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Mercury Computer Systems, Inc. (NASDAQ:MRCY)

F2Q09 (Qtr End 12/31/08) Earnings Call

January 27, 2009, 5:00 pm ET

Executives

Bob Hult - SVP and CFO

Mark Aslett - President and CEO

Analysts

Mark Jordan - Noble Financial

Stephen Levenson - Stifel Nicolaus

Jonathan Ho - William Blair

Jim McIlree - Neuberger

Operator

Good day and welcome everyone to the Mercury Computer Systems Incorporated Second Quarter Fiscal 2009 Earnings Conference Call. Today's call is being recorded.

And at this time for opening remarks and introduction, I would like to turn the program over to the Senior Vice President and Chief Financial Officer, Mr. Bob Hult. Please go ahead sir.

Bob 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 would like to remind you that remarks that we may make during this call about future expectations, trends and plans for the company and its business constitute forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Additional information regarding forward-looking statements and risk factors is included in the press release we issued this afternoon reporting the company’s second 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 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 third quarter, and at that point we'll open it up for your questions.

Mercury performed well in the second quarter. We continue to execute on our plan to focus the business improve our profitability increase our cash flow and position ourselves for renewed growth.

Overall the business produced solid financial results Mercury's total revenue and non-GAAP earnings exceeded the high end of our guidance range. Reflecting both our settlement with UBS, as well as strong cash flow we ended the quarter with a cash balance of $198 million compared with $167 million at the end of Q1.

This obviously puts us in a good position to meet the put on our convertible debenture that we expect to occur in May of '09.

We also continue to improve the underlying operations of the business. Inventory was down, we reduced our receivables, lowed our DSO sequential and year-over-year and we were able to increase our cash flow. Overall, I think these results were indicative of the operational improvements we've made in the business over the last 12 months, and these areas will remain a focus for us going forward.

This is a design win led business, and winning new designs to grow revenues requires new products. Consequently, the progress we've made in operations is timely, because we are in the midst of a significant new product development cycle. We are literally seeing a bio wave of new products move to engineering as we speak.

Although it it's particularly important for us to be launching new products, it's equally important for us to improve our R&D leverage at the same time. The changes we made in our engineering methodology are enabling us to bring our new technology to market much more quickly, more cost-effectively and with high quality than ever before.

Tiny operations is one facet of our strategy to become a more focused and profitable business. Another facet is to rationalize and optimize the return for Mercury's portfolio of a profitable and non-core businesses, and we've been working hard to divest these businesses by the end of fiscal '09.

Last year we shutdown AUSG, our commercial Avionics and Unmanned Aerial Systems Group and complete the sale of ES/PS, a small legacy professional services unit within VI, which allowed us to consolidate VI's German facilities.

In the first quarter of '09, we sold the assets and IP of SolMap Pharmaceuticals, a bio technology venture. And now, following a very rigorous process. I am pleased to announce further progress on this strategy. Today we signed and closed to deal to sell the VI business to Pro Medicus, an Australian company in the Healthcare and Life Sciences space for a total gross purchase price prior to transaction costs at US $3 million.

Pro Medicus has acquired all of VI’s customer commitments and 48 of VI’s 64 employees. This sale removes the business that’s been generating our most significant operating losses which on a non-GAAP basis total $2.1 million in the second quarter and $13.2 million for our last fiscal year.

Today’s M&A environment is clearly challenging and the sale to Pro Medicus enables us to forego what could have been a very costly and protracted severance and shut down scenario. So, this is a very important milestone for Mercury and its turnaround.

Selling VI leaves us with VSG as our last remaining non-core business. Although VSG is profitable and growing, we remained focus on our goal at divesting VSG and completing our portfolio rationalization efforts by the end of this fiscal year.

With that, let’s now take a look at how we performed in our ACS business for the first-half. Defense bookings were down because of the way in which fiscal '09 originally set up, but also due to the program timing. We currently expect stronger ACS Defense bookings in the second-half of the fiscal year as planned.

Mercury Federal turned-in an excellent first-half and if you combine Merc Federal with ACS Defense bookings for H1 '09 were down only 2% from H1 of '08. Commercial bookings on the other hand were worst than originally anticipated and they are down 33% in the first-half compared with last year, mainly due to the overall economy.

