Mercury Systems Inc (MRCY) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome, everyone, to the Mercury Computer Systems, Incorporated First Quarter Fiscal Year 2012 Conference Call.

Today's conference is being recorded.

At this time for opening remarks and introductions, I'd like to turn the conference call over to the Senior Vice President and Chief Financial Officer, Mr.

Bob Hult.

Please go ahead, sir.

Good afternoon, and thanks for joining us.

With me today is our President and Chief Executive Officer, Mark Aslett.

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

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 as that term is defined in the Private Securities Litigation Reform Act of 1995.

You can identify these statements by the use of the words may, will, should, would, plans, expects, anticipates, continue, estimate, but, project, intend, and similar expressions.

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

These risks include but are not limited to general economic and business conditions, including unforeseen weakness in the Company's markets; effects of continued geopolitical unrest and regional conflicts; competition; changes in technology and methods of marketing; delays in completing engineering and manufacturing programs; changes in customer order patterns; changes in product mix; continued success in technological advances and delivering technological innovations; continued funding of defense programs; the timing of such funding; changes in the US government's interpretation of federal procurement rules and regulations; market acceptance of the Company's products; shortages in components; production delays due to performance quality issues with outsourced components; inability to fully realize the expected benefits from acquisitions and divestitures or delays in realizing such benefits; challenges in integrating acquired businesses and achieving anticipated synergies; and difficulties in retaining key customers.

Additional information regarding forward-looking statements and risk factors is included in the Company's periodic reports filed with the SEC.

We caution listeners of today's conference call not to place undo 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'd also like to mention that in addition to reporting financial results in accordance with Generally Accepted Accounting Principles, or GAAP, during our call, we will discuss several non-GAAP financial measures, specifically adjusted EBITDA and free cash flow.

Adjusted EBITDA excludes interest income and expense, income taxes, depreciation, amortization of acquired intangible assets, restructuring expense, impairment of long-lived assets, acquisition costs and other related expenses, fair value adjustments from purchase accounting, and stock-based compensation costs.

Free cash flow excludes capital expenditures from cash flows from operating activities.

A reconciliation of adjusted EBITDA to GAAP net income from continuing operations and of free cash flow to GAAP cash flows from operating activities are included in the press release we issued this afternoon.

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

Thanks, Paul.

Good afternoon, everyone, and thanks for joining us.

I will begin with the first quarter business update.

Following that, Bob will review the financials and guidance.

And then we'll open it up for your questions.

Mercury's underlying performance in Q1 was strong, but our financial results were negatively affected by an $8 million order for a classified airborne radar program that pushed into Q2.

We've since received initial paperwork from our customer, and currently, we expect the order to book and ship in early November.

Our Q2 guidance has been updated accordingly.

As a result, although Q1 gross margin exceeded our guidance, total revenue, GAAP earnings per share, and adjusted EBITDA fell short for the first quarter, and operating cash flow was down from the same period last year.

As we expected, Q1 was a very good quarter for defense bookings, which grew 47% year over year and 4% sequentially.

Mercury's defense book to bill of 1.35 was the strongest we've seen in a very long time, as was our total book to bill of 1.3.

As I mentioned on our Q4 call in August, during the first month of the first quarter, we booked three major deals totaling $40 million.

These included bookings of approximately $18 million and $10 million in ACS for the Joint Strike Fighter and Saudi Patriot, respectively.

In addition, Mercury Federal Systems received a $12 million contract relating to phase two of our major program in that business, the image processing subsystem for the next-generation Gorgon Stare wide area airborne surveillance system.

The US Air Force is currently deploying the first generation of Gorgon Stare to support operation Enduring Freedom.

As announced last week, MFS is part of the team led by the Sierra Nevada Corporation that received the US Geospatial Intelligence Foundation's 2011 Industry Achievement Award.

This award recognizes the current generation of Gorgon Stare as best of breed in geospatial intelligence trade craft.

We're proud to have played an important part in developing this state-of-the-art surveillance system.

It was on the basis of this successful performance to date that MFS was selected for the next generation of Gorgon Stare, which is much more sophisticated than the first phase.

The $12 million booking received in Q1 is essentially equivalent to total MFS revenues for all of FY '11.

It accounted for the lion's share of our bookings in that business for the quarter, which totaled $12 million, up from $2.2 million in Q1 last year.

