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Mercury Computer Systems Inc. (NASDAQ:MRCY)

F1Q09 Earnings Call

October 22, 2008 17:00 pm ET

Executives

Mark Aslett - President and Chief Executive Officer

Robert E. Hult - Senior Vice President and Chief Financial Officer

Karl Noone - Vice President and Controller

Analysts

Tyler Hojo - Sidoti & Company, LLC

Jonathan Ho - William Blair & Co.

Elizabeth De Freitas - Stifel Nicolaus

Jims McIIree - Collins Stewart

Operator

Good day everyone and welcome to the Mercury Computer Systems Incorporated 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 Senior Vice President and Chief Financial Officer, Mr. Bob Hult.

Robert E. Hult

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 the copy of the earnings release, you can find it on our website at www.mc.com. We’d like to remind you that remarks we may make during this call about future expectations, trends and plans for the company and its business constitute forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Additional information regarding forward-looking statements and risk factors is included in the press release we issued this afternoon reporting the company’s 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 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 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 now pleased to turn the call over to Mercury’s CEO, Mark Aslett.

Mark Aslett

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

I’ll 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 it up for your questions.

We set out to make fiscal 2009 a 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 in divesting all of our unprofitable and non-call businesses by the end of the fiscal year, while strengthening and growing our core defense business. And our Mercury Federal business delivered their first significant bookings.

This is an important step forward in our strategy to expand Mercury’s addressable defense market, increasing the demand of revenue coming from software and services and assist in the transition of our corporate defense business. Summarizing our financial results, we continue 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-build for the first quarter improved from north 0.8 times in the fourth quarter to 1.01, largely driven by improved bookings in ACS quarter over quarter. This was the strong bookings performance for Mercury Federal.

Non-GAAP operating profits 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 continue to generate cash and we feel confident about our liquidity and our ability to meet the push on our convertible debenture in May of 2009.

Moving on to the business, we have made it a priority to improve our underlying operations and these efforts continue 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 shipping linearity was the best we’ve had in many quarters. We’re 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 base are likely 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 cost out of the business and tightening our operations to generate more cash. And we continue to produce good results with cash from operations being $2.6 million this quarter. To drive longer term improvements, we need to rationalize and optimize the return from our portfolio unprofitable in non-core businesses.

In fiscal ‘08, we shut down the unprofitable business of ASG, our commercial avionics and aerial systems group. We also completed the sale of ES/PS, a small legacy professional services unit within VI, which allowed us to consolidate VI’s German facilities.

Divesting ES/PS, 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, but by the end of fiscal ‘09. This effort stands a greater chance of success if we can demonstrate progress in converting VI sales pipeline. With that said, this quarter the sales cycle lends in as the economy weakened, making it a tougher environment to sell another profitable asset. However, we did make progress this quarter in rationalizing our portfolio. On the last day of the quarter, we sold the assets in IP at SolMap, a biotechnology venture to FORMA Therapeutics. Selling SolMap eliminates the annualized cash burn of 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, revenues down by $3.7 million or 24% from the first quarter last year and by $1.3 million or 11% sequentially.

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

Defense bookings were down 5% year on year but at 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’ve been facing headwinds for some time and it becomes more challenging as the economy has deteriorated. Revenue from our Legacy Medical business continues to erode as we approach end of Licensing business and our Commercial Telecoms business is also down.

In Semiconductor however, our loathing 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’re designing into the next generation of technology on major existing customer, KLA Tencor, we’ll be well positioned when the semiconductor industry recovers. Short-term however, it will be tough flooding 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 to sustain a profitable growth going forward.

The Defense products we introduced in prior years continue to drive bookings and revenues. 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 multi-computer 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’re focusing on existing military platforms where we have a presence and seeking ways to penetrate additional programs on those platforms. For example, if we’re currently participating in the radar, we’re pursuing design wins for the electronic warfare or the 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 a 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 the services-based business, focus primarily on government customers directly. Mercury Fed is still in early stage but our business development assets have begun to produce results and we’re beginning to see the linkages with our core ACS Defense business that we anticipated.

For our base of approximately $400,000 in bookings for all of fiscal ‘08. Merc Fed’s posted bookings in the first quarter are $4 million, a substantial increase. This is the leading edge in a long-term strategy to expand our term adjustable market. By leveraging our position in the progress base. This will enable us to penetrate the larger profit pools associated with the broader military electronics market and in particular the intelligence surveillance 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 aside for you in a more concrete way. If you look at the ISR space today, the DOC 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 moving minimal bandwidth and industry-standard networking. That is what our CF in architecture will do.

