Mercury Systems Inc (MRCY) 0 Q0 法說會逐字稿

Good day, and welcome to the Mercury Computer Systems, Inc. third-quarter preliminary revenue conference call. Today's call is being recorded. And at this time, for opening remarks and introductions, I'd like to turn the conference over to the Investor Relations specialist, Ms. Jennifer Heizer. Please go ahead, ma'am.

Good afternoon, everyone. On this conference call, we will be discussing Mercury Computer Systems' recent press release announcing preliminary revenues for the third quarter of fiscal year 2006. If you have not received a copy of this press release, you can find it on our website, www.mc.com, or on the FirstCall network.

We'd like to remind you that remarks that we may make during this call about future expectations, trends and plans for the Company and its business constitute forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Additional information regarding forward-looking statements and risk factors is included in the press release we issued yesterday and in the Company's periodic reports filed with the SEC. We caution listeners of today's conference 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.

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

Good afternoon, everybody, and thanks for dialing into the call here. The assumption is that you have all read the press release. Jennifer has told you where to find it if you haven't. I'm just going to make a couple of comments with regards to what's in the press release. I'm sure there will be some questions about it.

The revenue shortfall, as indicated there, primarily came from our defense business. And there were three or four different systems which we had some technical difficulties with -- one major system, which was worth multimillions of dollars, and it was the early delivery of one of our PowerStream 7000 systems that's scheduled to go to a major defense program, which will remain unnamed, and it is in the early stages of advanced testing, if you will, for that program. So we're looking forward to a long revenue stream and successful deployment on that particular program.

So this was just a minor hiccup, if you well. We did ship a good part of the system to the customer in order to keep them on schedule with their development activity, but clearly, could not take revenue credit until we were able to pass the complete systems acceptance tests.

Since we are in the middle of closing the books, the only comments that we are going to make have to do with the revenues. I'm sure you will have some questions with regards to the other financials. But we are not at liberty to be talking about any of the details regarding the financials. You are going to have to wait until the conference call on April 27.

So with those opening remarks, I'm going to open up the call up for questions.

(OPERATOR INSTRUCTIONS). Rob Stone, SG Cowen.

If you could just elaborate a little bit more on the other revenue-related items that were in the press release -- backlog, deferred revenue, and book-to-bill. I had trouble calculating a book-to-bill ratio of 1.5, which was noted in the press release, based on the preliminary revenue range and the change in backlog and so forth. So if you could walk through those numbers, that would be helpful.

I am going to ask Bob to take that --

Sure. Okay, Rob. I don't know if I'm going to be able to do a perfect reconciliation for you. But the book-to-bill remains at 1.5. We did round up there. I think our calculation was 1.47 to 1.48. So I'm fairly certain that that number works.

The ending backlog that we reported in the press release of approximately 85 million -- that is our full backlog. It is not limited to the next 12 months. At the end of last quarter, we reported a 12-month backlog including deferred revenue of approximately 71, 72 million.

So what we have given you to work with here is a total backlog of 85 million plus a preliminary deferred revenue figure that is in excess of 10 million. We've got a little more accounting to do there before we can finalize that number.

So if you take 85 plus 10, you're going to get 95. And then it has to be factored down by the 12-month factor -- what would ship in the next 12 months -- to get it back to last quarter's equivalent mark of 71 to 72, that range. So it should work for you.

The part that's missing is the 12-month backlog. But I guess if I look at the total backlog last quarter, it was 80.2. So that's the -- total backlog increase plus the deferred revenue doesn't get me to 65 million or so in bookings, which would seem to be the number implied by a book-to-bill of 1.5.

I don't know how we are going to do this in a middle of a conference call. But we're fairly certain that our numbers work here. I think you are doing something wrong on your end.

Okay, maybe we can take that off-line.

That would probably would be a good thing.

Glenn Primack, Broadview Advisors.

I'm just wondering how far along you are in incorporating the IBM Cell-based architecture in your product portfolio?

Well, we have shipped a number of development systems, Glenn. The systems are development in nature, because the chip that is in there from IBM is not the final version. And it's going to be some months before we get the chip that has production quality. So we've been out there to a number of customers. They are testing it. They're running some of their applications on it. They're benchmarking it. And it's really no different than any other new product that we would be introducing. Our customers need to touch it and feel it and smell it and test it and get some sense for what sort of price performance they are going to get out of it. That is the stage that we are in with it.

(OPERATOR INSTRUCTIONS). [Sally Rubin], Frontier Capital.

Based on the press release, it looks like about 12 to 15 million in revenue that you had been expecting fell out of this quarter. How much of that is attributable to that one program that you mentioned where there was a systems integration issue?

It was several million. And I am not going to get any more specific than that, Sally. It was a big piece of it.

Is it the majority of the 12 to 15 million shortfall?

Yes, it is definitely the majority. These are multimillion-dollar systems.

