Mercury Systems Inc (MRCY) 2006 Q3 法說會逐字稿

Good day and welcome, everyone, to the Mercury Computer Systems, Inc. third quarter fiscal 2006 earnings results conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the Investor Relationships Specialist, Miss Jennifer Heizer.

Good afternoon, everyone.

Welcome to the Mercury Computer Systems, third quarter fiscal year 2006 earnings conference call.

With me today are Jay Bertelli, President and Chief Executive Officer;

Bob Hult, Senior Vice President and Chief Financial Officer; and Alex Braverman, Vice President, Controller, and Chief Accounting Officer.

If you have not received a copy of the earning's release you can find it on our website www.mc.com or on the First Call network.

We would look 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 this afternoon reporting the Company's third quarter results 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 obligations to update any forward-looking statements.

In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, we'll also be discussing non-GAAP financial measures adjusted to exclude certain non-cash and other specified charges which we will specifically identify.

Management believes these non-GAAP financial measures assist in providing a more complete understanding of the Company's underlying operational results and trends and management uses these measures along with their corresponding GAAP financial measures to manage the Company's business to evaluate its performance compared to prior periods and the marketplace and to establish operational goals.

However, they're not meant to be considered in isolation or as a substitute for financial information provided in accordance with GAAP.

A reconciliation of GAAP to non-GAAP financial results discussed in today's conference call is contained in the Company's third quarter earnings release.

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

Thank you, Jennifer and welcome all.

As we reported today, the our quarter revenues were 44.5 million in line with the updated range we gave on April 4.

The revenue shortfall as well as charges related to the previously-announced workforce reduction and inventory writedown resulted in a loss below the guidance we offered in January.

The first loss in 15 years.

I had great difficulty in getting those words out.

While the focus has been on the top-line not growing as projected.

The bottom line issues can be attributed to several factors, including the acquisition of break-even businesses that have yet to generate the planned revenue synergies.

The downturn in defense plus the shift in product mix that has eroded the margins needed to fund the various developmental businesses that underway.

We have a number of moving parts that have management's full attention.

On today's call, we will be discussing some of the challenges we continued to face in the quarter and some of the areas which we are seeing signs that our investments in innovative solutions to address new markets with Mercury Technology are starting to pay off.

Let me now turn it to Bob for details of the third quarter and then I will make my remarks before we conclude with a Q&A session.

Bob.

Thank you, Jay.

Good afternoon, everyone.

I will review revenue, including details by business unit, discuss company operating performance, balance sheet and cash flow results and finish with a discussion regarding the outlook for the fiscal fourth quarter and the full year.

I will discuss the numbers on both a GAAP and non-GAAP basis.

First, let me summarize total company third quarter results that we reported this afternoon.

As you heard from Jay, third quarter 2006 revenues were 44.5 million.

This reflected a decline of 31% over third quarter 2005.

The shortfall is the result of several large defense programs experiencing timing delays and slower market adoption of the new 3D products in Life Sciences.

Additionally, as previously announced, the acceptance test failure of a multimillion dollar system adversely affected Q3 '06 revenues.

We expect to be able to recognize this revenue for this system in the June quarter.

We reported a GAAP operating loss of 24.1 million in the third quarter, which includes non-recurring charges of 7.2 million related to a workforce reduction and an inventory writedown.

Non-GAAP operating losses were 11.5 million.

GAAP losses per share were $0.67.

Non-GAAP losses per share were $0.36.

To summarize our revenue and operating results for the quarter, our defense business was affected by technical problems associated with third party products and failed acceptance testing of a multimillion dollar system.

In addition, this business continued to experience pushouts and the ramp up of new defense programs.

Revenue for our CIV business unit was roughly flat versus last year.

This unit is enjoying a solid pipeline of sales opportunities and we're starting to close new business, but the ramp up to significant revenues in our 3D imaging business, which is a cutting-edge application area is taking longer than anticipated.

Our advanced solutions business unit experienced a moderate decline on the most difficult quarterly comparison of the year.

The semiconductor equipment business appears to have stabilized and the advanced solutions business unit is beginning to enjoy some of its first orders for products that address new market opportunities for Mercury.

In particular communications.

We still expect advanced solutions to be down slightly for the full-year versus last year.

The marginal products and service business unit was up over last year.

This unit is growing solidly from a small base.

