Mercury Systems Inc (MRCY) 2007 Q2 法說會逐字稿

Good day and welcome everyone to the Mercury Computer Systems Inc. second quarter fiscal 2007 earnings results conference call.

Today's call is being recorded, and at this time, for opening remarks, I'd like to turn the program over to the Senior Financial Analyst, Ms. [Lesley Shafer].

Please go ahead ma'am.

Good afternoon everyone and welcome to the Mercury Computer Systems' second quarter fiscal year 2007 earnings conference call.

With me today are Jay Bertelli, President and Chief Fin -- 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 earnings release, you can find it on our website, www.mc.com, or on the First Com 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 this afternoon according to company's second quarter fiscal year 2007 results and in the company's periodic report filed with the SEC.

We caution listeners of today's conference call not to place undue reliance upon any forward looking statements.

We speak only as of the date of this call.

We undertake no obligation to update any forward looking statements.

In addition to reporting financial results in accordance with generally accepted accounting principals -- or GAAP -- we will also be discussing non-GAAP financial measures, adjusted to exclude certain 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 in the marketplace and to establish operational goals.

However, they are 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 second quarter fiscal year 2007 earnings release.

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

Good evening folks and thanks for joining us.

I will make a couple of remarks and turn it over to Bob for detailed analysis of the numbers.

I believe we did a good job executing this past quarter.

Revenues were above our guidance.

Gross margins were solid.

And we kept expenses under control.

We were disappointed with a book to bill, again below one, reflecting primarily the same challenges we've been discussing with you for over a year.

My big picture standpoint I can only reiterate that we continue to believe we are aiming our R&D resources and acquisition funding at the most promising marketing opportunities for Mercury and that we are pursuing the correct strategy.

That is, leveraging our unique technology and expertise across a number of niche markets, some of them relatively large.

Though not reflected in this quarter's results or guidance, all these efforts are resulting in signs that growth will resume, although we still don't have the visibility we would like to be able to tell you when.

With that I'm going to turn it over to Bob.

And then I'll come back for some closing remarks.

Thanks, Jay.

Good afternoon, everyone.

I will review revenue for the second quarter of fiscal year 2007 and company operating performance, discuss revenue details by business unit, balance sheet, cash flow results and finish with a discussion regarding the outlook for the full year 2007 and third fiscal quarter.

Second quarter revenues were $57.9 million, above our guidance range of $52 to $54 million.

Gross margins were approximately 57%, a decrease of approximately 5% from the same period last year.

Gross margin was adversely affected by lower volumes in both business unit and product mix.

On a GAAP basis, the operating loss was $7.5 million This includes stock based compensation expense of $3.1 million and amortization of acquired intangibles of $1.8 million.

Also, this quarter, we took a $300,000 restructuring charge, related to involuntary separation costs.

The GAAP net loss was $1 million, resulting in a diluted loss per share for the second quarter of $0.05.

On a non-GAAP basis, we reported a loss of operations of $2.3 million for the quarter.

The non-GAAP net income for the quarter was $200,000.

The non-GAAP diluted earnings per share for the second quarter were $0.01, exceeding the high end of guidance range of a loss of $0.23 to a loss of $0.19.

The majority of this upside was due to higher revenues.

Also contributing was the receipt of a $2.4 million litigation settlement relating to a foreign subsidiary.

The book to bill ratio for the quarter was .94.

Ending backlog, including deferred revenue, was $93.3 million, a $12.5 million increase over the same quarter last year.

And a $3.5 million sequential decline from the first quarter.

Of the ending backlog, $79.5 million, or approximately 85%, relates to shipments expected within in the next 12 months.

Our defense business unit reported revenue of $26.8 million, a 46% of total revenues for the second quarter -- a revenue decrease of approximate 21% versus the same period last year.

Revenues in the defense business unit continued to be adversely affected by the shift in government funding from procurement of intelligence, surveillance, and reconnaissance ISR systems to more immediate and tactical requirements.

