Mercury Systems Inc (MRCY) 2005 Q4 法說會逐字稿

Good day and welcome, everyone, to the Mercury Computer Systems Inc. fourth quarter of fiscal year 2005 earnings results conference.

This conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to the Vice President of Finance, Ms. Diane Basile.

Please go ahead, ma'am.

Thank you.

Good morning, everyone, and welcome to the Mercury Computer Systems fourth-quarter and fiscal 2005 earnings conference call.

If you have not received a copy of the earnings release, you can find it on our website, www.MC.com, or on the First Call network.

We would like to remind you that remarks we may make during this call about future expectations, trends and plans for the Company and its business constitute forward-looking statements for purposes of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

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

For a discussion of these risks and uncertainties, we refer you to the Company's reports filed with the Securities and Exchange Commission, including the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.

Further information regarding forward-looking statements and risk factors is included in the press release we issued this morning reporting the Company's fourth-quarter and fiscal 2005 results.

We caution listeners of today's call not to place undue reliance upon any forward-looking statements, which speak only as of the date of this call.

We undertake no obligation to update any forward-looking statements.

References by the Company to non-GAAP operating income and non-GAAP earnings per share refer to costs and expenses or earnings per share excluding equity-based compensation costs.

GAAP requires that this cost be included in costs and expenses and accordingly used to determine operating income and earnings per share.

The Company's management uses non-GAAP operating income and associated non-GAAP net income to make operational and investment decisions, and the Company believes that they are among several useful measures for enhanced understanding of its operating results.

Excluding the equity compensation costs from GAAP operating income will enable investors to perform a meaningful comparison of the Company's operating results to prior periods.

In these prior periods, the Company's GAAP financial results were not required to include expenses associated with stock option compensation, and now these expenses will be included within operating expenses in the GAAP presentation.

The Company also believes that providing non-GAAP earnings per share affords investors a view of earnings that may be more easily compared to peer companies.

I'm now pleased to turn the call over to Mercury's President and Chief Executive Officer, Jay Bertelli.

Good morning, everybody, and thank you for joining us.

Diane just said a mouthful there.

I hope you digested it all.

In addition to Diane, on the call with me today is Bob Hult, our CFO, and Joe Hartnett, our Corporate Controller.

As you can see from the press release we issued this morning, Mercury has had an exceptional fourth quarter and fiscal year.

We achieve $71.5 million in revenue and $0.41 in EPS for the quarter, and we wrapped up the fiscal year with $250.2 million in revenues and an EPS of $1.25.

This is a record quarter and also a record year in terms of revenues.

I'm going to turn the call over to Bob to discuss the 2005 results in more detail, as well as to provide the fiscal 2006 guidance.

I will then come back and talk about our strategy and provide some closing remarks.

Then we'll open the call the questions.

Bob?

Thank you, Jay.

Good morning, everyone.

As you heard from Jay, the results we reported earlier today for the fourth quarter and the fiscal year of 2005 represented a new high water mark in terms of revenue and operating income.

This past year was one of expansion into new markets and extension of capabilities into existing markets, predominantly through organic growth.

Of the 35% topline expansion over fiscal 2004, 29% was organic or from businesses that were already in the portfolio last year -- same-store sales if you will.

This past fiscal year was also one for the record books in terms of acquisitions.

During the year, we acquired technology that allows us to offer more complete solutions to our customers in high-growth markets such as medical imaging and signals intelligence.

In December, we acquired Momentum Computer; in July, SoHard AG, and two weeks ago, announced the intention to acquire Echotech Corporation, with the expectation that that acquisition will close during the first quarter of FY'06.

I will discuss the financial impact of these acquisitions when I cover guidance later in the call.

But at this point, I want to underscore Jay's comments regarding our acquisition strategy and our consistent approach to the evaluation of acquisition candidates for a strategic fit.