We had a strong bookings quarter with a book-to-bill of approximately 1.5.

Even after adjusting for the revenue shortfall in Q3, the book-to-bill still exceeds 1 driven by increases in our three largest business units.

Our operating income versus last year was affected by several factors, including declining revenues, business unit, end-product mix, modestly higher warranty expenses, the new accounting treatment for stock based compensation expense, and higher amortization of acquired intangibles related to recent acquisitions.

We also took the two nonrecurring charges this quarter as previously mentioned.

At this point, I would like to drill down on operating performance beginning with revenue detail by business unit.

Our defense business unit reported revenue of 18.4 million or 42% of total company revenues for the third quarter.

A revenue decrease of approximately 50% versus the same period last year.

The decline is the result of several large defense programs experiencing timing delays as I mentioned, and the acceptance test failure of a multimillion system.

We anticipate that all of the technical issues will be resolved soon and that the revenue will be recorded in Q4, FY 06.

Echotek, a recent acquisition in the defense space contributed 1.9 million of revenues for the quarter.

Our commercial imaging and visualization business unit revenue for the third quarter was 11.2 million.

Representing 25% of company revenues.

Above flat with the same quarter last year.

During the third quarter, revenue from MPR and digital X-ray modalities were down year over year due to legacy programs tailing off.

While we're starting to see early ramping of new products that addressed 3D visualization technology and solutions throughout the entire 3D radiology workflow, this transition has been slower than anticipated.

So Hard, another recent acquisition contributed $2.1 million of revenue for the quarter.

Or advanced solutions business unit's third quarter revenues, 11.6 million or 26% of company revenues.

A revenue decrease of approximately 18% from the same quarter last year.

Our marginal products and service business unit contributed 7% of revenues.

Ending the quarter, total backlog including deferred revenue, stood at 102.1 million.

A 21.3 million improvement over last quarter.

Of the ending backlog in the third quarter, 92.8 million or about 91% relates to shipments expected within the next 12 month -- months.

Please reference the investor relations portion of our website for a table summarizing bookings, backlog and deferred revenue for each of the three reported quarters of FY '06.

Nap GAAP gross margin for the quarter was 53% versus 66.1% last year.

The declining gross margin was due primarily to the revenue shortfall and to less than planned absorption of certain fixed manufacturing overhead costs.

In the third quarter, FAS 123R stock-based compensation extension came to 3.2 million.

Amortization of intangibles related to accessions was 2.2 million.

In the third quarter, we booked two non-recurring charges totaling 7.2 million, this was comprised of 1.9 million related to the workforce reduction and 5.3 million related to an inventory writedown.

In March 2006, we initiated certain measures across the organization to realign operating expenses.

As part of this initiative we reduced our worldwood workforce, including cotractors by approximately 80 positions or 8% of our workforce.

This workforce reduction action affected each of the business units and is expected to yield annual cost savings of more than $7 million.

The cost-saving measures were necessitated by the softness in our defense business caused by shifting priorities within DOD and the delayed adoption of new 3D business in the life science markets.

We also took an inventory writedown of 5.3 million, associated with inventory that we have deemed as in excess of that needed to ship revenues over the lifes of products for which the materials were procured.

Due primarily to a slowdown in business we ended proved forecasting methodologies.

There is no cash-outlay associated with this charge.

Investments made over the last year in our ERP system and in making our supply chain more efficient should help us improve inventory turns going forward.

For the third quarter GAAP operating losses were 24.1 million.

Net losses were 14.1 million.

Based on 21 million diluted shares, the resulting GAAP losses per share for the third quarter was $0.67.

Now, I will detail our third quarter results on a non-GAAP bases.

Measurably these non-GAAP financial measures assist in providing a more complete understanding of the Company's underlying operational results and trends.

Our non-GAAP reported results make four adjustments.

The first adjustment is the exclusion of FAS 123R stock-base compensation expense.

Second adjustment is the ex construction of amortization expense related to acquired intangible assets, which is a non-cash expense related to prior business acquisitions.

The third is a non-recurring charge we took in the third quarter for both the workforce reduction and the inventory writedown.

The fourth adjustment is the year-to-date tax adjustment of moving the rate from the GAAP tax loss benefit of 45% to a 30% normalized tax rate which accounts for non-GAAP adjustments.

The GAAP tax loss benefit includes significant state and federal R&D credits and reflects tax benefits for current yield losses.