Looking at the top-line, revenue in ACS Defense was up 14% from the first half last year. And adding Merc Fed Defense revenues increase 16% overall. However, for ACS as a whole, total revenue in the first half was roughly flat year-over-year. If you step back and look at the bigger picture, the solid growth we have seen in the core defense business has been more than offset by weaker than expected results in commercial.

Moving to the second quarter, total revenue in ACS was down 1% from the sequential first quarter and down 6% from the second quarter last year. Revenue in ACS Defense was up by $1.7 million or more than 5% from the second quarter last year and down 1.2%, sequentially.

Defense revenues represented 75% of ACS total revenue in the second quarter up from 67% last year. In ACS commercial, revenue was down by $4.4 million or 28% from the second quarter last year and by $200,000, sequentially.

Our book-to-bill in ACS as a whole was 0.9 times down from 1.13 in Q2 last year and from 0.98 in the sequential first quarter.

ACS Defense bookings were down 13% year-on-year but up 2%, sequentially. Commercial bookings in ACS were down 53% year-on-year and 40%, sequentially, mainly reflecting the strong headwinds we face for the macroeconomic environment in the December quarter.

As we previously discussed, revenue from our legacy medical products continues on its long-term downward trend, as we approached the end of life in our business. Our Commercial Telecoms business remain very soft in the quarter largely driven by the slowdown in the satellite communications space.

Our long-term target is the relationship between the ACS and Commercial businesses to stabilize around 80-20 level. However, this play is likely to continue fluctuating from quarter-to-quarter primarily driven by conditions in the overall economy and the impact on commercial bookings.

Our semiconductor business was also down significantly year-on-year as well as quarter-over-quarter given the severity of the industry downturn. In the long-term, we expect that renewed growth in ACS Commercial will be driven by customers in the semiconductor space.

To that end, we are pleased to announce that we received three related design wins in the second quarter with a major semiconductor company in Europe with the total five year potential at $25 million to $40 million. This is on top of a first quarter design win with the same customer with a five year potential in excess of $30 million.

If you also consider the fact that we designed into the next generation of technology, our major existing customer KLA Tencor, we should be well positioned when the semiconductor industry starts to recover.

Long-term, we believe that we can grow this part of our business. Short-term, however, the semiconductor industry is heading and the timing of any rebound is nearly impossible to predict.

In both Commercial and Defense, the key drive is design wins and the new products that produce those wins. The current product development cycle that I mentioned earlier is probably the most intensive in Mercury's history. The goal is to refresh important elements in both our signal processing and multi-computer product lines, and we are starting to see promising results.

We received a total of 10 design wins in the second quarter. Five of them, including the semiconductor awards I mentioned, were commercial and five were in defense. The five year probable value of all 10 wins is approximately $66 million, which represents a 61% increase over the design wins we reported for the second quarter of fiscal '08.

Let's turn now to the ACS Defense business, the core of the enterprise and the key driver of sustainable profitable growth for Mercury going forward. We see ACS Defense in commercial as complimentary businesses where our commercial experience and products can be leveraged into defense applications.

If you look at ACS today, the total adjustable market in COTS defense electronic is roughly $3 billion annually, while the broader military electronics market, at $30 billion, is ten times larger. Our goal over the longer term is to capture a greater share of this larger market.

Strategically, our plan is to transition from the hardware centric model, we currently have in our COTS board business, to a complimentary software and services model, focused on the intelligence surveillance and reconnaissance or ISR market.

As a segment of the overall defense electronics market, we believe ISR provides good potential, where the funding priorities are being driven by wars or the ongoing threat of terrorism.

Ultimately, we want to position Mercury as the government's trusted partner for next generation ISR platform single processing and computing, targeting both upgrades as well as new platforms.

We've been evolving our technology and product roadmap capabilities to make this happen. We are creating a next generation Converged Sensor Network or CSN platform architecture that we believe will position Mercury as a leader in this space overtime.

We've also been evolving our business development capabilities, primarily focused on the formation of our Mercury Federal business in fiscal '07.

Mercury Federal performed well this quarter with total bookings of $1.2 million and $1.1 million in revenue. Together Mercury Federal and ACS Defense create a hybrid business model.

This model positions Mercury close to the government and customer enabling us to track funding flows and gain much greater insight into DoD priorities largely in the ISR space.

Again we said that we want to position ourselves as the government's trusted partner of the next generation ISR smart processing solutions. And Mercury Federal has begun to advise the DoD ISR Task Force in this area. Because Merc Fed business model include funded product development. Our R&D expenses and product development risks should decrease overtime.