When we raised capital for this purpose last spring, we told you that it was our intention to prioritize our activities in terms of acquiring intellectual property, to look for businesses that were of appropriate size for Mercury and were consistent with our strategic growth objectives.

We believe that we have been true to those commitments.

Our process has been rigorous and it has built a stronger foundation for growth.

This morning, we will discuss the results for the fourth quarter and the fiscal year just ended.

We will then spend some time describing the assumptions behind our 2006 guidance as an aid to the development of your own models.

We will discuss our perspective of operating performance for the year ahead, incorporating the impact of recent acquisitions, and our view of current market conditions.

Finally, we will discuss the pending implementation of FAS 123R, Share-Based Payments, which require the expensing of equity-based compensation, and the projected impact to reported net income and earnings per share calculations.

As a June year-end Company, the results of our first quarter ending September 30, 2005, will be among the first group of companies to fully adopt this new accounting standard.

But first, a review of our fiscal 2005 operating results.

As reported this morning, total Company fourth-quarter revenue and operating profit were record-setting.

Fourth-quarter 2005 revenues of 71.5 million were the largest in our Company's history.

Fourth-quarter revenues grew by $12.4 million or 21% over the same quarter last year and grew $7.2 million sequentially.

Operating income for the fourth quarter was 13.9 million or 19% of revenues.

Earnings per share the fourth quarter were $0.41.

For the full year, revenues were 250.2 million, an increase of 35% over prior-year revenues of 185.6.

Operating income for fiscal 2005 was 42.5 million or 17% revenues.

It was the highest operating income reported in our Company history.

Earnings per share for the full year came in at $1.25.

At this time, I would like to delve into operating performance, beginning with revenue by business unit.

We will provide comparisons on a year-over-year basis and sequential change.

Note that it is generally difficult to identify sequential trends, even within business units, due to the nature of our OEM business model.

As an OEM supplier to commercial markets and a commercial off-the-shelf cost supplier to defense customers, customer delivery requirements are a primary driver of quarterly revenue fluctuations.

Customers specify the delivery date requirements that coincide with their need for product, and an order that falls within one quarter generally does not indicate a trend for future orders.

Additionally, order patterns of one customer do not necessarily correlate with the order patterns of another customer.

Our defense electronics business unit reported revenues of $47.5 million or 66% of total revenues for the fourth quarter, up 11% from the same period last year and 30% sequentially.

Growth was driven by systems serving radar and signals intelligence applications.

For the full year, the defense business unit revenues were 148.2 million, representing 59% of total corporate revenues.

This was an increase of 18% over the previous fiscal year.

Within the three application areas, defense application areas -- radar, signals intelligence and defense technologies -- signals intelligence growth was especially strong year-over-year.

Our imaging and visualization solutions business unit revenues for the fourth quarter were 12.2 million, representing 17% of total revenues and up 37% from the same quarter last year, 7% sequentially.

Growth was driven primarily by strong MRI sales in both comparisons.

For the full year, the IDS business unit revenues were 49.2 million, representing 20% of total corporate revenues and 50% growth over the prior year, including acquisitions.

Organic growth was 30%.

The unit experienced particular strength in applications serving the MRI modality space.

Our OEM solutions business unit, our third one, fourth-quarter revenues were $10.2 million or 14% of total revenues, up 38% from the same quarter last year.

Sequentially, quarterly revenues for this unit were down 3.9 million due to semiconductor customer order patterns.

Applications serving the semiconductor market represented more than 90% of total revenues for this business unit during the quarter.

For the full year, our OEM solutions business unit revenues grew to $48.4 million, representing 19% of total corporate revenues and 81% growth over fiscal 2004.

This growth was achieved on the strength of semiconductor application design wins moving into full production.

As a result, we experienced increased shipments of our systems to semiconductor capital equipment OEMs for integration into their inspection and mass generation systems.

Total Company book-to-bill ratio approximated 1 for the full year.

Total backlog at the end of the fourth quarter was 91.8 million, down 18.6 million from the end of the third quarter, and was relatively flat from the beginning of the fiscal year.