Going forward on a non-GAAP basis, we will continue to use a normalized rate of 30%.

On a non-GAAP basis, we reported an operating loss of 11.5 million for the quarter.

The non-GAAP net loss was 7.5 million.

Based on 21 million diluted shares, the resulting non-GAAP losses per share for the third quarter were $0.36.

Turning to the balance sheet, operating cash flow of 5.4 million in the quarter.

Operating cash flow is comprised on the of 14.1 million net loss, 4.7 million of depreciation and amortization and a 14.8 million net decrease in working capital, including a 10.7 million decrease in accounts receivable and a 3 million decrease in inventory and a 1.1 million net decrease in other working capital and non-cash items.

Third quarter day sales outstanding, DSO was 56.

Inventory turns were 5.6 for the quarter.

Excluding the inventory writedown, they were 3.5.

Capital expenditures were 3 million for the quarter.

Cash, cash equivalents and marketable securities were 168.1 million at the end of the quarter.

The end of the quarter total employee population excluding contractors was 854 compared to 891 at the end of the second quarter.

The decrease primarily result of reduction in force.

During the quarter, the Company repurchased no stock as part of the previously authorized share repurchase program.

Year-to-date, the Company repurchased 531,862 shares for approximately 12.3 million at an annual average, sorry, at an average purchase price of $23.10.

We have 7.7 million remaining for future purchases under the program.

We expect to continue to utilize our stock repurchase program to purchase shares to offset dilution from our employee stock option and purchase plans as necessary.

2006 outlook remaining.

I would now like to move to fourth quarter and full year guidance.

Let me remind you of the workforce reduction we announced in March.

We indicated that this cost reduction action is expected to result in annual savings of $7 million.

The first quarter in which we should achieve the full benefit of this cost reduction will be in the September quarter of fiscal 2007; however, we will see a partial positive fenal Impact on the June quarter of this current year.

Fourth quarter '06 outlook.

For the fourth quarter of fiscal 2006, we project revenues of 61 to 66 million.

We projected non-GAAP gross margin of approximately 59% and a non-GAAP operating earnings ranging from 1 to 6% of revenues.

Our non-GAAP tax rate is 30%.

Diluted shares at 21 million.

Given Mercury's net income doesn't meet the threshold for the convertible debenture adjustment.

The resulting non-GAAP earnings per share were in the range of $0.04 to $0.16.

The impact of the stock based compensation cost for the quarter will be approximately $3 million.

And the amortization of acquired intangibles will be approximately $1.7 million.

The GAAP tax loss benefit is 45%.

And the GAAP diluted shares are projected to be 21 million shares.

As a result, fourth quarter 2006 GAAP EPS is projected to be in the range of a loss of $0.09 to break even.

As you may be aware, our convertible debenture adjustment in the diluted shares calculations can only be included if the effect on earnings per share is dilutive.

For Mercury dilution occurs when net income is approximately 2.3 million GAAP or 3 million non-GAAP or above per quarter.

For a full explanation, please reference our press release in the accompanying financials.

This fourth quarter guidance would result in anticipated full-year 2006 revenues of 235 to 240 million.

Below the range we previously guided to of 250 to 260 million.

By business unit, we project a full-year revenue mix as follows.

Defense business unit will be approximately 55% of revenues.

The commercial imaging and visualization business unit will approximate 20% revenues.

The advanced solutions business unit will approximate 20% of revenues.

And the marginal products and solutions business unit will be approximate 5% in revenues.

In total, this would represent a mix of approximately 55% defense and 45% commercial applications.

We project a non-GAAP gross margin for the full-year of approximately 60%.

We projected a non-GAAP operating margin of approximately 1 to 3%.

In the fourth quarter, we expecting operating expenses to be roughly flat as compared to the third quarter.

The non-GAAP tax rate is 30%.

Shares are projected to be 21 million.

The resulting non-GAAP earnings per share are projected to be in the range of $0.15 to $0.27.

The impact of stock-based compensation for the full-year is in the range of 10 to 11 million.

The amortization of acquired intangibles are approximately 8 million and in process R&D charges are approximately $550,000.

GAAP effective tax benefit is 45% and the GAAP shares are projected to be 21 million.

As a result, fiscal 2006 GAAP losses per share are projected to be in the range of a loss of $0.56 to a loss of $0.47.