In addition, is a services based business we expect Mercury Federal to scale more rapidly and improve our time to revenue as compared with the hardware centric business model that we have in ACS.

One of our five design wins this quarter was actually our first true CSN award in onboard image exploitation.

In addition, an order we just recently received in Q3, was driven by Merc Fed, working in conjunction with ACS, meaning it’s the leading edge in what may well be our defense growth model going forward.

This is our first design win to encompass all of the smart processing for a next generation ISR platform. One that will likely leverage to the new screen computing products enhancing Q2 which incorporates graphics processing units or GPUs.

In effect we’re taking GPUs to process that are driving the video game industry and applying them to image exploitation in defense to create a truly next generation platform architecture to air borne assistance surveillance.

Merc Fed was critical to our winning this contract. Clearly ACS is going to provide the hardware but Merc Fed positioned us as the key consultants on the systems architecture which opened the door for us initially.

With that said it's important to remember what has enabled us to pursue these strategic opportunities in the first place. The fact that we have a strong install base in ACS Defense that encompasses a wide range of military platforms and programs.

We are not banking solely on new programs and new platforms to drive growth and we believe that this creates a lower potential risk profile for us in defense going forward.

Looking specifically at Q3 in the remainder of fiscal '09 we feel good about our defense business in terms of the opportunities that we are working on and the impact they could have in terms of bookings and revenue.

Although we expect to see continued economic headwinds in our commercial markets, overall our financial results should continue to improve and we are confident that Mercury will exit the fiscal year with a more focused and profitable enterprise with a strong and growing defense business.

With that I will hand it over to Bob, for the financial review, Bob?

Bob Hult

Thank you, Mark. I will review Mercury's financial results for the second quarter of fiscal 2009, discussing company operating performance, balance sheet and cash flow results, and then finish with a discussion regarding the outlook for the third quarter of fiscal 2009.

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

As Mark mentioned earlier today, we closed on the sale of our Visage Imaging business. The results of the Visage Imaging business are included in the operating results for the second quarter that we are discussing today. However, when we announce the result for the third quarter, Visage Imaging through the DataCell will be reported as discontinued operations.

Second quarter revenues were $50.7 million, above the top end of our guidance range of approximately $47 million to $49 million. The GAAP net loss for the second quarter was $17.1 million resulting in a loss per share of $0.77. Included in this GAAP loss per share were goodwill and long-lived asset impairment charges related for our Visage Imaging business totaling $14.6 million, or $0.66 per share.

The GAAP operating loss of $16.6 million includes goodwill and other long-lived asset impairment charges of $14.6 billion associated with our Visage Imaging business. Stock-based compensation expense of $2.6 million, amortization of acquired intangibles of $0.8 million, and a $0.3 million restructuring charge.

On a non-GAAP basis for the second quarter, operating income was $1.5 million. This compares with $2 million in the first quarter of this fiscal year, $0.1 million for the second quarter of last year. Non-GAAP operating income excludes goodwill and long-lived asset impairment, stock-based compensation expense, amortization of acquired intangible assets and restructuring charges.

We used a non-GAAP tax rate of 34%. The non-GAAP diluted earnings per share for the second quarter were $0.03. This was above the high end of our guidance, which ranged from a loss of $0.05 to breakeven.

The non-GAAP gross margin for the quarter was 59.9%, slightly above our guidance range due to a favorable product mix. Our non-GAAP operating expanses for the quarter were $28.9 million.

Book-to-bill ratio for the quarter was 0.9, backlog including deferred revenue was $82.6 million, a decrease of $7 million from the same quarter last year as reported and a $5.2 million decrease sequentially in the first quarter of this fiscal year. Of the ending backlog $71.8 million, or approximately 87% relates to shipments expected within the next 12 months.

Turing to the balance sheet and cash flow statement. Cash, cash equivalents and marketable securities at the end of the second quarter total $198 million representing a $31 million increase from the first quarter of this fiscal year.

We continue to do well from an operations perspective during the second quarter generating $1.6 million of free cash flow. In addition, we reached a settlement with UBS to provide partial liquidity for our frozen auction rates securities portfolio.

As part of this settlement, UBS provided us with a line of credit and no net cost to Mercury. We were advanced approximately $31.4 million under the line of credit in December. As a result, primarily of the $31.4 million borrowings, the $1.6 million of free cash flows that we generated in the second quarter and a $4 million unfavorable market-to-market adjustment on our auction rate securities.