Okay, so the majority of the shortfall is due to an integrated system not passing muster. And I think the press release said that it was a third-party revenue issue. In plain English, are you saying that someone else's subsystems didn't work, and so you couldn't recognize revenue on your stuff?

Well, let me go back to what it says. It says, "the revenue shortfall can be mostly attributed to our defense business, where technical problems associated with third party products occurred, and a multimillion dollar system failed" and so forth. So what you can read into that is that in addition to this PowerStream 7000 system -- a number of systems, if you want to think of it that way -- there were other systems that we were not able to ship because we had problems with some third-party content that did not allow us to pass acceptance tests on the systems. And I am not going to get into any more of the specifics than that. But we when we ship a system --

So I should think of it as one of the inputs into your products didn't work, but it was third-party product that failed?

Yes, exactly. You know, power supplies, cables, backplanes -- we buy out stuff like that. And --

And how much of the 12 to $15 million shortfall do you expect to be recognized in the June quarter?

Our sense is that (multiple speakers) the majority of these issues sort themselves out in the fourth quarter.

Have any of them resolved already in the first two, three days of the quarter?

They weren't those kind of problems, or they would have been in last quarter. (laughter)

I think the press release says we expect --

That's right.

We expect that they will be resolved.

That's right. That's the best we can do at this point. The folks were working pretty hard right up until the very end of the quarter. So our expectation obviously when we entered the quarter was we can get the job done on these systems. It did not turn out that way. But they were efforted right to the very end of the quarter. So we will get them. Hopefully we will get the majority in the fourth quarter.

And then the other question is -- in the backlog number of 85 million, would that include this 12 to 15 million that slipped out?

No. The 10 million deferred that we referenced in the press release as an approximate number -- that's where the majority of this lives.

Oh, does that mean you have been paid for it already? You've collected cash for it?

No.

Oh -- I thought that's what deferred revenue was.

No, no. We invoiced it.

[Anand Krishnan], [Core Research Management].

Question related to your non-defense business. Can you give some color in terms of how much traction you are seeing on those areas, and particularly your medical equipment, and also I guess the semi testing equipment business?

Sure. Well, without giving any specific numbers at this point, obviously, but the business unit that we refer to as Advanced Solutions, which includes the semiconductor business -- it had a very strong bookings quarter. We see the business picking up in both the semi business and the communications business. We had some new design wins in that communications space, but again, are not at liberty to disclose with whom until such time as we get our customer's approval to do so. So that business is -- we're quite satisfied with the results that that business is showing.

The life sciences business, which falls under the business unit that we refer to as CIV -- it also had a number of design wins, but it is too early to say what that's going to turn into in terms of revenue. You know, the OEM's make their decisions. And it takes awhile to get incorporated into products that they start to ship. So all we can say at this point is that we did have a number of design wins in the quarter in that space, and we continue to believe that we're on the right track with the right strategy.

And I also noticed that SBS Technologies was is being acquired by GE's division -- GE Fanuc venture. What kind of implication would that have for you guys?

Well, you can look at it and say it's indicative of some industry consolidation, which it certainly is. SBS as a competitor of ours has always been there. Whether or not they will be any stronger as a result of the GE acquisition remains to be seen. I'm sure it will take GE awhile to get them integrated. And we haven't seen SBS as a -- what I will call a real strong direct competitor in the past -- so don't know what's going to happen in the future.

Would this have any implications for your life sciences business?

Do you mean because of the GE connection?

Yes.

Well, my sense is that these GE divisions -- they operate pretty autonomously. And I don't think that they are going to dictate, if you will, that the products be used by medical group just because they come out of one of the other divisions. They want to put the best products -- their products have to be the best that they can -- in order to compete. And so they're I think going to continue to select the products that best satisfy their needs, regardless of whether they come from another GE division.

And just a question in terms of your cost structure, given the revenue pushbacks and -- I'm just trying to see what you're doing to adjust your cost structure to remain profitable.

Well, the numbers that we put out in the press release that -- (multiple speakers) Bob can talk about that.

We did put a release out about the middle of March where we talked about a workforce reduction primarily. And we noted that -- we felt that we would be impacting our costs on an annual basis by greater than 7 million. So think our FY '07 next year, when you take that 7 million and attempt to plug it in to a context. We did it very late, obviously, in the March quarter. So just by math, there can't be much impact in the third quarter. So we will start to see benefit in the June quarter, and then we'll get that 7 million on a fully annualized basis in FY '07.

And finally, thoughts on use of cash and your capital structure -- you've got a nice cash balance -- I guess net cash of about 30 million or so. Any color in terms of your capital structure and use of cash?

No change there from where we left it on the last call. I think we are fairly conservative with our capital outlays and our plans for our cash at this point. We have noted consistently through the year that we were going to use this year as a year to integrate and harvest the revenue synergies on our acquisitions of the last two years. We did have a share buyback approved by the Board at the beginning of the year to offset dilution from stock options and employee stock purchase plans. We have noted that we did purchase shares in quarters one and two against that plan. Our CapEx estimate for the year -- the last place we left it with you folks was about 15 million. So there's no moving parts there that we have not discussed -- nothing major.