Of the ending backlog, approximately 93% or $85.7 million relates to shipments expected within the next 12 months.

Gross margin was 67.9% for the quarter and 66.2% for the fiscal year, which was in line with our business model of 66 to 67%.

The modest uptick in the fourth quarter was driven by the relative strength of defense in the sales mix for the quarter.

Total operating expenses comprised of selling, general and administrative expenses plus research and development expenses and the amortization of intangibles were 34.7 million for the quarter and 123.2 million for the full year.

R&D expenses were 14.2 million for the quarter and 50.1 million for the year, each approximating 20% of revenues.

Overall, our total operating expenses decreased as a percentage of revenues from 50.4% in fiscal 2004 to 49.2% in fiscal 2005.

The increase in dollar spending relates to our continuing investment in R&D, which is critical to our success, and increased SG&A costs related to acquisitions.

Amortization of intangibles and in-process technology charges related to our acquisitions were 0.5 million for the fourth quarter and 2.4 million for the full year.

Operating income of 13.9 million represented 19% of revenue for the fourth quarter.

For the fiscal year, operating income was 42.5 million, representing 17% of revenue.

Net income of 30.2 million was 12% of revenue for the full year, up 32% from 22.9 million in fiscal 2004.

Turning to the balance sheet, operating cash flow was 37.2 million for the fiscal year.

Operating cash flow, comprised of 30.2 million in net income, 10.6 million of depreciation and amortization, 3 million in other and non-cash items, partially offset by a $6.6 million increase in overall working capital requirements.

In terms of the details behind working capital drivers, days-sales-outstanding were 50 for the quarter and the year.

This DSO represented an improvement of 13 days from the same quarter last year and a one-day improvement from fiscal 2004.

We continue to work on initiatives in this area with a target of 45 days.

Inventory turns of 5.5 for the fourth quarter were up from 4.7 turns in the third quarter.

This level of productivity is getting us closer to our target range.

We continue to invest in supply chain initiatives and are evaluating opportunities to improve our processes.

We remain committed to our longer-term inventory goal of 8 turns.

Capital expenditures were 3.2 million for the fourth quarter and 10.6 million for the fiscal year.

Cash and cash equivalents were 228.2 million at the end of the fiscal year, up 2.1 million from the third quarter.

At the end of the fourth quarter, the total employee population was 744.

Also, as you read in the press release this morning, this week our Board of Directors authorized a share repurchase program for up to $20 million of our outstanding common stock.

As has been our practice through previous share repurchase programs, the intention is to offset the potential diluted impact of shares issued in connection with the employee stock option and employee stock purchase plans.

I would like to now turn to the fiscal 2006 outlook.

The important data point that I would ask you to keep in mind when developing your models is the nature of our OEM business model, that customer order requirements can drive significant quarterly revenue variations, which are an important determinant of quarterized operating profit and earnings.

Additionally, the sweeping impact that FAS 123R will have on public company reported results merits its own discussion.

First, I will describe our fiscal 2006 projections on a basis consistent with the way we have just described our fiscal 2005 results.

While this presentation is considered to be non-GAAP, we believe that this is the most useful way to think about our operating results.

This is the way we measure ourselves internally, and this will provide a basis for comparison against prior reporting periods and against most public companies, who will not be incorporating in the impact of FAS 123R until next year.

So turning to our fiscal 2000 outlook on a non-GAAP basis, revenues are expected to grow approximately 20%, resulting in revenue in the range of 295 to 305 million.

By business unit, we project the full-year 2006 revenue mix to approximate 60% defense and 40% commercial applications.

Moving through the P&L, we project gross margins to be approximately 66 to 67%, which is consistent with our stated business model objectives and recent years' performance.

We anticipate operating expenses to approximate 50%, including an increased amortization cost related to acquisitions, which will cost approximately 1 point more than fiscal 2005.