CapEx for 2006 is projected to be approximately 11 million.

Depreciation and amortization would be approximately 18 million, including amortization from intangibles.

At this point, I would like to turn the call back over to Jay for his industry comments and additional context regarding our business outlook.

Thanks, Bob.

In our January call, I talked about what is causing the softness on our top-line and just to summarize it quickly, the continued program cuts and shifting of funds within the U.S.

DOD, the OEM designed decisions and adoption rate of our new technologies taking longer than we planned.

And the migration of some applications to what we call good enough products.

These issues continued to influence our performance.

I also spoke about our mission strategy and the innovative value we provide in architecting solutions to challenging computing problems.

I gave an example of a satellite data links application which applies to both defense and commercial markets.

This is a very demanding, signal-crossing application which requires an innovative hardware and software solution, utilizing heterogeneous architecture with tens to hundreds of processing elements, including digital signal processors, general purpose processors, and in our case, power PC s and FPGA's, and the software to make it all work.

I am pleased to report that we have signed the contracts finally.

One commercial customer and one defense customer to deliver these systems over the next several months.

The potential business in the commercial space could be several tens of millions, while the defense space it could be even greater over several years.

If we can get permission from the two customers, there will be press releases put out as soon as permission is granted.

This example that I have talked about here reinforces the soundness of our strategy which is to develop a leading-edge technology, both hardware and software, based upon our signal processing expertise, which can then be applied to both commercial and defense markets.

In January, I spoke of the value migration to the silicon and how we're positioning Mercury to capture that value.

This all falls under the rubric of open innovation and what we're doing to pursue open innovation as part of our world strategy.

So, we have developed strategic partnerships with IBM, TI , Invidia, that makes the graphics processing chips and Xilinx with their PGAs and they're absolutely critical to introducing us to new opportunities and to enabling us to develop cost effective implementations of systems that will assure market success of the applications.

We are in the early stages of market development for the self-process of bay systems.

To date, we have shipped six development systems with support to defense contractors and three systems with support to commercial customers.

I expect to be in investment mode for several quarters, given the time required by OEM's and Primes to bring new products to market.

The TI and Xilinx engagements are examples of how Mercury is leveraging open innovation across the organization.

We developed a TIGSP-based AMC module and are shipping them as part of ensemble system.

As a result of this development, TI requested that we combine their DSP and - Xilinx FPGAs on the same module with TI software to specifically target Wi-Max applications.

Wi-Max stands for worldwide interoperability for microwave access.

This is the next generation wide area, wireless technology which is in the early phase of development and adoption.

Working closely with TI on a new market development and leveraging their technical and sales resources will enable us to again access to the development labs within the telecom OEMs leading to production opportunities for Wi-Max applications.

A similar relationship exists with Xilinx as we are now an alliance partner of theirs.

Through this partnership, Mercury's rapid IO intellectual property will be introduced to Xilinx users.

This relationship is expected to develop new market opportunities for Mercury's products and services.

Defense, we had an excellent quarter for design wins recording 8.

This now gives of us 20 for the year to date.

In addition, as I said previously we have shipped six cell development systems to prime contractors.

The potential revenues over the program life could well be over, could be over $100 million from these 20 design wins.

The systems which didn't ship in Q3, and which we were primarily responsible for the Q3 revenue shortfall previously announced we're all expected to ship this quarter.

In fact, some already have.

Year-over-year, the domestic defense business is down $8 million and international is up 900,000.

The growth we have forecast for FY '06 hasn't materialized for all the reasons previously stated with regard to DOD budget issues.

The bright spot is our acquisitions.

Advanced Radio Corp, Echotek and Momentum, in that they're exposing us to new market opportunities which, of course is why we bought them.

Our capabilities range from the antenna or the sensor to data conversion, to processing, and to the visualization of the results.

This end-to-end capability is unmatched in the industry.

We can provide the components or integrated systems to enable a wide range of challenging applications.

The advanced solutions group.

This business unit addresses developing market opportunities primarily in the semiconductor industry and communication industry.

Overall, this business unit is expected to be down slightly from FY '05.

The semiconductor business is down approximately 20% year-over-year for the following reasons.Some tools, as they're referred to in the trade, have shifted to in-house designs and we have shipped fewer development systems and are in what I would call a steady state for the production requirements.

