the crystal ball comes in, and I can't predict that far out, Andrew. All I can tell you is that with that kind of money being budgeted, we are about to see some of it, but when, I can't tell you?

One real quick question on the tax rate, the tax rate was 31%. Should we be using that number going forward?

Yes.

Okay, thank you.

We'll take our next question from Rob Stone with SG Cohen Securities.

Congratulations on a great start to the year.

Thanks, Rob.

Again, reflecting some commentary that's in the press release, Jay. You talk about the aspect of lumpiness and lack of visibility being inherent to the defense business. Do you feel like that's incrementally the same as, better or worse than when you were talking about the outlook at the Q4 call last time?

I don't think it's any better or any worse worse than it has. There's major pieces of business that could amount to anywhere from 5 to 10% of the quarterly number, even more than -- quarterly total number not just for the defense number that if one of those orders slips out a quarter, you know, we have a difficult time in making the numbers for the quarter. That's the message that I'm trying to get across to you, that this is not a steady run rate business. It's not a traditional run rate business. It's not like the medical business where we have -- I would say, you know, something like 90% accuracy in the forecasting capability.

That said, your level of comfort with your full-year picture, you know, 90 cents to a dollar and 1.70, 1.75 is the same as before?

Again, we're integrating it over a number of quarters and over that period of time, we believe that we'll be able to at least do those numbers.

Great. Thanks very much.

We'll take our next question from Lee Etzel from EmRing Capital.

A couple questions. One, you have done a wonderful job in improving DS will l, and I wonder if you can give me more color of what's behind that? Are you collecting differently than before? Is there different payment terms? Was there one large payment?

Sure. There are a couple of large drivers. First of all, we have a great customer base so we should have very strong DSOES anyway. The only reason we wouldn't get paid is if there are problems in paperwork or something like that that need to be followed up on and just reminding people that the receivables are out there, so we have increased the activity on the whole revenue process and looking at each of the drivers and activities and that paid off significantly in this quarter. You know, the receivables really, there were two factors driving it. One was Q1 revenue was lower than Q4, so we expected a decrease in accounts receivable from that phenomena, and then we exceeded that by improved collections.

Is this one large payment? Is there something that we can count on going forward?

It was not one large payment. It was across the board improvement in the aging. We look at the accounts receivable aging as a key indicator. I think we will look to continue this level of performance in the future.

Great, and one more question. If you look at IOCD, has that business performed in line with the remainder of your business year over year? Has that done better or worse?

IOCE has done actual --actually, a good acquisition gets integrated and you lose a little bit of visibility in terms of what the IOCE revenues are because those products are being incorporated into our systems and sold by the Mercury sales force, but there was growth in the IOCE business over their levels last year. Probably slightly in excess of the total company average.

Great. Thank you very much.

As a final reminder, if you would like to ask a question, please press star one, and we'll take our next question from Steven Wortman with Sidoti & Company.

Good afternoon of I was hoping you could qualify the amount of value screening revenue you got in the quarter.

Approximately a million dollars.

And the second question I had was just regarding a possible free cash flow range for the year given a strong 1Q performance.

Yeah, right now, I think if you looked at the guidance and worked that through, the free cash flow number would be somewhere around 20 to 24 million, with some potential upside there.

Thanks a lot.

Moveing on to Allen with Penn and Capital. .

Great quarter, gentlemen.

Thank you.

I'm relatively new to the story, so I hope my questions aren't naive, but I want to understand the earnings guidance as we get into the second half of this year. There are two issues that concern me. One is the fall-off in the CT medical imaging revenue, and the other is the quarterly payments that you've been receiving due to the sell of the business. Can you talk to me in terms of your visibility in the second of this year and how you get comfortable with the full year guidance you're providing today.

We still aren't comfortable, as Jay mentioned, with a full-year guidance. The second half has a bit more growth in it than the first half. We're looking for sequential growth throughout the year. In terms of the medical revenues specifically, we had guided and indicated that medical revenues would be down somewhere between 10 to 15% year over year. The increase that we're seeing in the MR business and the digital X-ray as well as a slower decline in the CT sales that Jay mentioned are going to help to mute that and help to contribute to that performance primarily in the first half of this year. So I think we're still comfortable with the total year performance. We have a strong 12-month back log at 64 million. That is very strong relative to historical levels and right now, we feel good about the total year, but we do recognize the backdrop of the general economic climate we're in. There's downward pressure perhaps in the Semiconductor area as we expressed before, and of course, the broad geopolitical environment maybe it would be helpful in earns it of a different question. In terms of this quarter, earnings and from the IBM payment contributed to how much of your quarterly results?

The CT revenues were fairly modest. There was a decline year over year in the CT revenues. It was a little ahead of our expectations, but there was a decline, so that did not contribute significantly to earnings. The SSBU payment was 1.6 million in the quarter, and we expect to get 1.6 million in each of the next two quarters and then that will decline in Q4. There is -- or deferred payout of about $1 million, an escrow payment that we would expect to get in Q4 as well, but beyond that, that would -- that payment would no longer be in the earnings stream, so the bottom line there is that the growth that you see in the second half is from operating income, so we see and anticipate expanding the operating income margins in the second half of the year.

Great. One last question, and I will let you go. Do you see that as a revenue-driven phenomena, or cost-driven phenomena?

I'm sorry. Could you repeat the question?

Do you see the improvement in the second half as being top-line, revenue driven, or are there cost opportunities where you can improve margins, even if you don't see a pickup in the military side of the business in the second half? ?

It is primarily driven by revenue. The cost model is essentially in place, you know, our costs are not volume driven for the most part, so as we see that sequential growth in revenue throughout the rest of the year, that will drive the expansion and operating margins.

Great. Thanks, again. Good job.

Thank you.

We'll take our next question from John Noon from Providence Investment Council.

Going back to the medical revenues again. Can I get a better understanding of what your expectations are for revenues going forward. You had expected negative 15 to 20% decline in those revenues, both the CT revenues that offset that. Going forward, do you expect the next three quarters tos achieve that negative 15 to 20% year over year growth in that segment of the business?

For the total year, the guidance was for the total year, not for any individual quarter in medical, so right now, I would say that given the strength in the new modalities that is, digital X-ray and the MR as well as some of the trailing CT revenue, again, we don't want to overstate that. That was still a significant decline year over year. We would probably expect to be closer to the 15% decline than the 20%.

And that's included in your guidance? ?

Yes.

Okay, and as far as the CT revenue, that one customer that you said didn't ship their new product as scheduled, is your expectation that they will get that product out this quarter that we're in now?

Not clear. Could be.

Does your guidance indicate you gaining revenue from that CT side?

No.

Thank you.

We do have a follow-up question from Andrew Huang of CIBC World Markets Andrew Hong with CIBC world markets.

Thanks. Were there any 10% customers for the quarter, and if there were, can you do those percentages?

There were two 10% customers. I don't have the percentages at my fingertips, Andrew, you okay, and in terms of the R&D spend going forward, can you give me a sense of, you know, do you expect the increase in absolute dollars from the 9.1 million, or remain kind of flat around these levels?

We would expect it to increase modestly each quarter throughout the rest of the year.

Okay, and do you have an idea where you want to exit the June quarter?

Not higher than 10 million.

Okay. .

We have no further questions at this time. I would like to turn the call back over to our host.

Okay, thank you, ladies and gentlemen, and we look forward to talking to you again next quarter. Good-bye now.

That does conclude today's conference. Thank you for your participation, and you may now disconnect.