Our long-term vision is to position Mercury as the government’s trusted partner for next generation ISR single 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.

Robert E. Hult

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’ll 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 per 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 $47-49 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 excludes 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 58-59%. 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-build 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 twelve months.

Now I will discuss our business by segment for the first quarter. Advance 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 of $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 Communications applications and Legacy Medical systems.

For the first quarter, Visage Imaging, which is our wholly owned subsidiary that focuses on the three medical imaging market, reported revenues of $2.0 million, down approximately 29% of the year ago period. VI’s book-to-build 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, with sales development toolkits and visualization applications to geosciences, engineering to manufacturing, and other markets reported a $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 option rate securities.

Included in the company’s $167 million cash, cash equivalents and marketable securities balance is $46.0 million of student loan option rate securities. $50.25 million at par. As discussed in previous quarters, these debt securities are all highly rated investments with AAA ratings. This mid-February 2008, auctions for all the company’s option rate securities had failed. We believe that the current liquidity of these investments is temporary in nature.

In October 2008, Mercury was notified that UBS had finalized the settlement agreement with the SEC which entitles Mercury to full payment 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. A 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 push for the company for repayment of the outstanding $125 million Mercury convertible diventure in May 2009.

First quarter days sales outstanding were 49 days. Account receivables declined from $33.1 million to $27 million, driven by improved shipment linearity and improved collections within the quarter. Inventory returns of 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’d 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 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. Impacted 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 break even.

Cap Ex for the second quarter’s projected to be approximately $2 million. Depreciation will be approximately $1.6 million. With that, we’ll be happy to take your questions.

Question-and-Answer Session

Operator

Thank you very much, sir. Our first question comes from Jonathan Ho with William Blair.

Jonathan Ho - William Blair & Co.

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.

Robert E. Hult

Sure, be happy to Jonathan. I will stay 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 our long-term business model. You ask specifically about our ACS business and its Defense portion inside of it, I think simply I would state that it performed according to our plan. Ties very nicely into the race that we’ve been performing in that 59% range. We were only hurting in Q1 by the revenue shortfall in our Visage Imaging business which is software-based; comes with very high gross margins. 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.

Jonathan Ho - William Blair & Co.

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 if 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 the pipeline conversion? Has that been pushed out or it’s just a situation where we’ve persist a little bit?

Mark Aslett

Hi 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 a 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.

Jonathan Ho - William Blair & Co.

Okay. My last question is on SG&A. Can you kind of break out sort of the components of that decline between the prior quarter and this quarter in terms of the SG&A?

Robert E. Hult

We don’t normally do that, Jonathan. We only give you an Op Ex number in terms of forward guidance.

Jonathan Ho - William Blair & Co.

Just in terms of between Q4 of last year and Q1 of this year, there’s a pretty big sequential drop. Can you just break that out for us in terms of where that comes from?

Robert E. Hult

Well, 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?

Jonathan Ho - William Blair & Co.

Yes, just trying to get a sense of how that breaks out in terms of the recurring piece of it.

Robert E. Hult

You see expense, it is 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?

Mark Aslett

Correct.

Robert E. Hult

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 line, SG&A, quarter to quarter.

Jonathan Ho - William Blair & Co.

Okay, thank you guys.

Operator

And our next question will come from Tyler Hojo with Sidoti & Company.

Tyler Hojo - Sidoti & Company, LLC

Hi, 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? Just the second in general.

Mark Aslett

So if you look at year over year, Tyler, is ACS Defense business was up approximately 23% in a revenue perspective. 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 in the quarter.

Tyler Hojo - Sidoti & Company, LLC

All right. Well, 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? I mean is it flattening out from here or do you still expect it kind of another stair step down?

Mark Aslett

Yes, I think you’ve got to look at the 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 years. So the rate of decline in bookings overall has slowed.

What I think we saw in Commercial this quarter was that we actually saw bookings increase sequentially but we continue 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’re thinking about it is that we’ve signaled that we expect to get it towards a 80/20 Defense versus Commercial. And we’re kind of heading down that path but I’m not suggesting that we’re going to get in excess. It’s going to migrate down towards those levels.

Tyler Hojo - Sidoti & Company, LLC

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 it’s the majority of your backlog is consumed within, say, a 12-month period?

Mark Aslett

Yes, it’s going to be a multi-quarter period to recognize the revenues associated with those bookings.

