Mercury Systems Inc (MRCY) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Mercury Computer Systems, Inc.

first-quarter fiscal 2009 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 Senior Vice President and Chief Financial Officer, Mr.

Bob Hult.

Mr.

Hult, please go ahead, sir.

Good afternoon and thank you for joining us.

With me today are our President and Chief Executive Officer, Mark Aslett; and our Vice President and Controller, Karl Noone.

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

We would like remind you that remarks we 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 first 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 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 principles, or GAAP, we will also be discussing non-GAAP financial measures adjusted to exclude certain charges which we will specifically identify.

Management believes that 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 press release we issued this afternoon.

I am pleased to turn the call over to Mercury's CEO, Mark Aslett.

Good afternoon, everyone, and thank you for joining us.

I will begin with an update on the business.

Bob will then review the financials and discuss our guidance for the second quarter, and at that point we'll open up for your questions.

We set out to make fiscal 2009 the pivotal transition year for Mercury by becoming a much more focused business, improving our profitability, increasing our cash flow and positioning ourselves for renewed growth in fiscal 2010 and beyond.

The first quarter was a strong start to the year in all these respects.

We met or exceeded our internal targets for the majority of our key financial and operational metrics, including our first-quarter guidance.

We made progress toward our goals of divesting all of our unprofitable and non-core businesses by the end of the fiscal year while strengthening and growing our core defense business, and our Mercury Federal business delivered its first significant bookings.

This is an important step forward in our strategy to expand Mercury's addressable defense market increase the amount of revenue coming from software and services and assist in the transition of our COTS defense business.

Summarizing our financial results, we continued to see the levels of revenue and profitability we expected in our core ACS defense business.

As in prior quarters, these results were partially offset by the continuing revenue decline in the commercial business within ACS and by losses in Visage Imaging.

Starting with the top line, Mercury's total revenue for the first quarter was $49.1 million.

This compares with $55.2 million in the sequential fourth quarter and $48 million in the first quarter of fiscal '08.

Our book-to-bill for the first quarter improved from 0.8 times in the fourth quarter to 1.01, largely driven by improved bookings in ACS quarter over quarter as well as the strong bookings performance for Mercury Federal.

Non-GAAP operating profit increased to $2 million in Q1 from $1.1 million last quarter on lower revenues, so the profitability of the business improved substantially.

Year-on-year, operating profit was also up.

Non-GAAP EPS from continuing operations for the first quarter was $0.07 per diluted share, well above the high end of our guidance range, which was a loss of $0.03, and up $0.04 from Q4.

Finally, we continued to generate cash, and we'll feel confident about our liquidity and our ability to meet the put on our convertible debenture in May 2009.

Moving on to business, we have made it a priority to improve our underlying operations, and these efforts continued to pay off this quarter.

Inventory was down by $3.2 million from the sequential fourth quarter, and since the end of Q3 of '08 inventory has declined by a total of $7.1 million.

Our shipment linearity was the best we have had in many quarters.

We are also continuing to do well in cash collections.

DSO's this quarter declined to 49 from 54 in the fourth quarter and from 63 in Q1 of last year.

Our customers in the defense space are reliably paying us on 30-day terms, and overall more of our first quarter business was in defense versus a year ago.

If you look at our strategy in the short-term, we're focused on taking costs out of the business and tightening our operations to generate more cash, and we continued to produce good results with cash from operations being $2.6 million this quarter.

To drive longer-term improvement we need to rationalize and optimize the return from our portfolio of unprofitable and non-core businesses.

In fiscal '08 we shut down the unprofitable business of AUSG, our commercial avionics and unmanned aerial systems group.

We also completed the sale ESPS, a small legacy professional services unit within VI, which allow us to consolidate VI's German facilities.

Divesting ESPS, consolidating facilities and lowering headcount helped reduce VI's operating loss from $3.3 million in the fourth quarter of '08 to $2.1 million in Q1.

However, revenue in VI declined in the first quarter, reflecting a longer sales cycle and tougher market conditions.

As I mentioned, our objective is to exit the remaining non-core businesses, chief among them VI, by the end of fiscal '09.

This effort stands a greater chance of success if we can demonstrate progress in converting VI's sales pipeline.

That said, this quarter the sales cycle lengthened as the economy weakened, making it a tougher environment to sell an unprofitable asset.