However the positive side is significant new opportunities beyond wafer and radical inspection are emerging with new customers, broadening our base and developing new applications that require Mercury's unique capabilities will enable us to capture new revenue streams from a more diversified customer base.

In Q3, one self-development system has been delivered in this market space.

The communications market development with the TIMS plus the previously mentioned satellite data link design wins are encouraging.

The revenues generated almost offset the reduced semiconductor revenues.

The communications market continues to be the largest market opportunity that we address and we are encouraged by the steady progress being made in both the commercial and defense side of this business.

CIV our commercial imaging and visualization business group.

This group includes the life sciences, the TGS operation that we acquired in France that serves the oil and gas industry primarily.

Our web-based PACS software and our synthetic visions system.

As stated in January, we continue to believe that our e 3D everywhere strategy is valid.

We had seven designs wins in life sciences in Q3 that will start to wrap up within the next few quarters.

Our TGS operation is experiencing strong growth from the oil and gas industry, primarily for a 3D reservoir modeling with a $1 million follow-on order, this is all software from a major player.

We also have a follow-on commitment from a medical company for our rod and web-based PACS system and we have also shipped 70 VistaNav systems to private pilots, many of whom have been effusive in their praise of the system as it relates to improving flight safety.

The mass general hospital digital breast terminal synthesis system, a great example of our open innovation strategy is in clinical trials.

We received orders in Q3 for a number of systems to implement these trials.

We also delivered two self-development systems to major diagnostic imaging modality manufacturers for evaluation.

While the 3D market development has been slower than expected, the design wins we have achieved and the robust sales pipeline are very encouraging for the future.

Our marginal products and services group, that's the momentum acquisition.

I consider NPS to be a turnaround situation.

We have brought in new management to improve operational effectiveness and to increase sales.

Developing products for our defense business and leveraging the Mercury defense sales of course took longer than planned.

We believe we can move this from a break-even situation in FY '06 to a profitable growth business in FY '07, supporting our defense customers performance, lower performance requirements and opening up new opportunities specifically in the telecom market.

Operating margins.

We implemented significant cost reductions in Q3 as I had indicated we would by reducing staff by approximately 80 associates, including contractors or 8% of the population across the company.

Our portfolio announces exercise is ongoing as part of our three-year strat planning process.

The results of this plan won't be unveiled until our July investor call.

It's clear that any additional significant reductions in expenses would cut into our long-term, 25%plus growth objectives, and more importantly, impact our ability to meet our customers needs.

A return to our 16 to 18% operating margin model will require revenue growth and some patience.

In conclusion, the future really does look promising.

The revenue synergies from our acquisitions are developing, finally.

The transition of our hardware centric medical business, to a software centric business model, while life sciences is gaining traction.

Our technology investments in NPGAs, CELL, GPUs, and 3D visualization software clearly positions us as the technology leader in high performance embedded computing with signal and image processing.

Our new market development activities in communications, biotech and synthetic visualization systems all have potential to open up major new market opportunities.

We're committed to maximizing the value of these developmental activities for our shareholders.

The leadership team is focused on three areas.

One, develop new capables for existing markets and also new markets to fuel our growth objectives.

Two, leverage more strategic relationships so as to create innovative solutions and solutions in this case is not only technology but it's also innovative business models.

And, three, to return to our 16 to 18% operating margin model.

So I repeat.

The future really does look promising and in closing, I ask for your continued support.

We will now open up the call for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll go first to Steve Levenson of Ryan Beck.

Good afternoon, Jay and Bob.

Hi, Steve.

The return to the operating margin range that you're hoping to do I know you mentioned patience.

Is there a timetable?

You expect it to come back fairly quickly or do you think it's going to be over a period of longer than through 2007?

Steve, it's Bob.

I will get us going on that.

As Jay noted, we're right now in the thick of our strategic planning process and then we roll from that into our budgeting, preparing our operating plan for FY '07.

In the strictest sense, the answer to your question, lies in that process.

I think in the spirit of your question, though, since you asked, is it, you know, is it going to happen next quarter.

No.

I don't think anybody expects miracles.

Be nice, but that's okay.

Miracles do happen, Steve.

I would like to see one.

Believe me.

Are you finding -- there has been some discussion that the government has been concerned about using commercial off-the-shelf products for certain intelligence applications that somebody else can get their hands on them.

And use them the same way we do.