MFS is still highly concentrated on this single program.

However, we believe it's a high-priority capability, and now that it has become a government program of record, it should be well funded going forward.

Overall, from a bookings perspective, receiving the $18 million PO for Aegis in Q4, coupled with the total of $40 million for JSF, Gorgon Stare, and Patriot in Q1, puts us in a very good position at an early point in the year with regard to four large programs.

For the first quarter, our defense backlog grew 20% sequentially and 21% year over year, in effect, de-risking the first half of our financial year '12 and positioning us well to meet our previous guidance for the full year.

As an industry, we're also once again dealing with the continuing resolution and longer-term uncertainties in the defense budget.

We currently expect the existing [CIOT] to end by Christmas but a continuation beyond calendar year-end can't be ruled out, and as such, we remain cautious.

Longer-term, the actions of the congressional bipartisan committee and steps ultimately taken to address the country's deficits and debt could significantly affect overall defense spending, adding to the uncertainty.

Nonetheless, we're feeling very positive about how we've positioned the business and the underlying strengths in our new business pipeline, both near and longer term.

We feel good about the defense budget in relation to our major ongoing programs.

Our new major programs, like JCREW and SEWIP, also appear well funded at this point.

We have a strong relationship with Lockheed-Martin on the Navy's Aegis Ballistic Missile Defense System with Northrop Grumman on Global Hawk and a number of other platforms, including the Air Force's existing long-range bomber and with Raytheon on multiple programs, chief among them, Patriot.

As we mentioned last quarter, Congress has cancelled long-term funding for the [MEADS] program, which was due to replace the Army's existing Patriot fleet.

We believe this positions Patriot for stronger future growth than we had previously anticipated.

Looking farther ahead, the Navy Service Electronic Warfare Improvement Program, or SEWIP, is also shaping up to be an important program for us.

SEWIP has significant growth potential longer term because compared with Aegis, which is our largest current program, it upgrades a much larger swath of the Navy surface fleet.

We feel very good about the relationships we've built with Lockheed around SEWIP, and we expect to see early LRIP bookings toward the end of our current financial year.

In addition, we have significant potential associated with the JCREW Counter IED program.

There has been no official new news regarding JCREW since our last conference call.

As such, we continue to model LRIP bookings from the program to start during the second half of our financial year '12, with LRIP revenue beginning in FY '13.

As you may have heard, the Senate Budget Subcommittee mark-up in September cancelled funding for the Army's competing CIED program called IEWS because of overlapping capabilities with JCREW 3.3.

As a result, the Navy is likely to play the lead role in CIED activities for the foreseeable future, which is a positive development for the program.

At present, we believe JCREW 3.3 targets production of approximately 5,000 units for the Marine Corps with a potential for significant future growth if deployed to the Army, as well.

In addition, we've developed an exceptionally productive relationship working on JCREW 3.3 with our customer ITT, and ITT considers us one of their top partners on the program.

We believe this positions us well for additional JCREW-related business over time.

The progress we're making -- we've made in rebuilding our backlog over the past two quarters shows that we've done a good job focusing Mercury on the right parts of the market, namely, ISR, electronic warfare, and missile defense.

In addition to that, over the past few years, we've developed a strong services and systems integration, or SSI, business within ACS while implementing a total refresh of our ACS product line.

As a result, we've been able to position ourselves as the premier commercial subsystem outsourcing partner to the [Primes] as they work to rapidly develop more affordable and open ISR solutions.

We were probably the first to recognize the industry shift from a focus on power PCs to Intel chip-based architectures.

What we've done in the process of refreshing our product line is to find ways to meet the challenges associated with size, weight, and power for onboard embedded processing using Intel-based enterprise cost components.

Most of our competitors, on the other hand, are still focused on computing with mobile-type devices that have much more limited capabilities.

Our new Intel-based product line has been received exceptionally well by our customers.

It's been a key factor in our SSI-led deals, as well as success in winning new designs.

Design wins for the first quarter totaled nine, eight of them in defense.

This compares with a total of 13 wins, all of them in defense in Q1 a year ago.

The five-year probable value of our Q1 design wins was $52.5 million.

This compares with $68.5 million in Q1 of last year.