However, we did make progress this quarter in rationalizing our portfolio.

On the last day of the quarter, we sold the assets of SolMap, our biotechnology venture, to FORMA Therapeutics.

Selling SolMap eliminates the annualized cash burn at more than $2.5 million that we experienced in 2008.

Let's turn now to the core business, the defense business within ACS.

Our mission is to unlock the value in this business, which continues to perform well both tactically and strategically.

Revenue in ACS defense was up by $6.1 million or 22% from the first quarter last year and down 9% sequentially.

Defense revenues represented 74% of ACS total revenue in the first quarter, up from 64% last year.

In ACS commercial, revenue was down by $3.7 million or 24% from the first quarter last year and by $1.3 million or 11% sequentially.

Our book-to-bill in ACS as a whole was 0.98 times, down from 1.12 in Q1 last year but up sequentially from 0.81 in the fourth quarter.

Defense bookings were down 5% year-on-year but up 11% sequentially, due to continued growth in the defense radar segment.

Commercial bookings were down 12% year-on-year but up 8% sequentially.

Looking at the commercial business in ACS, we have been facing headwinds for some time, and they have become more challenging as the economy has deteriorated.

Revenue from our legacy medical business continues to erode as we approach end-of-life in that business, and our commercial telecoms business is also down.

In semiconductor, however, although the industry is in a severe downturn and worsening, we did reasonably well this quarter and have a potentially positive development to report, that being a design win in the first quarter with a five-year potential in excess of $30 million from a major semiconductor company in Europe?

Adding that to the fact that we design into the next generation of technology at our major existing customer, KLA-Tencor, we will be well-positioned when the semicon industry recovers.

Short-term, however, it will be tough sledding, and we expect further deterioration as the semiconductor market continues to weaken.

Therefore, our strategy to unlock the value in ACS is primarily directed at the defense business because this is where we see the real potential for sustainable, profitable growth going forward.

The defense products we introduced in prior years continued to drive bookings and revenue.

We have good penetration across a wide array of programs and platforms with opportunities for upgrade business at relatively low risk.

This business is driven by design wins, so our key focus for the near-term is to refresh key elements of both our single processing and multicomputer product lines.

It's critical for us to not only launch new products, but also to improve our R&D leverage so we can reduce our time to market and achieve greater efficiencies, and we're making good progress in this regard.

In addition to the commercial design win I just mentioned, in the first quarter we recorded two other wins in commercial and five in defense.

Two of the defense wins, both in electronic warfare, were substantial, with a five-year potential in excess of $50 million and $10 million, respectively.

The five-year value for all eight wins is approximately $110 million, which represents a 57% increase over the first quarter of fiscal '08.

Looking forward near-term, we are focusing on existing military platforms where we have a presence in seeking ways to penetrate additional programs on those platforms.

For example, if we are currently participating in the radar, we're pursuing design wins for the electronic warfare, or the C4I elements of the platform.

Farther ahead, we're working to leverage our existing technology, roadmap and relationships to expand into new applications and platforms.

With the product portfolio and technology capabilities that we have or are working on, we think we have good chance of executing this successfully.

Moving from the tactical to the strategic, ACS today is largely a hardware-based business with our customers being the prime defense contractors.

Our goal is to grow the software and services part of our business and to exploit adjacent market growth potential surrounding the ACS defense core.

We formed our Mercury Federal business in fiscal '07 to pursue this opportunity.

This was based largely on the assumption that we can scale up a services-based business focused primarily on government customers directly.

Merc Fed is still in early stage, but our business development efforts have begun to produce results, and we are beginning to see the linkages with our core ACS defense business that we anticipated.

From a base of approximately $400,000 in bookings for all of fiscal '08, Merc Fed posted bookings in the first quarter of $4 million, a substantial increase.

This is the leading edge in a long-term strategy to expand our total addressable market by leveraging our position in the COTS board hardware space.

This will enable us to penetrate the larger profit pools associated with the broader military electronics market and, in particular, the intelligence, surveillance and reconnaissance, or ISR, segment of that market.

Our goal is to become the recognized leader in delivering a next-generation converged sensor network, or CSN, platform architecture that we believe will dominate the ISR space in the decade ahead.

Let me lay this out for you in a more concrete way.