Okay, great. And you anticipate becoming free cash flow positive again? I guess last quarter, you were essentially breakeven on a free cash basis?

Certainly again. But you'll have to join us on our April 27 call to get that into a context in terms of which quarter, etc.

Thanks. Good luck.

[Michael Brown], [ICM Asset Management].

I think that I can answer my own questions from pieces of your other answers. But I'd like to make sure I've got this right. I was trying to reconcile the statement that a part of the problem was that you could not recognize revenue until a complete system passed an acceptance test. But it sounds like you actually had two things going on -- that you had a system that you build for, and that accounts for roughly 3.5 million increase in deferred revenue -- and then a second thing where parts from a third party failed, and so you couldn't ship. And that would be included in the backlog increase. Do I have that right?

We have -- I think you have derived those numbers yourself. So I'm not going to comment on -- regard to their accuracy -- I would caution you. But conceptually, some of these systems, for instance, that did not make it to final acceptance and test, at the customers request -- and in many cases, we're talking about prime contractors here in the defense marketplace -- we ship the system. And when we do that, we invoice it. It has nothing to do with collecting, getting paid, or cash or anything like that. And that -- clearly, when we do that, it is in deferred revenue.

Other systems where we also had perhaps some issues as Jay talked about -- power supplies or cables -- some of these cables, by the way, are -- don't think simple cable; they can be fairly sophisticated cables, custom cables -- those systems don't work. We didn't ship them. We're still in the process of making those systems work. They are not in deferred. They would remain in backlog. I think that is what you described to me.

Yes, that's it.

Shao Wang, Lotus Investment Management.

I just wanted to make sure, going back to the backlog side again, Bob, at the end of the -- in January, for the December quarter, you mentioned the backlog of I think it was 80.8 million, of which 10 million is in deferred revenue. And that's [forward] 12-month shipping backlog -- is that right? Not the deferred revenue, but --

What I mentioned in my script was a backlog including deferred revenue of 71.3. I am looking right at the transcript of the call.

You are talking about January now, or today's call?

January. So I'm not taking exception with the few of you that want to do numbers here. But that is in the transcript. So I feel a little bit bad that some people are confused here. But that is what we said.

Okay. So the 85 million number that you are giving out for ending total backlog, which is forward 12 months, plus shipping beyond that --

That is not the equivalent of the 71.3. It doesn't include deferred --

It does not include deferred --

That's another 10. So that could take 85 up to 95. But it has not been trimmed back for the stuff that falls outside of a 12-month delivery window.

Do you have a comparable number to that 85 for the December quarter and for the March and July quarter --

We will on April 27. But this is what we have right now.

Totally separate -- understood that it is relatively soon since you announced the restructuring effort, back -- what, mid-March or March 13 or so?

Yes.

Any updates by heads as to how many of the 80 might be moved forward, as they say?

Moved forward? What do you mean, Shao?

Well, I think you mentioned you were going to reduce headcount by about 80.

(multiple speakers) Yes, that's the number in the press release.

Where are we on that?

We're more implemented than not. But please remember that --

And that number included contractors, as I recall.

That's right. And that's the element that is the easiest to implement and the quickest. Some of our folks we have asked to stay on and help us through a transition. So they time out differently. And we also -- we are an international company, so some of our folks here are based outside the U.S. -- examples, some of the Western European countries where there is a whole different protocol for how you do this. It simplistically takes more time.

Got it. And then the last thing --

But we won't get -- Shao, just to be clear -- we won't get full benefit in the June quarter.

Understood. Last element -- any updates on the stock option expense issue?

No update other than what I think you can see with the filings, that some restricted stock grants were made to executive officers. And we did indicate on the last call that on the back of the stockholders in November approving our new equity plan, we now had the ability to use restricted stock in addition to stock options. And of course, the premise here is that restricted stock grants can be more efficient, less costly to the company. So that is out there as a leading indicator.

Jeffrey Meyers, Intrepid Capital.

If you could talk a little but about ATCA out in the marketplace -- what the adoption has been like, and what you see there going forward?

Well, we are using the ATCA form factor, of course, in what we call the Ensemble system that we are shipping into some of the telecom OEMs for their evaluation purposes. It is obviously the form factor of choice. I can't tell you what the adoption rate in the market of it is. But we certainly see a lot of the local OEMs going to it. So I don't have any more to say about it than that.

Glenn Primack, Broadview Advisors.

It was just answered.

And at this time, we have no other questions standing by on our question roster. I'd like to turn the conference back to our speakers for any additional or closing comments.

Well, thank you all for joining us. And we look forward to talking to you on the 27th of April, which is when we are currently scheduled to have the next call. Good night now.

Thank you for your participation in today's call. You may disconnect at this time.