Our design wins for the first quarter continue to focus on radar, electronic warfare, and EOIR, the largest win this quarter, being an onboard processing solution we've jointly developed with ITT for the Army's tactical UAV called [Shutter].

This program is yet another example of how we're enabling the transformation of huge amounts of data on board the platform into information that's actionable for our troops on the ground in real-time.

This builds upon our success in doing similar work on larger UAV platforms, such as the Reaper.

Despite the slowdown in the government contracting process, our design win pipeline is looking very strong as we begin the second quarter, with good prospects for some major wins that we're looking forward to announcing soon.

It's our goal to supplement Mercury's organic growth with growth-ripe positions, so a couple of words on our M&A strategy.

Reiterating my comments last quarter, we're continuing to look at ways to enhance our business in both ACS and MFS, with our near-term priority being ACS.

This is largely because we're seeing more opportunities in the RF domain which look particularly attractive given the growth we anticipate in the EW market going forward.

As I said previously, we're focused on smaller private companies that are performing well.

Our goal is to build our capabilities along the single processing chain, but we also want to acquire companies that are on the right programs and platforms.

Executing in this area is a high priority for us.

We have ample cash and have every intention of putting our cash to work.

At this point, we're not prepared to discuss the timing of any possible future acquisitions, although what I will say is that we're active in the marketplace and we have a good working pipeline of deals.

It all depends, however, on finding the right deal at what we believe to be the right price.

Before I turn it over to Bob, I'd like to extend my thanks to those of you who participated in last week's annual meeting.

We appreciate your vote of confidence in the board's nominees, all three of whom were reelected to three-year terms as directors.

Along with voting for my reelection, shareholders reelected George Chamillard, former chairman of the board at Teradyne, and Bill O'Brien, former executive chairman at Enterasys Networks and senior executive at PricewaterhouseCoopers.

On behalf of the entire board, I'd like to thank George and Bill for their past service to Mercury, and we look forward to benefiting from their counsel in the years ahead.

As a reminder, we invite you to attend Mercury's 12th Annual Investor Day, which will be held in New York City on the morning of November the 16th.

We expect this to be an informative half-day of presentations from our senior team, as well as from General James E.

Cartwright, who as you probably know is a former four-star Marine Corps general who just recently retired as vice-chair of the US Joint Chiefs of Staff.

General Cartwright will share his thoughts on the defense budget, the ISR market, and the government's emerging priorities in defense procurement, so it should be an interesting and valuable morning.

In conclusion, despite the temporary bookings and revenue setbacks, Q1 was a solid start to Mercury's new fiscal year.

We feel good about the outlook for our major programs and the proposed FY '12 defense budget, our backlog is growing, the second quarter FY '12 is shaping up well, and we're reaffirming our guidance for the full year.

Although the defense business can be lumpy and, clearly, we experienced that lumpiness in Q1, it was limited to the timing of a single large booking across the quarterly boundary.

If we see risk anywhere right now, it's largely related to the potential impact of the current continuing resolution which we expect to be resolved by Christmas.

Looking farther ahead, we feel good about the progress we've made in positioning Mercury for growth this year and in future years.

We're booking new business and winning new designs on defense programs that we believe will be relatively well insulated from budgetary pressures and, in some cases, are entering favorable upgrade cycles.

Our business model is aligned with the government's emerging priorities in defense procurement reform.

We're strongly positioned as the premier commercial ISR subsystem outsourcing partner to the defense prime contractors.

Also, we have both the right strategy and the liquidity necessary to supplement Mercury's organic growth through acquisitions.

Consistent with what we've done for the past two quarters, Bob will conclude his prepared remarks with both our guidance for Q2, as well as some directional perspective for FY 2012 as a whole.

With that, I'd like to turn it over to Bob.

Bob?

Thank you, Mark.

Good afternoon, everyone.

Again, as Mark noted, Mercury's underlying performance in Q1 was strong, but our financial results were negatively impacted by a single $8 million order for a classified airborne radar program that pushed into Q2 from a revenue recognition viewpoint.

That stated, Q1 was a solid start to our fiscal 2012.

Mercury's total revenue for their first quarter of fiscal 2012 was $49.1 million, below our guidance range of $54 million to $56 million.

This compares with $52.1 million in revenue for the first quarter of fiscal 2011.