If you look at the ISR space today, the DoD now has a new generation of sensor technology that makes it possible for the war fighter in the field to see the world differently than in the past.

The difficulty is that most imagery systems are still largely platform-centric and the data that they collect primarily moves in a linear fashion from the tactical edge up and down the command structures.

The challenge is to get a richer stream of imagery to the war fighter in the field precisely when and where they need it.

The answer lies in solutions that are network-centric, capable of moving imaging information across platforms from one intelligent node to another using minimal bandwidth and industry standard networking.

That is what our CSN architecture will do.

Our long-term vision is to position Mercury as the government's trusted partner for next-generation ISR signal processing and computing solutions.

We're now in the process of evolving our technology, product roadmap and business development capabilities towards realizing this vision, and we're beginning to see some exciting opportunities.

So, in summary, we feel very good about our results this quarter and remain confident that Mercury will exit fiscal '09 as a much more focused and profitable business and a business with broader opportunities for growth.

With that, I'll hand it over to Bob for the financial review.

Bob?

Thank you, Mark.

I will review revenue for the first quarter of fiscal 2009, including details by business unit; discuss Company operating performance, balance sheet and cash flow results and then finish with a discussion regarding the outlook for the second quarter of fiscal 2009.

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

In the first quarter, Mercury sold the assets and intellectual property of its subsidiary, SolMap Pharmaceuticals, to FORMA Therapeutics.

All historical statements have been adjusted to reflect this discontinued operation.

First-quarter revenues were $49.1 million, at the top end of our guidance range of approximately $47 million to $49 million, and represents a $1.1 million increase year-over-year.

The GAAP net loss from continuing operations for the first quarter was $1 million, resulting in a loss per share of $0.05.

The GAAP operating loss of $1.3 million includes stock-based compensation expense of $1.4 million, amortization of acquired intangibles of $1.4 million and $600,000 in restructuring costs.

On a non-GAAP basis for the first quarter, operating income was $2 million.

Non-GAAP operating income includes stock-based compensation expense, amortization of acquired intangibles and restructuring charges.

We used a non-GAAP tax rate of 34%.

The non-GAAP diluted earnings per share for the first quarter was $0.07.

This was above our guidance range, primarily due to lower operating expenses.

The non-GAAP gross margin for the quarter was 57.7%, slightly below our guidance range of approximately 58% to 59%.

Gross margins were adversely impacted by lower than planned revenues in our Visage Imaging business.

Our non-GAAP operating expenses for the quarter were $26.3 million, below our guidance of approximately $30 million, due to engineering program spending shifts to the December quarter and general cost controls.

The book-to-bill ratio for the quarter was 1.01.

Backlog, including deferred revenue, was $87.8 million, an increase of $3.6 million from the same quarter last year, as reported, and a slight increase sequentially from the fourth quarter of last fiscal year.

Of the ending backlog, $72.5 million or approximately 82% relates to shipments expected within the next 12 months.

Now I will discuss our business by segment for the first quarter.

Advanced Computing Solutions or ACS, which consists primarily of our defense, semiconductor, communications and legacy medical businesses, reported revenues of $44.6 million or 91% of total corporate revenues for the quarter, up approximately 6% from the year-ago period.

The increase was driven by a 22% increase in year-over-year defense revenues from $27.1 million to $33.2 million.

This increase was partially offset by a year-over-year decline in revenues from commercial customers of $3.7 million, primarily due to declines in sales of commercial communication applications and legacy medical systems.

For the first quarter Visage Imaging, which is our wholly-owned subsidiary that focuses on the 3-D medical imaging market, reported revenues of $2.0 million, down approximately 29% from the year-ago period.

VI's book-to-bill for the quarter was 0.93.

The combined revenues for Mercury's other business segments totaled $2.5 million.

Our Visualization Sciences Group, or VSG, which sells development tool kits and visualization applications to geosciences, engineering and manufacturing and other markets, reported $2.3 million in revenues for the first quarter.

Mercury Federal reported approximately $300,000 in revenues.

Turning to the balance sheet and cash flow statement, cash, cash equivalents and marketable securities at the end of the first quarter totaled $167.0 million, representing a $0.5 million increase from the end of fiscal year 2008.

This net increase includes operating cash inflows of $2.6 million, partially offset by $1.1 million in capital expenditures and a $1.2 million unfavorable mark-to-market adjustment for our auction rate securities.