We ended the quarter with cash, cash equivalents and marketable securities probably $198 million, compared with the $167 million at the end of the first quarter. This puts us in a good position to meet the put on our convertible debenture that we expect to occur in May of 2009 as well as run the business. Our settlement with UBS also entitles us to full repayment of our auction rate securities portfolio at Par on June 30, 2010.

In terms of the underlying operations for Mercury's business, we continue to drive inventory down. As we have noted on previous calls, this is a journey to improve our overall supply chain capabilities, creating competitive advantage for Mercury and our customers. At the same time, we continue to do well in cash collections from customers.

Second quarter day sales outstanding were 46 days, accounts receivable declined from $27 million to $25.8 million driven by collections within the quarter, inventory turns were $3.8. Inventory decreased $0.2 million during the quarter from $21.5 million to $21.3 million.

At the end of the quarter, the total employee population excluding contractors were 634 employees versus 623 at the end of Q1. Guidance, as previously mentioned, we no longer provide full-year guidance. Accordingly, I would now like to move to the third quarter fiscal 2009 guidance.

These guidance amounts do not include our Visage Imaging business, which was sold today and will be reported as a discontinued operation when we report the March quarter results.

For the third quarter of fiscal 2009, we currently expect a revenue range of between $48 million and $50 million. Again, this revenue guidance excludes Visage Imaging revenues. We anticipate the Q3 gross margin to be approximately 57%. Operating expenses that currently anticipated to be approximately $26 million on a non-GAAP basis. The GAAP earnings per share are currently expected to be in a range a loss of $0.02 per share to earnings of $0.03 per share for the third quarter of fiscal 2009.

GAAP shares are projected to be approximately $22.2 million, in the event of loss were $22.7 million, in the event of earnings, due to dilutive common stock equivalents. The impact of the stock-based compensation costs for the third quarter will be approximately $1.7 million; the amortization of acquired intangibles will be approximately $0.7 million. The non-GAAP tax rate is 34% to non-GAAP diluted shares are projected to be approximately $22.7 million.

As a result, third quarter fiscal 2009, non-GAAP earnings are currently expected to be in a range of $0.05 to $0.09 per share. CapEx for the third quarter is projected to be approximately $2.5 million, depreciation approximately $1.5 million.

With that, we will be happy to take your questions. Operator, you can proceed to the Q&A session now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question this afternoon from Mark Jordan with Noble Financial.

Mark Jordan - Noble Financial

Good afternoon gentlemen, I have three questions if I may. First; what was the operating loss at Visage in the second quarter?

Bob Hult

Yeah, on the non-GAAP basis, Mark, we noted that could be $2.1 million.

Mark Jordan - Noble Financial

Okay. Secondly, looking at as Mark said, obviously, you have seen some very attractive growth and you had decent bookings there. Could you give us an idea of what might be a reasonable ramp in terms of revenue that Mark said moving forward? And where would you place the revenue breakeven threshold for Mark said on a quarterly basis?

Bob Hult

Mark, we haven't broken down specifically revenues and bookings by business unit from a guidance perspective. We do expect that bookings and revenues will grow from this point forward.

In terms of the breakeven, again. Well where the breakeven is on revenue?

Mark Jordan - Noble Financial

Yes.

Bob Hult

The range.

Mark Jordan - Noble Financial

Yes.

Bob Hult

Three to four per quarter, that was your question Mark?

Mark Jordan - Noble Financial

Yes. On a quarterly run-rate where you would assume that as Mark said could be breakdown?

Bob Hult

Yes, I think that’s probably where it is somewhere around near three to four, but I will try to be do exact.

Mark Aslett

Yes, I think it depends upon how much work we subcontract out versus the mix of resources that we have internally. But as Bob said that’s not about number.

Mark Jordan - Noble Financial

Okay. A final question, you had press release couple of days ago on your PowerStream 7,000 that you had delivered to Lockheed Martin and apparently we have seen some significant success. Could you contrast the performance enhancement to 7,000 had versus the entire VME product that used by Lockheed in the FUY Aegis radars? And is this significant enough that it could be a catalyst for a major refresh cycle?