GAAP income from continuing operations for the first quarter of fiscal 2012 was $2.7 million, or $0.09 per diluted share, on approximately 30 million shares outstanding.

This was below our Q1 guidance of $0.10 to $0.12 per share.

For the first quarter last year, Mercury reported GAAP income from continuing operations of $3.7 million, or $0.16 per diluted share.

The miss to guidance was solely due to the delayed order, which was not received in time to score the revenues in Q1.

We currently expect to book and ship the entire order this quarter, and as I will describe later in my remarks, our Q2 guidance has been updated accordingly.

Breaking down our results by operating segment, revenue and ACS, including both defense and commercial, for the first quarter of fiscal 2012 was $47.3 million, down 9% from $51.9 million in Q1 last year.

Revenue in our services and systems integration business within ACS was $4 million, compared with $3.9 million in Q1 last year.

In our Mercury Federal Systems business, Q1 fiscal 2012 revenue was $4.2 million, up from $1.9 million a year ago.

Please note that revenues by operating segment do not include adjustments to eliminate intercompany revenues of $2.4 million included in those operating segments.

Total defense revenue for Q1, including ACS defense and MFS, was $45.0 million, up 19% from $37.7 million in Q1 of fiscal '11.

Mercury's commercial revenue for the quarter decreased 71% to $4.1 million from $14.4 million in Q1 last year.

Turning to bookings, total bookings for the first quarter of fiscal 2012 were $64 million, a 24% increase compared with $51.6 million in Q1 last year and up 2% sequentially.

Mercury's total book to bill ratio for the first quarter, including ACS and MFS, was 1.3.

This compares with 1.02 in the sequential fourth quarter of fiscal 2011 and 0.88 for full-year FY '11.

Our Q1 total backlog, including deferred revenue, was $101.8 million.

This compares with backlog of $86.9 million at the end of fiscal 2011 and $104.1 million for Q1 of 2011.

Approximately 96% of our current backlog relates to defense.

In addition, 88% -- or 89 point -- sorry, $89.9 million of our total Q1 backlog relates to shipment schedule within the next 12 months.

This is up by 27%, or $19.3 million from Q4 2011.

Given the growth in our backlog, we should see continued improvement in our near-term revenue visibility and in our ability to execute future quarters in a more linear shipment fashion.

In defense specifically, bookings for the first quarter of fiscal 2012, including ACS and MFS, were $60.9 million.

This is up 4% compared with defense bookings of $58.3 million in the sequential fourth quarter of fiscal 2011 and up 47% compared with $41.3 million in Q1 last year.

Our defense book to bill for Q1, including ACS and MFS, was 1.35, up from 1.09 in the sequential fourth quarter of fiscal 2011 and 1.09 in Q1 last year.

Our backlog in defense for Q1 increased to $97.8 million from $81.5 million in Q4 of fiscal 2011 and also increased from $81.1 million in Q1 of FY '11.

Mercury's adjusted EBITDA for the first quarter of fiscal 2012 was $8.7 million.

This compares with $8.8 million for the first quarter of fiscal 2011.

Adjusted EBITDA for Q1 fiscal 2012 excludes the impact of approximately $6 million in net benefits as follows -- zero interest income and expense, a $1.3 million tax expense, $1.9 million in depreciation, $0.8 million in amortization of acquired intangible assets, and $2.0 million in stock-based compensation charges.

Our adjust (inaudible - technical difficulty) for Q1 was 18%.

This is the high end of our long-term pro forma target of 17 to 18%.

A reconciliation of adjusted EBITDA to GAAP net income from continuing operations is included in the earnings press release we issued this afternoon.

We used an effective tax rate of approximately 34% before discrete items for the first quarter of fiscal 2012, and we expect this to be our rate for the full fiscal year.

If the federal R&D tax credit is renewed mid-year, this 34% effective rate for the full year would come down by approximately one point to 33%.

Our gross margin for the first quarter of fiscal 2012 was 60.9%, above our guidance of 58% due to a favorable program mix.

Operating expenses for the first quarter of fiscal 2012 were $26.4 million compared with $25.4 million in Q1 last year and $28.5 million sequentially.

Inventory for Q1 was up sequentially to $24.5 million from $18.5 million in Q4 of FY '11, mainly driven by the late order we had expected to ship in the quarter.