Included in the Company's $167 million in cash, cash equivalents and marketable securities balance is $46.0 million of student loan auction rate securities, $50.25 million at par.

As discussed in previous quarters, these debt securities are all highly rated investments with AAA ratings.

Since mid-February, 2008, auctions for all the Company's auction rate securities have failed.

We believe that current illiquidity of these investments is temporary in nature.

In October 2008, Mercury was notified that UBS had finalized their settlement agreement with the SEC, which entitles Mercury to full repayment at par on June 30, 2010.

The same settlement agreement gives Mercury a zero-cost loan facility in the amount of 75% or approximately $34.5 million of our fair value ARS balance, currently marked at $46 million.

We assert that we have the financial ability and intent to hold these investments until successful settlement with UBS, as described.

The combination of our cash reserves, future cash flows from operations and proceeds from portfolio divestitures will be more than adequate to fund the Corporation's cash needs over the next several years and to meet the potential put to the Company for repayment of the outstanding $125 million Mercury convertible debenture in May 2009.

First-quarter days sales outstanding were 49 days.

Accounts receivable declined from $33.1 million to $27 million, driven by improved shipment linearity and improved collections within the quarter.

Inventory turns were 3.9.

Inventory decreased $3.2 million during the quarter from $24.7 million to $21.5 million.

At the end of the quarter, the total employee population excluding contractors was 623 employees versus 670 at the end of Q4.

As previously mentioned, we no longer provide full-year guidance.

I would now like to move to second-quarter fiscal 2009 guidance.

For the second quarter of fiscal 2009 we currently expect a revenue range of between $47 million and $49 million.

We anticipate the Q2 gross margin to be approximately 59%.

Operating expenses are currently anticipated to be approximately $29 million on a non-GAAP basis.

This is an increase from the first quarter as engineering program spending shifted from Q1 to Q2.

The GAAP earnings per share are currently expected to be in the range of a loss of $0.22 per share to a loss of $0.14 per share for the second quarter of fiscal 2009.

GAAP shares are projected to be approximately 22.1 million.

The impact of stock-based compensation costs for the second quarter will be approximately $2.4 million.

The amortization of acquired intangibles will be approximately $0.8 million.

The non-GAAP tax rate is 34%.

The non-GAAP diluted shares are projected to be approximately 22 million.

As a result, second-quarter 2009 non-GAAP per-share estimates are currently expected to be in the range of a loss of $0.05 per share to breakeven.

CapEx for the second quarter is projected to be approximately $2 million.

Depreciation will be approximately $1.6 million.

With that, we will be happy to take your questions.

Operator, you can proceed to the Q&A session now.

(OPERATOR INSTRUCTIONS) Jonathan Ho, William Blair.

Good morning, guys, great results.

Can you talk a little bit about the gross margins and whether there was any impact to that line, given that you have higher defense revenue and sort of our expectations for 59% in the second quarter?

Just give us a little bit of color on that.

Sure, be happy to, Jonathan.

We'll stand with our guidance for the second quarter, so I think I made that clear, what the expectations are for guidance in Q2, which is approximately at our long-term business model.

You asked specifically about our ACS business and the defense portion inside of it.

I think, simply, I would state that it performed according to our plan, ties very nicely into the range that we have been performing in, that 59% range.

We were only hurt in Q1 by the revenue shortfall in our Visage Imaging business, which is software-based, comes with a very high gross margin.

So the simple math on why we didn't hit 59% in Q1 is, we missed the revenue target for VI in Q1.

ACS performed right on plan.

Great.

And, just getting into VI a little bit, can you talk about your expectations there for sort of the rest of the year?

And you know, VI has been sequentially declining so far in the past couple of quarters, and just wanted to get a sense of whether you see that trend reversing or if the pipeline conversion -- has it been pushed out, or is this a situation where we expect this to persist a little bit?

Hey, Jonathan, it's Mark.

If you look at I think last quarter, the revenues in VI were actually up sequentially.

The challenge this quarter is, I think we have seen somewhat of a deterioration in the market, resulting in longer sales cycles.

We believe that that's really due to the overall economy, so we don't expect that that's going to rebound anytime soon.

Okay.

My last question is on SG&A.