Bob Hult

Okay. So, the PowerStream 7100 product is the next generation of the previous generation that Lockheed was using. The 7100 product is the product that would likely be deployed as part of the Aegis Ballistic Missile Defense Program when it hits production, probably likely sometime in our non-financial year '10. In terms of the performance upgrades, it gives increased [Pro] Digital single processing capability. And given the sensitivity, we are not really in a position to be able to expand too much upon in terms of the performance improvements.

Mark Jordan - Noble Financial

Do you believe though that it gears a potential for a significant upgrade market in the install base and Aegis radar that are deployed?

Mark Aslett

Yes. I said I think if you look at it, Mark, we are expecting that the Aegis BMD systems will upgrades, will likely start in FY '10. That’s where we are expecting production revenues to occur and the product that we just announced the other day, will be the product that forms the basis of those upgrades. So, clearly, I think, as we said, historically, Aegis is a pretty important program for us in terms of driving growth in radar as well as in the naval sector. So, it is clearly a good opportunity for us.

Mark Jordan - Noble Financial

Thank you.

Operator

And we will take our next question from Steve Levenson with Stifel.

Stephen Levenson - Stifel Nicolaus

Thanks, good afternoon.

Bob Hult

Hi Steve.

Stephen Levenson - Stifel Nicolaus

Hi, good to see the progress that you are making.

Bob Hult

Thank you.

Stephen Levenson - Stifel Nicolaus

Back to that Lockheed radar that's S4R radar that right now I guess is suppose to be for, DDG 1000 Destroyers. And I guess that's a program that is certainly questionable. Do you think if the DDG 1000 isn't made that this will be an upgrade for DDG 51's or is that not necessarily a possibility?

Mark Aslett

I think our expectations at this point is based on all indications that we have got is that the aegis upgrade are likely to occur as planned starting in FY10. And I think the scheduling of the ships, are taking place as we speak. So, I think we feel at this point that the programs and the revenues associated with those seem to be in pretty good shape.

Stephen Levenson - Stifel Nicolaus

Okay. Thank you. There are number of airborne intelligence platforms and ground based intelligence platform that are coming up, including things like the project Liberty plans Aerial Common Sensor, and ground-to-profit. Do you see opportunities there for your boards or is that something that uses something not as sophisticated?

Mark Aslett

Yes, I think so, when ACS came around the first time we were certainly bidding on that opportunity and felt that we were well positioned. We also feel good this time around and given our position in certain of the large wide bodied airborne seeking platforms. So we think that EW seeking platforms going forward in the airborne space, it's certainly in the area of growth for us. And certainly thinks that we are going to be pursuing.

Stephen Levenson - Stifel Nicolaus

Okay thanks. Your headcount, the headcount that, Bob, just gave of 631, does that include the Visage people.

Bob Hult

Yes it does.

Stephen Levenson - Stifel Nicolaus

So this will do down by the 60 odd, did you mention.

Bob Hult

Correct.

Stephen Levenson - Stifel Nicolaus

Okay thanks. Have you received any royalties from Honeywell on Synthetic Vision arrangement?

Mark Aslett

When we sold the AUSG.

Stephen Levenson - Stifel Nicolaus

No, since.

Mark Aslett

Since, yes, but I mean since we’ve sold the AUSG. No nothing of significance.

Stephen Levenson - Stifel Nicolaus

Okay. And last item you talked about capturing share, a sizable market. How higher are you aiming here?

Mark Aslett

Well we haven’t these specifics in terms of the longer term growth targets. But I think if you look at kind of big picture, what's driven Mercury's growth historically, has really been in the radar space. I think over the last couple of years or so and specifically in '08 I think we've made great progress in the EW side of things. And then going forward we believe that the EO market and sort of the thrust around system surveillance, it looks that both video and command areas where we see significant opportunities. So I think there’s huge potential growth opportunities for us, and we are going to go after it.

Stephen Levenson - Stifel Nicolaus

And is that one or two specific partners or across the board.

Mark Aslett

Yeah, I think it's across the board. I mean we are going to continue to work with the large primes like we do today and clearly Merc Fed takes us into a direct prime contract model from a services perspective. So that is also an area have good potential growth and I think we've seen that in the first half of 2009.

Stephen Levenson - Stifel Nicolaus

Great thanks very much.

Mark Aslett

Thank you, Su.

Operator

And we will take our next question from Jonathan Ho with William Blair.

Jonathan Ho - William Blair

Good afternoon. Good afternoon guys, just a couple of quick questions on the Converged Sensor Network platform. Can you talk a little bit about some of the examples or some of the potential opportunities there are for this application. That you guys are seeing right now.