Inventory turns for the first quarter were 3.1.

DSOs in the first quarter of fiscal 2012 were 72 days, up from 67 in the sequential fourth quarter and an increase from 68 in Q1 last year.

At the end of the first quarter, our total employee headcount, excluding contractors, was 604, compared with 602 at the end of Q4 FY '11.

We continued to generate cash from operations.

Free cash flow was $2.6 million in Q1, down from $5.1 million in the sequential fourth quarter and $7.8 million in Q1 last year.

We closed the first quarter of 2012 with a total of $165.9 million in cash and cash equivalents, an increase of $3 million from the fourth quarter of fiscal 2011.

Looking further down the balance sheet, we continued to have zero short and long-term debt.

We also have a $35 million operating line of credit and a $500 million universal shelf registration.

In short, Mercury is well prepared to supplement its organic growth with additional growth from strategic acquisitions.

Now, moving on to guidance.

For the second quarter of fiscal 2012, we currently expect a revenue range of $67 million to $69 million.

We anticipate Q2 gross margin to be approximately 59%.

Our second quarter operating expenses are currently anticipated to be about $28 million.

CapEx for Q2 of fiscal 2012 is projected to be approximately $4 million.

We expect to report second quarter GAAP income from continuing operations in the range of $0.24 to $0.27 per diluted share on approximately 30.3 million shares outstanding.

Turning to Mercury's adjusted EBITDA guidance for the second quarter of fiscal 2012, our estimate excludes the following approximate amounts -- zero interest income and expense, depreciation of $2.1 million, $0.7 million in amortization of acquired intangible assets, negative $0.1 million fair value adjustments from purchase accounting, $1.7 million in stock-based compensation costs, and as I said, an estimated FY '12 tax rate of approximately 34%.

As a result, adjusted EBITDA for Q2 FY '12 is currently expected to be in the range of $15.7 million to $17.0 million.

On a full-year FY '12 basis and consistent with the outlook we provided on our last earnings call, we continue to expect an organic revenue growth rate of approximately 10% year over year.

We expect our FY '12 operating margin to be roughly in line with the low end of our current target business model range at 12% and our adjusted EBITDA as a percentage of revenue becoming roughly in line with the target model's high end of 18%.

Due to the impact of new shares issued in FY '11, via a follow-on offering, we expect EPS for FY '12 to be approximately flat year over year.

As we noted on the last earnings call, we expect approximately 47% of our full-year FY '12 revenue to be recognized in H1 and 53% in H2.

To further assist in your modeling, gross margin is expected to be approximately 57% for the full year FY '12.

With that, we'll be happy to take your questions.

Operator, you can proceed with the Q&A now.

Thank you.

(Operator instructions)

Mark Jordan, Noble Financial.

Looks like your guidance, if you look at the midrange of the guidance for the second quarter, you're realizing approximately half of the year's earnings in the first half, and as you just mentioned, you're looking for about 53% of revenues in the second half, consistent with what you've been guiding.

Is there a mix shift that would cause generically lower margins in the second half?

Yes, Mark.

I think the best way to think about that is there's a mix shift with regards to our programs, H2 compared to H1, which we'll deliver that lower margin in H2 as compared to H1.

So that's why I guided 57% for the full year.

We also anticipate somewhat of a change in business mix in the second half where we're probably going to see an uptick in our services business, which, as we've described in the past, has got a slightly lower gross margin than some of our hardware sales, so it's really those two things, Mark.

Okay.

Secondly, just looking at the second quarter, you talked about $28 million in overall op expenses.

That seems to imply a $2.5 million-plus increase in SG&A sequentially.

Is that all tied to commissions, or is there some investment that's also going on there?

No, there will be a little bit of hiring, and then there will be spending on the R&D line as we move some programs forward.

Outside spending, including prototypes, will account for the majority of that.

If you look at it, Mark, OpEx, it's really timing.

There was some lower OpEx in Q1 and there's a little bit of catch-up going on in Q2, also, yes.

You'll see it on the engineering line.

Okay.

Final question, if I may.

I'm starting to see with [MEADS] being cancelled, there's talk more of a dependence on Aegis as the cornerstone of missile defense and seeing estimates that there would be as many as 94 Aegis-equipped ships by 2024, which is a dramatic increase from, I think, the 23 we have afloat right now.