Our commercial imaging and visualization business unit revenue for the second quarter was $11.3 million, representing 20% of total revenue, down approximately 26%, again from the same quarter last year.

Revenues from MRI and digital X-Ray modalities were down substantially year over year due to our Legacy 2D projects tailing off as we have previously communicated.

However, the new 3D visualization business was up significantly but still too small to totally offset the decline in our Legacy medical business.

Our advanced solutions business units' second quarter revenues were $14.1 million or 24% of Q2 '07 revenues, a revenue increase of approximately 32% from the same quarter last year.

The year over year increase is due to continued strength in the semiconductor business and growth in sales to communications customers.

Our modular products and service business unit second quarter revenues were $5.7 million, or 10% of total company revenues for the quarter.

Turning to the balance sheet and cash flow statement, cash, cash growth and marketable securities were $136.5 million at the end of the second quarter, representing a $16.2 million decline from the last quarter of $152.7 million.

The decline includes an operating cash outflow of $5.3 million, $1.5 million in capital expenditures and an additional $9.4 million net outflow for other investing and financing items, which includes the mortgage payoff of $9.8 million on our Chelmsford, HQ properties.

In addition, or I should say in additional effort to monetize our non-performing assets, we are pursuing a sale lease-back structure for these same Chelmsford, HQ facilities.

We listed the property just this past week at $27 million.

Second quarter day sales outstanding DSO were 64, inventory turns were 2.9 for the quarter.

At the end of the quarter, the total employee population, excluding contractors, was essentially flat at 822, compared to 823 at the end of the first quarter.

And now, I'd like to move to full year 2007 and third fiscal quarter guidance.

For the full year fiscal 2007, given that the book to bill ratio for the second quarter was below 1, and we still have limited visibility, we anticipate fiscal year revenues will be approximately $230 million versus our beginning of year guidance of $235 to $245.

We project gross margins of approximately 56% for the full fiscal year.

We expect GAAP operating expenses to approximate $159 million and we expect non-operating income to be approximately $5 million.

The GAAP effective tax rate for the full year will be approximately 30%.

The diluted share are projected to be approximately $21 million, given Mercury's net income does not meet the threshold for the convertible to venture adjustment.

Based on a $230 million revenue estimate, the fiscal year 2007 GAAP losses per share are currently expected to be approximately $0.85 versus our previous guidance of a loss of $0.50 .

The impact of stock based compensation cost for the full year is currently expected to be approximately $10.7 million.

The amortization of acquired intangibles will be approximately $7.1 million.

There is a Q1 in-process Research and Development charge of $3.1 million and a first-half restructuring and impairment charge totaling approximately $1.1 million.

Excluding these charges, we currently expect non-GAAP operating income to approximate $138 million for the year and non-operating income to be approximately $5 million.

The non-GAAP rate rate will be 30% for the full year.

The diluted shares for the full year are projected to be approximately $21 million, given Mercury's non-GAAP net income does not meet the threshold of the convertible to venture adjustment.

Based on a $230 million revenue estimate, the non-GAAP losses per share for full year 2007 -- fiscal 2007 are projected to be approximately $0.13 versus our previous earnings per share guidance of $0.29.

Given the on-going profitability challenges, we expect to take appropriate actions to better align our cost structure with our revenue outlook.

CapEx for 2007 is projected to be approximately $11 million.

Depreciation will also be approximately $11 million.

For the third quarter, we currently expect revenues to be approximately $55 million.

Currently expect gross margins to be approximately 53% for the third quarter.

The GAAP tax rate will approximate 34%, and the diluted shares are projected to be approximately $21 million.

As a result, fiscal third quarter GAAP losses per share are currently expected to be $0.31.

The impact of the stock based compensation cost for the quarter -- currently expected to be approximately $2.8 million.

And the amortization of acquired intangibles will be $1.8 million.

Our non-GAAP tax rate is 30%.

Diluted shares, approximately $21 million, the resulting non-GAAP losses per share -- currently expect approximate $0.18.

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

Jay?

Thanks, Bob.

The highlights for Q2 are listed in our press release and rather than repeating them, I suggest that you take a look at that.