Can you break out the components of that decline between the prior quarter and this quarter in terms of the SG&A?

We don't normally do that, Jonathan.

We don't give you an OpEx number --

Okay.

In terms of forward guidance.

Well, just in terms of -- between Q4 of last year and Q1 of this year, there was a pretty big sequential drop.

Can you just break that out for us in terms of where that's (multiple speakers) --?

Well, you know, generally speaking, we took costs out at the end of last year.

We did have a restructuring action.

Is that what you're getting at?

Yes.

I'm just trying to get a sense of how that breaks out in terms of the recurring piece of it.

You see expenses are going to go up in Q2 from Q1, and the only driver there, major driver, is the shifting of engineering programs from the first quarter into the second quarter.

We've got a number of new products -- I want to say 15, Mark?

Correct.

About 15 new boards nearing completion with associated program spending.

So with the big driver being on the R&D line, and that's accounting for the step-up, I think you can kind of maintain a consistency on the other lines, SG&A, quarter to quarter.

Okay, thank you, guys.

Tyler Hojo, Sidoti & Company.

Hey, good evening, guys.

I guess just to clarify -- did you say that ACS commercial came in kind of where you were thinking, or just ACS defense, or just the segment in general?

Yes, so if you look at year-over-year, Tyler, the ACS defense business was up approximately 23% from a revenue prospective.

The commercial business was down 24% year-over-year, so Q1 of '09 over Q1 of '08.

I think we landed around about where we thought, what we thought was going to happen overall in the quarter, [for] commercial.

I know you just want to stick to the quarterly guidance, but I think it might be helpful if you could maybe just generically talk about where you see the commercial side of ACS going.

Is it flattening out from here, or do you still expect another stair-step down?

Yes.

I think you've got to look at big picture and kind of what's also happening in the marketplace.

If you look at the bookings on a year-over-year basis, '08 over the prior year, excluding the legacy medical bookings we saw basically bookings flat year-over-year, which was a substantial improvement where we've been over the prior year.

So the rate of decline in bookings overall has slowed.

What I think we saw in commercial this quarter was a -- we actually saw bookings increase sequentially, but we continued to face some headwinds in the commercial business, and I think it's largely in the semiconductor space because I think that market looks like it's getting slightly worse.

So I think the way in which we are thinking about it is that I think we've signaled that we expect to get it towards a 80/20 defense versus commercial, and we are kind of heading down that path, but I'm not suggesting that we're going to get there in a stair-step.

It's going to migrate down towards those levels.

Okay, that sounds good, I appreciate that.

And, you talked briefly about the Merc Fed bookings, which I thought were really impressive.

Could you maybe just talk about the backlog on that business?

Is it similar to ACS defense, where the majority of your backlog is consumed within, say, a 12-month period?

Yes; it's going to be a multi-quarter period, just to recognize the revenue associated with those bookings.

Okay.

But they don't stretch out over multiple years, if that's what you're getting at, Tyler.

Yes, that's what I'm getting at, alright, great.

And I guess just another kind of macro question -- just in light of some of the recent developments, and I think you touched on it a little bit on the divestitures, but generally speaking, how would you think, or how do you think that the defense business is positioned in light of basically there being a bit more of a strain on defense spending?

Any comment there would be helpful.

Yes, I think we feel good about where we're at in defense.

Clearly, the business is performing well.

As you know, the revenue in defense was up 17% year over year, the bookings in defense was up 33% year over year, and our revenue performance in the first quarter, which was up 23% year on year, was pretty good.

So we feel good about where we're at.

I think, if you'll look at the longer-term trends, our focus in the ACS defense business around the broader military electronics market, and coupling that with Merc Fed, we think we've got the opportunity for sustainable, profitable growth.

Clearly, with the election, there could be some delays or some slowdowns.

We don't think that that's going to happen out of the gate, but I think overall we feel good about where we're at and it's the right place for Mercury to be, and a great place for Mercury to be, given in this macroeconomic environment.

I appreciate that, thank you very much.

Elizabeth De Freitas, Stifel Nicolaus.

I just wanted to ask, given about the about $2 billion in ISR government budget funding for fiscal '09, do you expect to see some or any of that?

And, any thoughts on timing or amount, perhaps?

Yes, we absolutely believe that we will see some of that.