We therefore expect fiscal 2006 operating margins to approximate 16%.

This operating margin performance is also consistent with our stated business model objectives of a range between 16 and 18%.

Assuming a 30% tax rate and considering the impact of our contingent convertible, or COCO, on both the numerator and the weighted-average shares outstanding, we would therefore expect earnings per share of $1.35 to $1.40 for the fiscal year on a non-GAAP basis.

For the first quarter ending September 30, we anticipate revenues to be in the range of 60 to 63 million.

We project the corresponding non-GAAP earnings per share, excluding the expenses related to equity-based compensation, to be in the range of $0.18 to $0.20 per share.

Now, applying FAS 123R to these projections, the impact would be a reduction of approximately $0.38 per share on a full-year basis and approximately $0.07 for the first quarter.

In terms of working capital, we expect to drive improvements in our DSO towards a goal of 45 days, and our working capital initiatives are expected to deliver progress on our inventory turns towards our longer-term goal eight turns.

Capital expenditures for '06 are projected to be approximately 15 million, and depreciation and amortization will be approximately 18 million for the full year.

In summary, for the full year, we project revenues in the range of 295 to 305, or 20% growth over fiscal 2005.

We project gross margins of approximately 66 to 67%, resulting in our full-year guidance for operating profit of approximately 16%.

In fiscal 2005, we not only delivered record-setting revenues and operating income, but we made significant progress on our longer-term growth objectives.

We demonstrated consistency in our acquisition strategy, extending our technology capabilities and our ability to better serve our customers in targeted high-growth markets.

Over the longer term, we remain committed to our goal of achieving 25% sustainable growth CAGR on the top line due to the combination of organic and acquired revenue.

At this point, I would like to turn the call back over to Jay for industry comments and additional insights.

Thanks, Bob.

Some of you may have seen an article that was published in a mass high-tech journal within the last week or so written by Steve Goldstein, where he asks the question, is tech a growth business anymore or is a value play?

I suggest that I believe Mercury is a growth business and is employing growth strategies that are building excellent value.

We are addressing the latent demands -- market demands with a combination of innovative technologies developed internally and acquired, either through acquisitions or alliances such as the cell processor alliance that we announced with IBM.

We've also developed new business models that deliver modular products with good enough performance to meet cost constraints, while continuing to deliver integrated systems that deliver ultimate performance.

Service offerings for all of our markets are being developed so that we can compete across a broader price performance range, delivering the value customers seek in the various dimensions that define their challenges.

It is these challenges the drive the innovation of Mercury.

We will transform a number of markets by delivering our broad range of engineered solutions, implemented in systems which are architected with the optimal processing and software elements for the given application.

To capture more of the value generated by our R&D budget, we are packaging our IP developed for rapid I/O and marketing these offerings to customers who will imbed our IP into their silicon.

We're taking the 3D visualization software known as amira, developed initially for scientific uses, and commercializing it for multiple markets such as diagnostic imaging, drug development for the pharmaceutical industry, flight simulation for commercial and defense applications and reservoir modeling for the oil and gas industry.

Mercury's strength is in synthesizing solutions by bringing the best technologies available, hardware and software, together by virtue of our open innovation philosophy.

Some evidence to support these statements.

Our ensemble system developed for the communications market is being utilized by two major telco OEMs in their development labs to verify the performance of the rapid I/O-based system.

This ensemble system is an accumulation of technology acquired externally and technology developed internally by Mercury architected into a system that meets the specific needs of the telco OEMs.

Mercury has developed the Vista nav system that processes inertial and GPS-sensitive data and creates 3D pictures of the terrain.

The system can be used in general aviation and does not require FAA certification, and can also be used in UAV ground stations.

The same Vista nav core package can also easily be adapted for simulation and training systems for both commercial and military applications.

The system was introduced today at the AirVenture Trade Show being held in OshKosh, Wisconsin.