If, in fact, you see that type of acceleration, when do you think that you're going to see this Aegis business take a step function for you?

I'm not sure that we're going to see necessarily a step change.

I think we anticipate roughly six to eight ships a year that's going to be upgraded, and prior to, say, a JCREW kicking in, we still believe it's going to be roughly a 10% program.

So I think it's going to provide some pretty foundational -- you know, solid foundational revenue capability, but at this point, we're not anticipating a step change.

All right.

Thank you very much.

Michael Lewis, Lazard Capital Markets.

Mark, I wanted to hit on a topic you discussed about the [tactical shadow] design win.

Now, the shadows are going through a weaponization process, and as we see those changes occur on the shadow fleet, will this new technology or product be implemented into this production run?

It may not be in this production run, Mike.

I mean, basically, what we're delivering is a similar capability to what we're going to be -- or what we are delivering in Gorgon Stare.

It's basically more on-board exploitation to provide more actionable intelligence in a timely manner to our troops on the ground.

So what we've delivered in the first instance with ITT is really a demonstration capability that is looking at expanding the capability of the US army's FUSE program, which stands for Federated Universal Synchronization Engine, and it's basically being led out of the UAS command down in Huntsville.

So we feel pretty good about the program longer term.

It's not clear exactly how quickly the revenue is going to ramp from it, but it gets us on a new platform with capabilities that we think are important longer term.

Okay.

And if I can shift gears for just a second, the $8 million revenue slip, if that were to hit in the quarter, what contribution would you have seen or noted in the EPS off that contract alone?

I don't think we would tend to look at it quite that way, Mike.

You know, we scrambled a bit and made some of the distance up to cover off the fact that that $8 million did slip into Q2.

So it's not perfectly plug compatible.

You'll notice we almost got to the low end of the EPS guidance range, if you will.

I think maybe a better way to say it is we would've probably maintained our track record of meeting or slightly exceeding our guidance on the top and bottom lines if we had gotten that order out cleanly.

Okay.

And, hey, Bob, if you had a 7.3% EBIT margin in the quarter, should I assume that this $8 million contract was a higher-margin profile?

It had definitely a decent margin as a program, and I think you can see that in the first half.

When Bob described what we're expecting gross margins to be in the first half versus the --

Yes, I mean we're looking at 59% to Q2, and clearly, that program's going to be a major piece of the Q2 revenues.

But it's a very solid (inaudible).

Okay, that's very helpful.

Thank you, guys.

Yes, okay.

Thanks, Mike.

Tyler Hojo, Sidoti & Company.

Wanted to go back to that question in regards to the $8 million order.

Is that an order that you guys had in hand, or was it something that you were expecting that never came?

Yes, it was an order that we were anticipating receiving in the quarter.

It didn't actually happen during Q1.

We've got -- we've currently received the initial paperwork from our customer, and we're expecting to book and ship the order that basically moved early in November.

So what happened is it was the delay at our customers' level receiving their paperwork from the government, and it basically pushed across the quarterly boundary.

Okay.

Is this something that -- is this the first time this has happened with this particular contract, or is this kind of a new development?

Well, I mean on this one particular program, I think it's the first time it's happened.

I think as we see in the past, though, the defense business is lumpy, and clearly, we experienced that lumpiness this quarter.

No, that's fair.

I'm just trying to get a feel for what the risk is that something similar happens in the second quarter with this particular order.

Yes, we think that the risk is very low at this point.

As we say, we've received the initial paperwork from our customer, and actually, the paperwork that we received is for close to 13 million, not just the 8 that pushed.

So we believe that we're actually in a very good position for Q2 on this particular program.

Okay.

Thanks for that additional color on that.

And also just wanted to talk about the level of sales volumes in ACS commercial.

Those surprised me a little bit just in regards to being down 70% year on year.

Is that a good go-forward rate for that piece of your business, or was that abnormally low in the quarter?

No, I think as we said, we expected a pretty significant drop-off in the commercial business, and in effect, in relation to the semiconductor business, we believe that we're going to be out [of it] as we exit the first half.

However, we did see -- you know, it was a really a very strong performance, as we'd anticipated, in the defense business.

Our defense bookings in Q1 increased 47% year over year, defense revenues were up 19%, and clearly, we saw a good increase in our defense backlog.