Are you running into any of that or are your products enough different than straight commercial off-the-shelf stuff that you think you still have the edge their?

Well, Steve, it's the first that I have heard of it and if you have got anything specific, I would like you to give me a call and let me know what it is later.

I will forward you up the text.

There are, clearly ITAR regulations that we have to live with in terms of who has access to what technology.

Even here within the Company.

And there are export licensing issues that we adhere to.

But that is nothing new.

It's been there for quite awhile.

Thanks very much.

Thank you. [OPERATOR INSTRUCTIONS] We'll go next to Rob Stone of Cowen Company.

Two questions, please.

One, Jay, could you just repeat what you said about the two contracts for the satellite data links application?

And the second question, with a little more color, if you can, -- and the second question is, in any of your various business units other than the comment on semi equipment and some designs going in-house, would you attribute the revenue softness to competitive losses?

Can you just say that again?

The first question was about the satellite--.

Data links, yes.

And the second one is except for the note about semi equipment, tool designs going in house, have you seen other examples of competitive losses.

Okay, let me answer the last one first and the answer is no.

Again the -- the end of the market, one of the markets that we deal with here requires a considerable amount of compute power and, frankly, there is not anybody else out there that can put the systems together with the 1,500 and in one case, 300 processing elements.

But the customer, one of our customers is attempting to do that with the blade type solutions, and so -- anyway, we never give up.

We're going to get back in the game with the self-processor, we believe.

With regards to the satellite and the data links application, I said there were two customers yet unnamed, one in defense and one in commercial that we had contracted for within -- contracted with within the last quarter to provide systems to do the really different applications but fundamentally, it's dealing with data flows from ground stations to satellites and what you're doing with those data flows being forming functions and other functions within it.

I'm not going to say any more than that right now.

Some of this is under NDA with the customers.

I think you said it could be several tens of millions in commercial and more in defense.

Did I get that detail right?

Yes, you did.

Okay, thank you.

Just think about, just think about data transmissions from ships via satellite to shore.

Think about things like that and you get some idea what we're talking about.

[OPERATOR INSTRUCTIONS] We'll go to Shao Wang of Lotus Investment Management.

Good afternoon.

A couple of questions, Bob, made you already answered this.

I'm curious if you have a sense, since you're going through the planning process now, I suspect you can't give me hard head count number right now at the end of the fiscal '07, can you give me sense as to what your predilections might be in that regard?

Separately, Jay, on the multimillion dollar system that was delayed use with failed test.

My recollection is the reason for the failed test was not due to a technology shortfall or an issue on the Mercury side but rather on another component.

I'm wondering if my recollection is correct on that?

Second, I am assuming you won't quantify how large that revenue piece might be to Mercury but might it be -- can you give me some sense as to the size of it.

Thank you.

Shao, it's Bob.

I'll take your first question.

You're correct.

I can't do much right now to help with your sizing the workforce.

We need to do our planning to come up with the answer.

I think Jay was pretty direct in his prepared comments that our sense is that we need to grow the top line and the resources we have we need to help us do that.

I would not be expecting much in the way of change there on that line.

Would you think up or down?

Now you got to wait.

Okay.

All right.

Shao, I'm not quite sure I understand the questions about the systems and -- what do you want to know what the problems were?

You had mentioned several times there's a multimillion dollar system that did not ship in the March quarter due to a failed test.

Yes.

And my recollection is that the failed test was on a component or a piece that was not dependent.

That was not a Mercury piece of technology.

It was on another component.

Is that true?

I don't believe so.

Okay.

I think that we may have confused you because there were multiple issues with multiple systems that have caused this 10, $11 million revenue shortfall, or we couldn't ship t products.

Some had to do with third-party products and some had to do with new capabilities that we were introducing into the power stream 7,000.

In fact, we have shipped the biggest part of the system to the customer because they wanted to start using it.

So we expect to get the rest out to them shortly and we'll be able to take revenue credit this quarter.

Got it.

All right, thank you.

Thank you, with no further questions, I would like to turn the conditions back over to Mr. Jay Bertelli for any additional or closing remarks.

Thank you all for your participation today.

It was a light call and we'll -- I guess we'll be back with you sometime at the end of July for the annual wrap-up.

Okay.

Thanks again.

Thank you for your participation.

That does concludes today's conference, you may disconnect at this time.