I think we are already starting to see some potential from it in the short-term, given some of the programs and the platforms that we are on.

I think, longer term, if you look at the ISR space, the ISR space, it's about a $19 billion market today, growing to about a $24 billion market over a period of time, and it's the area that we see great potential for Mercury going forward with the products and capabilities that we have.

And in fact, this converged sensor networking architecture that I mentioned on today's call is directly targeting the ISR space, as is Mercury Federal.

So we think that it's a very important market for us, it's an area where we see great growth and it's an area that really plays to Mercury's strengths, Elizabeth.

Great, okay, thank you very much.

(OPERATOR INSTRUCTIONS).

Tyler Hojo, Sidoti & Company.

I don't know if you guys are willing to do this, but is it possible to provide the operating performance per segment?

It is.

We have been trying to step into that, even ahead of where our SEC segment reporting is.

You know, we still have the old segments, Tyler, so we've been parsing ACS and Merc Fed, trying to give as much detail as possible there.

Are you looking for something in particular that you're not getting?

Well, maybe I missed it on the press release.

But I was just looking for the EBIT from --

From ACS.

Yes.

You see that when we file a Q, via our segment reporting.

No, I understand it will be in the Q.

I was just wondering if you could provide it now.

I think if you look at it, Tyler, if you look at where ACS has been performing historically as a percent, on a percent basis, we are there for the first quarter.

Okay, thank you.

(OPERATOR INSTRUCTIONS).

Jim McIlree, Collins Stewart.

Just on a rough order of magnitude, could you break out the commercial revenues in ACS between the semi-medical and comm markets?

Yes, we actually haven't broken it down to that level, Jim, from a reporting perspective, historically.

Okay.

And then, relative to the December quarter guidance, the Q to Q decline in the top line, that is primarily from the sum of the commercial businesses -- is that correct?

Defense is, I'm assuming, is relatively stable, or up quarter to quarter?

Yes; we believe that defense is going to continue to do well.

I think, as I mentioned, we feel that we're seeing some slight headwinds from a commercial perspective.

I would say, though, that overall we feel that we're somewhat in line with where we thought the year was -- how the year was going to play out at this point in time, as it relates to the guidance that we've given.

Right, okay.

And then, you mentioned the put option on the convert.

Any initial thoughts on how that's going to play out?

We think it will be put to the Company in May of 2009 because of the underlying conversion price being in excess of $30 per share, so our approach for some time now has been to ensure that we have the cash to meet the put, and I think that remains our approach -- have the cash.

And our sense is, we'll be able to do that readily.

Okay.

But if you did that, at least on today's cash, you would be down to -- I'm sorry; I'm not looking at the long-term marketable securities.

Okay.

Yes.

And, those auction rates are in the long-term or the short-term marketable securities?

Yes, they are in the long-term.

I think you're a little new to the story, Jim, so I'll help here a little bit.

Those $50 million of ARS's have been marked down, mark to market, to $46 million, and they are not accessible to us.

So if you took the balance sheet as we just reported it and work through our net cash position, subtracting out the $46 million, since they are frozen, we would come up at about $120 million of available cash, and the put would be $125 million.

Right.

Okay?

So, between here and May of '09, it's important that we go after working capital.

It's important that our operations continue to improve in terms of bottom-line results, and of course there's the portfolio rationalization agenda, where we hope to have some proceeds from sales of future business units.

The backstop to all of that is this margin loan facility that we now have with UBS as part of their final settlement with the SEC, which gives us, at zero cost to us, borrowing capacity of $35 million.

So you net it out, $35 million against the negative $5 million that Bob described with the margin loan, we are in great shape in terms of being able to repay the convert.

Okay, that was a very helpful discussion.

Thank you.

You're welcome.

At this time, there appear to be no further questions.

Mr.

Aslett, I'll turn the conference back over to you for any additional or closing remarks.

Okay, thanks very much, Matt, and thanks to everyone for listening.

We'd like to remind you that we're holding our investor day at the Langham Hotel in downtown Boston this coming Wednesday, October the 29th, at which we will be actually laying out our plans, our future plans, for Mercury.

We're looking forward to seeing many of you there and look forward to speaking with you all again next quarter.

Operator, this concludes our call.

Thank you.

That does include today's teleconference.

We would like to thank everyone for their participation and wish everyone a great day.