So what are we seeing in the marketplace?

Well, we see a data explosion across multiple markets requiring specialized computational systems which is what Mercury's technologies does very well.

We are applying systems based on the Cell BE processor to a number of these markets.

And the Mentor Graphics design win is a representative example.

We are well positioned for a rebound in the defense market as a result of the product investments we have been making.

For example, our systems designed for high end radar have the potential to generate between $100 and $125 million in the revenue over the next 5 years as committed programs move into production.

In calendar year '06 we closed 29 design wins with revenue potential over $75 to $100 million spread out over the next 3 to 5 years.

The Cell processor is generating significant interest across the federal marketspace including the national labs and [inaudible] agencies.

A number of Cell systems have been sold for evaluation purposes.

Defense continues to be a significant portion of our business -- 46% in Q2 and a key contributor to our portfolio strategy.

We see a large opportunity -- somewhere over $100 million -- in our 3D medical imaging business.

The new 3D business is growing at a faster rate than the old 2D business is declining.

In calendar year '06, we signed up 14 new customers, including 6 for packs with a $15 plus million revenue per year potential in total.

We are leveraging our investments into adjacent and new markets.

Our investments at the fundamental technology level, for example, microprocessors such as Cell, MPGAs, DSPs -- digital signal processors, graphics processing units and general purpose processors are applicable across most, if not all of our markets.

For example, we are driving Cell into applications in defense, semiconductors, oil and gas, medical imaging, bio tech and national labs.

And FPGA-based products are penetrating both defense and commercial applications.

Our open innovation strategy has created early-stage market opportunities for us in bio tech for drug design, synthetic vision, applied to controlling unmanned vehicle systems for asset-protection applications such as oil pipeline and border monitoring, data acquisition systems for magnetic resonance imagining systems, bay stations for satellite communication systems for both defense and commercial applications.

Our unique capability to architect ultimate performance single processing systems has enabled us to enter these emerging markets.

We have previously stated that the cost reductions we implemented in Q4 of FY of '06 would enable us to create operating leverage opportunities when revenue growth resumes.

The revenue growth has not materialized as planned.

Therefore, even though we believe the basic strategy to be sound, and that is a timing and government funding issue we must initiate actions to reduce our break even point to a level which provides us the assurance that we will be around to enjoy the fruits of our investments in the previously mentioned exciting growth opportunities.

It is premature to discuss these specific action items.

We must revisit our product and market portfolio opportunities from a strategic perspective with the focus on creating long-term shareholder value.

Having completed this action, your company will then be positioned to realize the benefits from the substantial, organic and inorganic investments made over the past 3 years.

This stock called IEME firmly believes that the results will justify the efforts, and the time-to-value creation is rapidly approaching.

That concludes my remarks.

I will now open the call for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from [Jim Macry], David Jay Green.

Jay, Bob -- just if you could help us out with your thoughts on the cash flows for the balance of the year.

Sure, be glad to.

I think we're going to actually see an improvement here.

The big picture for us on cash flow is if we have an operating profit where we're usually positive to the good.

Right.

So, if you work through the guidance here we're going to have that situation in the fourth quarter, the June quarter.

So we'll be -- we'll be cash flow positive -- operating cash flow positive by a wide margin in the fourth quarter.

And I think if we burn any cash at all in the third quarter it's going to be fairly modest.

We've got an opportunity to improve our working capital -- you heard me on the DSO's and the turns.

We're posturing that we're going to improve that here in the second half, and then, of course, we've got the opportunity to restructure our Chelmsford headquarters through a sale lease-back.

And we're out in the market with that.

A lot of interest there.

I think it's a great transaction.

So, we got a chance of closing that deal either late in the third quarter or early in the fourth quarter.

So --

Right, that would be the plus.

But on an operating basis, though, we're looking at hopefully around break even cash flow 3Q, and then swinging to a positive cash flow in the fourth Q?

That's correct.

Okay.

Great.

Great.

That's my only question for now.

Okay.