This system leverages technology developed by TGS, which we acquired in April of 2004, and also technology licensed from the University of Darmstadt in Germany.

This is an excellent example of Mercury's ability to develop exciting products based on technologies developed internally and externally to create a new market.

Tuesday of this week in New York, IBM conducted a major press conference to announce new products.

Mercury was invited to participate by demonstrating a CT reconstruction application running on a cell blade processor.

The performance was up to two orders of magnitude faster than when run on a standard PC.

We then used our amira pro software from our TGS acquisition to manipulate the reconstructed image in real-time, using a GPU or graphics processor.

This is testimony to Mercury's architectural skills in designing heterogeneous systems which provide revolutionary price performance breakthrough.

In our primary market, defense, we are working on some exciting projects.

We're partnered with Raytheon on a DARPA project known as XMonarch to develop a specialized processor for certain defense applications.

Our rapid I/O silicon IP will be incorporated into the processor.

Mercury will also build a test platform which will also include software provided by Mercury.

Our PowerStream 7000 computers have been selected by Lockheed for the AEGIS program, a major design and for Mercury.

The Army has turned Boeing on again for the JTRS Cluster 1 program, which is a major component of the Future Combat System program.

Mercury's RF Center of Excellence, acquired in June 2004, supplied the RF tuners and transmitters used in Boeing's testbed to demonstrate the viability of their system.

We are pioneering the concept of exploiting aerial reconnaissance data close to the sensor so that it can be delivered in a timely manner to the war fighter.

We have partnered with two prime contractors who will develop the image understanding algorithms that will be processed on Mercury's multicomputers deployed on aerial reconnaissance platforms.

In FY'06, we will be focusing full management attention on extracting the value from our recent acquisitions.

We have uncovered a number of opportunities to cross-pollinate the acquired technologies in multiple markets, thereby creating additional revenue synergies than originally conceived.

The development activities I have shared with you give me great confidence that our 25% CAGR goal is achievable and sustainable.

We will achieve this revenue growth rate while maintaining our operating profit goal of 16 to 18% of revenue, which will enable us to continue to create shareholder value.

That concludes my closing remarks.

We will now turn it over to the moderator for questions.

(Operator Instructions).

Brian White, Kaufman Brothers.

It looks like in the quarter, you had some upside in the defense market.

Were you surprised by that?

And maybe comment a little bit about the outlook.

You have incremental revenues from acquisitions for the September quarter, but the outlook seems a little soft.

Maybe talk a little bit more about what end markets are attributing to that.

I don't think we were surprised per se by the performance in the fourth quarter.

It was a strong finish, no question about that.

But we went high side of our guidance at the beginning of the quarter.

Commenting on '06, I can break that down a bit by business unit.

There was a 60/40 split, defense versus commercial.

If we look at our defense business unit for '06, the growth rate is going to be approximately 20% for that business unit.

If we look at our imaging and visualization solutions business, the growth rate there should be approximately 35%.

However, looking at our OEM solutions group, which is heavily weighted towards the semiconductor industry, and we did make some comments about the softness there, as across the industry, our planning assumption is that we will be flat to slightly down in that space.

And I think it's the sum of two extremely good growth rates with a flat to slightly down assumption that is causing us to come up with the guidance range of approximately 20% for the entire Company.

And when we look into the September quarter, though, sales seem a little bit softer than what I have or what others have, and we don't have the acquisitions in our model.

What can we attribute that to?

Semiconductor also, or also maybe defense was lumpy -- you got more in the June quarter than people had (multiple speakers)

Yes, you know that I personally don't like to use the term lumpy, but it is our OEM business model.

With our strong backlog and I'd say pretty good forecasting track record on the commercial side, which is much less backlog-intensive, we've got a pretty good eye on the quarter when we enter it, the very next quarter.

My view -- our view on Q1 is it's going to be the third-largest quarter in the history of the Company.

So, I mean, that is a perspective that I think is important.