So from our perspective, although we just finished Q1, the year is playing out the way in which in which you anticipated.

Okay.

So the 4.2, 4.3 million revenue run rate for commercial ACS, that's kind of?

I think that's in range, Tyler.

We've said that we felt that commercial for this year, FY '12, would be 10% or less of our total revenues, so --

Right.

-- if you'd take your four dot number and multiply it by four, you're lining up pretty good with that earlier statement.

Okay, that's fine.

Thanks for that.

And just, lastly --

And, by the way, Tyler, just to add to that, it was not much semi revenues in the fourth, so it's behind us here.

Okay.

Well, that's certainly good to see.

And then just lastly for me, we haven't heard a whole lot about how the LNX transaction had been tracking since you made that acquisition.

So if you wouldn't mind maybe taking a few moments out to kind of give us an update of how that's going?

Sure.

I think it's going extremely well.

It's fully integrated into the business at this point.

We haven't lost anyone in the business.

We believe that the technology synergy has clearly opened up more opportunities than what we would've had without LNX, particularly on the RF side of things, both on -- on JCREW, we see there's more potential there going forward, as well as on some of our existing programs which LNX wasn't involved with.

As an example, I think we see some opportunities longer term on the SEWIP program.

So I think we're very pleased with the purchase.

I think the company is a great fit with what we're doing, and it's clearly opened up more opportunity.

Fantastic.

Thanks a lot.

Michael Ciarmoli, Keybanc Capital Markets.

Just to maybe stay on the LNX topic, are they going to be on track, or is the organization going to be on track to hit the earn-outs?

Yes, we believe so.

And then, Mark, not to beat a dead horse here, but just on that delay, is this something that -- are you looking at your programs or other opportunities and trying to factor in maybe the risk of other delays cropping up?

I mean I'm not sure if you can give us the real rationale or reason why the paperwork was held up or what happened.

Could this be more systemic across the industry as sort of more programs get scrubbed here?

Maybe if we do enter into a more prolonged continuing resolution, do you see more risk in the portfolio?

Yes, I think this was a specific case in point, Mike.

Clearly, we deal with the lumpiness of the defense business quarter in and quarter out, and over the past 17 quarters, I think we've done a pretty good job.

The challenge this quarter was that this was a very large deal for us, and so in the past, we've had some movement in smaller deals that we've been able to cover up, and that's obviously been taken into account in our guidance and obviously taken into account in terms of the track record that I think we've put up.

However, when it's one of your largest deals, if it's not your largest deal, it's very difficult to basically cover up that risk completely in a specific quarter.

And in effect, that's basically what happened.

It was a matter of timing.

As I said, we've since received the initial paperwork.

We believe the risk of us booking and shipping this order in Q2 is low.

I would say that at a more macro level within the industry, contracting or contracts are taking longer than what they have in the past, but I don't think there's anything specific in relation to this program that we would point to going forward from a risks perspective.

Okay.

And if the continuing resolution persists into 2012, say it runs similar fashion to last year, how much risk is there to both your top and bottom-line projections for 2012?

You know, I think right now we feel pretty good.

As I said on the call, our current expectation is that we believe the CR isn't going to extend beyond calendar year end.

If it does, then, obviously, we're going to be a little bit more cautious.

Okay.

And just on the bookings in backlog, obviously, great performance in the quarter.

Do you guys have a full-year target for bookings that you'd be willing to share?

And do you think that you can grow the backlog and exit fiscal '12 with a higher backlog than current?

We typically don't guide, Mike, and obviously, we've got our own internal plans and budgets that we're working towards, but I'm not going to share those numbers today.

We were very pleased with the performance in Q1 that built upon the strength that we saw in Q4, and I think with the 47% increase year over year in our defense bookings, my guess is we're probably going to stand out from the crowd a little bit positively in Q1 in that regard.

Yes, definitely.

Well, all right.

Thanks, guys.

I think that's it for me.

Go next to Jonathan Ho with William Blair.

First, can you give us a little bit more color around the pipeline of opportunities that you're seeing out there?

Are there any programs that you guys are looking at which potentially could be game-changers for the business going forward?

We see some pretty interesting opportunities.

As I mentioned in the call, I think the pipeline is pretty healthy.

I think our design win opportunity continues to look good.