And we'll go now to [Jonathan Ho] with Williams Blair.

Hey guys.

Nice quarter.

Just a quick question.

Can you guys give us quick update on what's shaping with -- up with some of the opportunities with the national labs and kind of the progress towards maybe commercialization on that side?

Well, I'm not sure what you mean by progress towards commercialization on that side.

Just the broader opportunity that's there once you kind of have developed the exposure -- kind of the longer term strategy, maybe.

Okay, well, I'm still not really sure we're on the same page here.

The national labs typically uses supercomputers.

And what we're seeing here is opportunities to put the Cell processor in primarily as a result of the software that we have developed to enable one to be able to stitch together these multiple cords on a given chip, and then multiple chips together on a given cha -- on a given chassis.

So it's a early stage effort, and it's not one that I would say is going to be a huge opportunity for us.

But it's certainly a very interesting and challenging one.

We're learning a lot in dealing with the national labs, and it's a -- I'd say single digit millions opportunity.

Okay, great.

My second question would be -- we saw a sequential up-tick in the inventories.

If we could just talk about a little bit.

Sure.

There was an up-tick of a couple million dollars.

It's kind of a direct reflection of our business tempo right now.

We're entering a quarter not knowing exactly how the quarter is going to finish.

And historically, when our backlog is larger, and we're running with strong book-to-bills, dialing in the quarter for Mercury was always -- the very next quarter -- was always easy, I would describe it as.

It was mostly there in backlog and we could be fairly explicit with our MRP system.

So now we got to put a little more flex into the MRP to make sure that we can get the stuff out the door, and we're not exactly sure what that is.

So it's a function of load going into the quarter being not as robust as it was historically.

Okay, thank you very much guys.

This is all the questions I had.

Thanks.

[OPERATOR INSTRUCTIONS] We'll go now to Steve Levenson with Ryan Beck

Good evening, Jay and Bob.

Hi, Steve.

Can you tell us a little bit more about the design wins you referenced before.

And I know there's a fair time lag between getting a design win and seeing some revenue, but if you can elaborate a little that would be great.

Well, if we could say anything, certainly talking about defense?

No the ones you mentioned about Life Sciences too.

They're all important.

All right, well the -- within the Life Sciences area, a number of them were -- I think I said 6 were -- 5 or 6 were PAC systems.

A number were the distribution channels that we're setting up, and then we've also had some design wins within the -- the bio imaging area.

I can't re -- We're not at liberty to disclose specifically who it is.

But there's -- and then also in the molecular modeling area there is a rather large company that has picked us for that.

So, it's dispersed if you will across multiple applications in what we call the Life Sciences area.

Within defense, I think there were 29 design wins that we had talked about over the calendar year.

And if we can say anything specifically we would.

And the press release would have been out by now.

But, as you know, the customers have a way of not wanting us to disclose that so unfortunately I can't tell you that.

There were a number that were for the Cell-based systems, though, and what we're seeing there, again, is a strong interest across the spectrum both in terms of radar type applications, signal processing or, I should say SIGINT applications, research labs and so we're very pleased to see the diversity of the potential within the defense space.

Okay?

And -- In relation to SIGINT -- do you think that is going to help you recapture some of the share that you had before?

I'm not -- I don't realize we lost any share in SIGINT.

And I think we have been doing very very well in SIGINT.

Okay.

And then just back to the sale lease-back again, are there particular plans for the cash?

Or is is basically just to take the asset off the books?

Basically to take the asset off the books.

I would loosely put it in the non-performing category.

We can do better than that even by just investing the cash in money market instruments.

But, I think it's a prudent thing to do at this point.

It's probably unusual for a tech company to have $25, $30 million tied up in real estate.

Okay, thank you very much.

Yes.

And at this time we have no other questions standing by.

I'd like to turn the program back to our speakers for any additional or closing comments.

Well, thank you all for joining us on this call, and we look forward to seeing you again three months from now with improved results.

Thank you, good-bye now.

Thank you everyone for your participation in today's conference call.

You may disconnect at this time.