The other thing that I feel obligated to remind everybody on the call is that this now is the first time we have provided any guidance specifically for Q1.

So, I know you folks run your own models and you have what you have in your models, but this is our first attempt at guidance in the first quarter.

And again, I tie it back to the OEM model.

What we are capable of delivering is what our customers are placing on us for orders, and there is variability, as we've stressed throughout some of the earlier comments here quarter to quarter.

So we like to take a broader view, look at things over six-month intervals, nine months, even a year, to gauge the true strength and growth rates of our businesses and relationships in some of our larger OEMs.

Well, let me ask you it this way.

Do you think any markets will grow sequentially and if so, which ones?

Sequentially in the --

September quarter.

Oh, September over June?

Yes.

Yes.

We are looking at growth in the commercial space sequentially.

Defense will obviously be down.

Mark Kelleher, Adams Harkness.

A couple of questions.

The momentum revenue number -- did I read that right at 1.6 million?

Correct.

So that's down a little bit from the March quarter?

Is there something driving that?

It is down from the March quarter.

The backlog is building there.

The order book continues to build.

We did have a -- I think an issue with a part from a silicon provider.

And as far as -- we loosely describe that as timing, Mark, as opposed to anything else.

So, I didn't say it specifically, but the momentum business in the September quarter will be up dramatically from the June quarter.

Okay, and on the R&D line, what do you think -- does that trend with revenue or do you have to keep boosting that up?

Well, if you work through our guidance here, from Q1 September quarter compared to June quarter, our operating expenses are going to be approximately flat.

And there will be some growth in the R&D space, which is driven sequentially, driven primarily by the acquisition.

We'll have SoHard in there for a full quarter -- bought that on the first of July.

We hope that we will have a little bit of Echotech in there.

We hope we get that closed before the last day of the quarter.

So that's what's going to be driving the R&D line.

Our SG&A expenses will actually go down a bit.

What we pick up on the SG&A line at the end of the year are some period increments for year-end commissions, bonuses.

And this year, we -- as most companies, we picked up an incremental charge for the cost of Sarbanes-Oxley 404 process.

So net-net, our operating expenses should be flat Q to Q sequentially.

Okay, and just one quick last question.

The cash flow from operations in the quarter?

June quarter?

Digging that out here.

Yes, about 5 million.

Bill Benton, William Blair.

It's actually Ed Littman for Bill Benton.

Bob, you kind of just touched on this a little bit quarter to quarter, but can you talk about the full-year '06 operating expense guidance or operating margin guidance of 16% and why that's actually going down a percent versus the 17% that you achieved in '05?

I'd be glad to.

I hope you are going to like this answer.

We've had a model out there for a couple of years now, at least this last year, year and a half, where we say we can run the Company the way we believe is necessary to support our growth and the fact that we are a technology player in the 16 to 18% range.

What we said that might move it around a bit in that range is the rate of growth on the top line and the rate of some of our acquisition activities.

Now I will freely admit, you can all see it -- we did '04, 17%.

We did '05 at 17%.

In '05, we did 17% despite having a full point in there for the amortization of intangibles associated with our acquisitions.

In '04, that was a very small number, close to zero.

In '06, we're guiding at 16 points.

Our opening top line guidance is 20% on the top line.

Obviously, that's coming off a year at 35%.

Having said that, our amortization of intangibles charges in '06 are a full 2 points.

So I think the simplest view that I can find for you is we're picking up an extra point on the amortization of intangibles associated with our acquisition activities, which have been substantial this past year, and that's the reconciliation.

And then you touched on the 20% year-over-year revenue growth.

Can you give us some flavor as to how much of that is organic and how much you're accounting for on the acquisitions?

Our view on organic -- everyone has -- how do you define this?

But if we have had something that we've been operating it for a full year, so it's in the base comparison, we would consider that now to be organic.

So, we don't have too, too much of that because most of our acquisition activity here was in '05.