We're going to save a couple of those for our Investor Day on November the 16th in New York, so I'd rather talk about it there, Jonathan, actually.

Great.

We're looking forward to that.

One thing that you did hint at was for JCREW 3.3 you were looking at potentially getting some additional content onto the platform or some additional work.

Can you maybe quantify or give us a sense of how large that opportunity could be?

It's still early days.

I think we've got a very good working relationship with ITT.

I think we've demonstrated our technical prowess and the fact that we can partner with a company on a pretty challenging program from a technical perspective.

We do see more opportunity.

If we're successful, it's probably going to be on the RF side of things, but I think we're going to wait to, hopefully, succeed there, and we'll describe or communicate what the opportunity is when and if we win that.

Great.

Thank you.

(Operator instructions)

Howard Rubel, Jefferies.

Could you give us a sense, Mark, of the win rates?

I know you gave us the absolute number of new programs, but how are you doing in terms of going to bat and (inaudible)?

I think it's very high, Howard.

I'm not going to quote a specific percentage, but I think what we're seeing is that with the growth in the pipeline and some of the design wins that we're getting, clearly, we're displacing other companies.

I think it's due to the fact that, one, we've made some pretty fundamental investments in technologies and capabilities that are enabling our customers to do things that on a historic basis they weren't able to do.

In addition, I think if you look at Mercury, we are a subsystem or a systems-level company, and I think that's really differentiating us right now, particularly given the outsourcing trend that we see.

So I feel really good about the win rates and our new business pipeline going forward.

So on that front in terms of outsourcing, are there some -- in that win rate, were there some outsourcing contracts that heretofore are new?

I think there's going to be a couple of interesting ones when we talk at Investor Day that we're going to talk about.

And then to go to -- to look at this radar contract that you talked about, is this a one-off program, or is this the beginning of many opportunities for this particular customer and this particular application?

So this has been producing us for the last few quarters.

It's a classified airborne radar program where Mercury basically invested in some new technologies and capabilities that allowed for our customer to basically introduce some additional war fighting capability that is in high demand.

So it was a technology development that we basically -- that enabled our customers to deliver a new capability.

I think going forward we do see more potential on the program.

I think this particular quarter we're looking at approximately $13 million from bookings, and a good portion of that is going to turn into revenue.

So it's an important program for us at the year level.

Oh, on any level, it's pretty darn big then, in fact.

Yes.

Thank you very much, both of you.

(Operator instructions)

Brian Ruttenbur, Morgan Keegan.

The question I have -- and a lot of them have already been asked and answered very good -- but the continuing resolution -- two things, just macro stuff -- has it helped you at all having the continuing resolution this year given that there's going to be cuts in the fiscal '12?

Can you explain that?

And then can you give an opinion on the super committee and what you think may happen there near term?

Sure.

Well, I'm not sure the continuing resolution helps anyone, and we clearly saw the impact of that during our financial year '11, and where it impacted us was basically a slowdown in bookings.

Now, what we have experienced was a very strong bookings performance in Q4 and now our Q1 in the defense business.

So I don't think it really hurt us from a bookings perspective, but we did see design wins taking longer and some of those being pushed to the right.

So I don't think a CR is good for anyone.

As it relates to the bipartisan committee, I don't think there's a lot of information that's coming out of that committee yet.

And, also, we know what stage one looks like with the 350 billion of cuts.

I think the greatest concern is obviously what's going to happen in stage two where they're trying to find well over 1 trillion' worth of savings, and in the worst-case scenario, that could result in additional $50 billion of additional defense cuts starting in 2013 going through 2021.

So I think most people in the industry are expecting that the 350 billion is probably the best-case scenario, but I don't think people are anticipating that the worse-case occurs.

But we're going to have to wait and see, Brian.

Okay.

Thank you very much.

At this time, we have no further questions in the queue.

I would like to turn the conference back to the speakers for any additional or closing remarks.

Okay, well, thanks, Keith, and thanks to everyone for listening.

As a final reminder, we'd like to invite you to attend our 12th Annual Investor Day, which will be held in New York City on the morning of November the 16th.

We'll hope to see you there.

Operator, this concludes our call.

Thank you.

Ladies and gentlemen, this does conclude today's discussion.

We appreciate your participation.

You may disconnect at this time.