Robert E. Hult

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

Tyler Hojo - Sidoti & Company, LLC

Yes, that’s what I’m getting at. All right. 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 do you think that the Defense business is positioned in light of basically their being a bit more of a strain on Defense spending? Any comment there would be helpful.

Mark Aslett

Yes, I mean 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. It was pretty good. So, we feel good about where we’re at.

I think if you 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 sustaining profitable growth. Clearly with the election, there could be some delays or some slowdowns. We don’t think that that’s going to happen 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.

Tyler Hojo - Sidoti & Company, LLC

I appreciate that. Thank you very much.

Operator

Our next question will come from Elizabeth De Freitas with Stifel.

Elizabeth De Freitas - Stifel Nicolaus

Hi. Just wanted to ask, given about the $1.2 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 amounts perhaps?

Mark Aslett

Yes, we absolutely believe that we will see some of that. I think we’re already starting to see some potential from it in the short term, given some of the programs and the platforms that we’re on. I think longer term, if you look at the ISR space, the ISR space is back 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 sense of networking architecture that I mentioned on today’s call is directly targeting the ISR space. And at this 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.

Elizabeth De Freitas - Stifel Nicolaus

Great. Okay, thank you very much.

Operator

We’ll go back to Tyler Hojo with Sidoti & Company.

Tyler Hojo - Sidoti & Company, LLC

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

Robert E. Hult

It is. We’ve been trying to step into that even ahead of where our SEC segment reporting is. We still have the old segments, Tyler.

Tyler Hojo - Sidoti & Company, LLC

Yes, right.

Robert E. Hult

So, we’ve been passing ACS and Merc Fed. Try to give as much detail as possible there. Are you looking for something in particular that you’re not getting?

Tyler Hojo - Sidoti & Company, LLC

Well, maybe I missed it on the press release but I was just looking for the EBITDA from ACS.

Robert E. Hult

Yes, you see that when we file the Q.

Tyler Hojo - Sidoti & Company, LLC

Right.

Robert E. Hult

We view our segment reporting.

Tyler Hojo - Sidoti & Company, LLC

No, I understand it will be in the Q. I was just wondering if you provide it or not.

Mark Aslett

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

Tyler Hojo - Sidoti & Company, LLC

Okay, thank you.

Operator

And we’ll go next to Jim McIIree with Collins Stewart.

Jim McIIree - Collins Stewart

Thanks. Good evening. Just on kind of a rough order of magnitude, could you break out the Commercial revenues in ACS between the semi-medical and com markets.

Mark Aslett

We actually haven’t broken it down to that level, Jim, from a reporting perspective historically.

Jim McIIree - Collins Stewart

Okay. And then relative to the December quarter guidance, the Q to Q decline in the top line, that’s primarily from the sum of the Commercial businesses? That correct, Defense, I’m assuming is relatively stable or up quarter to quarter?

Robert E. Hult

Yes, we believe that Defense is going to continue to do well and 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 inline with where we thought how the year was going to play out at this point in time as it relates to the guidance that we’ve given.

Jim McIIree - Collins Stewart

Right. Okay. And then you mentioned the put option on the convert. Any initial thoughts on how that’s going to play out?

Robert E. Hult

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.

Jim McIIree - Collins Stewart

Okay, but if you did that at least on today’s cash you would be down to--oh, I’m sorry. I’m not looking at the long-term marketable securities. And those auction rates are in the long-term or the short-term marketable securities.

Robert E. Hult

Yes, they’re in the long-term. I think you’re a little new to the story, Jim, but I’ll help you a little bit. Those $50 million of ARS’s have been marked down mark-to-market to $46 million and they’re 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’re frozen, we’d come up at about $120 million of available cash. And the put would be at $125 million. 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.

Mark Aslett

So you net it out $35 million against the negative $5 that Bob described with the margin line. We’re in great shape in terms of being able to repay the convert right.

Jim McIIree - Collins Stewart

Okay, that was a very helpful discussion. Thank you.

Operator

And 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.

Mark Aslett

Thanks very much, Matt, and thanks to everyone for listening. We’d like to remind you that we are holding our Investor Day at the Langham Hotel in Downtown Boston this coming Wednesday, October 29th at which we’ll be actually laying out our future plans for Mercury. We’re looking forward to see many of you there and look forward to speaking with you all again next quarter.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Mercury Computer Systems Inc. F1Q09 (Qtr End 9/30/08) Earnings Call Transcript
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