So right now, you can take that 20% and pretty much split it down the middle -- half organic and half inorganic.

So 50-50.

And then (multiple speakers)

50-50.

Okay, great.

And then finally, on the stock options, how are you planning on reporting that in kind of your -- I guess in your full P&L?

Are you going to be showing one line item that shows that expense or will it be kind of spread out through the P&L and you'll just show that on a pro forma?

Well, the GAAP requirement is going to force it into multiple lines in the income statement.

It tracks with where people work.

So those people that have options, if they are, for instance, in your supply chain, it's going to be above gross margin.

If they are in your engineering staff, it will be on the R&D line.

Do you see the flavor there?

It's going to spread itself across multiple lines.

That will be the GAAP report.

I think all of us in the September quarter, the first guys, are then going to have to pull it out for you folks almost line by line so you can see it.

Yes, well, that will be fun.

Thanks, guys.

Steve Levinson, Ryan Beck.

Good morning, Jay, Bob and Diane.

Can you tell us, please, do you think your partnering arrangement with IBM on the cell processor is going to do or has it already done anything on getting back into the CT business?

Well, you heard me comment about the demo that we ran in New York at the IBM conference this week.

We would certainly anticipate that that is going to go a long way towards helping us get back in there.

But we're not there yet.

This is brand-new stuff that we've just started working with, really, and it's premature to expect an OEM to adopt it overnight.

Okay, thanks.

In relation to the guidance, does the '06 guidance include anything from Echotech or are you going to wait until that closes?

No, it does include our assumption it will close late in the first quarter for Echotech.

So that's built-in, Steve.

Okay.

And then, I know, Jay, you said you still have a 25% revenue CAGR that you are aiming for, and based on what your guidance was last year and where you actually came out, do you feel this is really just an opening cut with the 20% growth, or do you really believe that's where it's going to be?

Well, Steve, if you've followed us for a while, you know that we tend to be a little bit on the conservative side.

And we don't want to disappoint.

So, I believe that the 20% number that we've put out there is based upon our best visibility into the opportunities that we're currently working on, and that's what we're sticking with.

Okay, did you have any 10% customers during the quarter?

We had three.

Similar to the past?

Yes.

Three for the quarter, four for the full year and it's the usual customers.

Okay, and lastly on the competitive environment, particularly on things like checked baggage scanners and some of the SIGINT stuff.

Are you seeing any pressure there from other devices, or do you still feel that Mercury products are still the standard?

I wouldn't call them necessarily the standard in the baggage scanning business.

There's two major competitors there.

You have GE InVision, which is where we've supplied products in the past, and then you've got L-3, that resells the analogic system.

I don't know what the market share is split between the two of them, but at the end of the day, it's not a major part of our business which comes out of that OEM solutions group.

Okay, and on the SIGINT side, where maybe you are more of the standard?

SIGINT has been a real strong growth market for us.

And I think you can attribute a lot of that to the interest and the funding within the DOD budgets in order to deploy systems that can capture the information that will help us track down terrorists and errant governments.

Okay, and I guess one little follow-on to that.

In UAVs, I guess Europe and the UK are deciding to spend a whole lot more money on unmanned aerial vehicles.

I know you are in the ones here.

What's the situation over there, if any, for Mercury?

I think that, yes, the opportunities in Europe, or some of them that we're looking at could very well be supplied by U.S. companies.

So we would hope to be above to capitalize on any opportunities that develop over there also.

Rob Stone, SG Cowen & Co.

I wonder if you could provide just a little bit more color on where the two recent acquisition are going to fit into the lines of revenues that you report?

Are you still going to show four different breakouts including Momentum, and where do SoHard and Echotech fall into the line items?

Rob, pretty straightforward.

We'll continue to show four, the fourth being Momentum, and Echotech will fall into our defense business unit and SoHard into our imaging and visualization solutions business unit.

Okay.

And could you comment, Jay, in the OEM solutions business, in the past you've talked about a number of design wins for semi-cap equipment customers versus the number that are in production.

Can you just give us an update as of the end of the fiscal year where that stands, design wins versus the number that were actually in revenue in FY'05?

Most if not all of them that we were working with one of the major OEMs have moved into production, and that was one of the reasons for the very strong year we had in that business sector in '05.

There were still a few opportunities out there with other, let me call them second- or third-tier players that were working on it.

But in terms of the big design win cycle, it sounds like it's going to be quieter for awhile, at least in that segment.

Yes, I would expect at this point that we will be at the mercy of the industry in general, if you will.

Finally, a housekeeping question for Bob.

Just to be clear, since we're talking about amortization in percentage point terms in relation to a revenue number that's a range, but I would expect that the amortization is actually a fixed number for the year.

Can you just give us that number in dollars?

Were you looking for a number for the full year?

Yes, just the (multiple speakers) amortization.

Sure.

Last year it was $2.4 million.

That's '05.

And it would be approximately 6 in 2006.

And just roughly level through the year, or is there likely to be a bump-up after the first quarter because of the (multiple speakers)

There's a bump-up after Q1 because of the late closing -- planned closing of Echotech, and then it's level-loaded for the next three quarters.

So, it's about $1 million in Q1.

Approximately.

That's helpful for modeling cash flow.

Thanks a lot.

(Operator Instructions).

David Heger, Kennedy Capital.

I had a question in relation to equity compensation expense.

Obviously, as you guys said, under GAAP you're going to have to start reporting that.

Have you guys been making any type of efforts to bring that expense down over time, or are you going to pretty much leave your compensation plans as they are?

Well, the program that we have in place -- and we've had it in place since the Company started -- is there in order to enable us to attract and retain the best talent that is available for us.

We believe that we need to continue and have some form of equity compensation.

We've been working certainly with the Compensation Committee and outside consultants to understand what the industry is going to be doing here, given that we now have to expense these items.

And at the same time, we need to be able to maintain our competitive position.

So we're operating within a total budget, if you will, for compensation which now includes the cost of the equity.

And we'll be benchmarking ourselves against the other companies to see to it that we are in line, and again, at the same time, enable us to attract the best people.

So, that's the overall comment on that.

And as part of those efforts, is it you guys would take a look at other potential forms of equity compensation, whether it's restricted shares or things like that?

We have been looking at all forms and have not decided yet, but we will be deciding here shortly since we need to request from the stockholders in our plan, which will go out -- when are we scheduled to submit that, Joe?

The annual meeting is going to be November 14.

So it will go out sometime in the end of September.

Part of the proxy.

Okay so if you are making any changes, then you would be putting that to a vote in the proxy?

Correct, that will be the process.

(Operator Instructions).

At this time, there are no further -- I'm sorry, the next question is from Bill Dane (ph) with Wells Fargo.

Good morning.

What should we expect on the acquisition front in '06?

Do you think that things are going to be slow -- will you slow down while you absorbed SoHard and Echotech, or do you think that there is some more technology out there that you could use to integrate into your product offering?

Well, I'm sure there's more technology out there that we could use.

There's no question about that.

But we're also realistic in that we need to make sure that we maximize the value that we saw and that we've paid for.

And so as I said in my remarks, '06 is going to be a year of consolidating and making sure that we capture the revenue synergies that we had saw when we started to do the due diligence on these companies.

And as I also mentioned that may have been lost on you, we have -- since we've acquired a couple of these operations, we've uncovered opportunities that we hadn't seen before to take some of that technology into new markets such as that flight simulator that I mentioned to you.

So, again, we need to consolidate the gains that we're seeing here, but at the same time, we're not going to totally stop looking, because what we are really looking for is IP.

So we don't expect that it would be a major acquisition, but we do need to put management's attention on consolidating what we've acquired.

At this time, there are no further questions in queue.

Okay.

Well, thank you all for joining us, and we'll look forward to our next call in October.