Mark Aslett

Yeah so I think the applications fall into couple of different scenarios. Clearly there is an opportunity of upgrades to existing sensor platforms where we are looking to upgrade the onboard processing and provide from digital signal perspective but then also provide more capabilities around image exploitation onboard the platform. In addition from a new platform perspective we are seeing more opportunities around unmanned platforms and specifically around the persistent surveillance space.

So, the two examples that I mentioned in the prepared comments. One was to provide the onboard processing the entire onboard processing and storage sub systems for an image exploitation platform for one of the large primes over in the UK. And then the other which we think is kind of going to be the driver as the growth model going forward which was where Merc Fed won a prime contract position to work on providing the entire signal processing. We kind of see that being the model going forward. And again that's in the airborne persistent surveillance space.

So the good thing is I think the opportunities that we are seeing in the ISO market kind of play to where Mercury's historic strengths are from an install base perspective and clearly the new capabilities that that we are bringing to market provides us opportunities for continued growth.

Jonathan Ho - William Blair

Okay, just taking a look a bit at your book-to-bill ratio. Can you talk a little bit about why we saw the drop off this quarter? And is there something that's more of a I guess, a timing issue and should we look forward sort of a strengthening like you said offsetting your comments.

Mark Aslett

Yeah, so I think if I take the two businesses in ACS separately, and I think overall we expected that the first half of the year was going to be slightly slower than the back half, and that's the way in which things kind of played out in the first half of '09.

Defense, it's largely a timing issue. As we said in the prepared remarks, we are conceiving some good some growth opportunities in the back half of the year from a bookings and from a revenue perspective.

Commercial was slightly weaker than we anticipated in a largely due to the macroeconomic environment that we find ourselves in along with everyone else. And we expect those headwinds to continue going forward in the second half.

So overall I think from a first half perspective, it's kind of lining up the way in which we though other than in commercial, which is weaker than anticipated.

Jonathan Ho - William Blair

Great. And my last question is on sort of this new product cycle that you guys had referenced in your comments. Can you talk a little bit more; give us a little bit more color on the timing of when these products are going to come out, what the potential maybe impact to the top line would be, and what do you sort of expect as these things start to roll out?

Mark Aslett

Yeah, so we've got a lot of new boards and now products in both the multi-computing and the signal processing demand coming out really over the next 12 months. That already started is an example, we've delivered, early deliverables of the PowerStream 7100 product as we had previously mentioned as part of the Aegis program. Now, we've got a whole range of other products that will continue to be delivered throughout the next 12-month period.

And those products, we expect to drive growth not only in terms of upgrades for existing programs and platforms, but as well as allowing us to go after new markets that Mercury has not participated in historically such as the EO market, around Video Persistent Surveillance.

Jonathan Ho - William Blair

Great, thank you.

Operator

(Operator Instructions). We’ll move next to [Jim McIlree] with Neuberger.

Jim McIlree - Neuberger

Hey, Mark, Bob. Just one quick question and I apologize if you already covered it. We know the sales run rate for the first six months at Visage looked like $4.5 million. Did you indicate what the loss at the EBIT line had been?

Bob Hult

In the operating income non-GAAP.

Jim McIlree - Neuberger

Right.

Bob Hult

Operating loss, Jim in Q2 was $2.1 million.

Jim McIlree - Neuberger

Okay.

Bob Hult

And it was around about the same in Q1.

Jim McIlree - Neuberger

Right, right. Thank you and very great work on that, keep it up.

Bob Hult

Thank you, yeah. That was a good result for us, we think.

Operator

We will take a follow-up question from Mark Jordan with Noble Financial.

Mark Jordan – Noble Financial

Yeah. Thank you, just a quick question, VSG had a strong quarter, could you just a talk about why that thing the pop-up for the revenue standpoint and what given the movement in oil prices, do you see that as sustainable or declining back to where we were a couple quarters ago?

Mark Aslett

I think they are largely just due to the timing of some larger customer contracts. I think overall that business has been growing and we expect it to continue growing going forward, so there nothing really out of the ordinary going on their market, it's just the way and which are the quarter unfolded.

From a oil price perspective, at this point we haven't seen any major impact in terms of the fluctuations in the oil price in terms of the way which our customers are purchasing from us.

Mark Jordan - Noble Financial

Thank you.

Operator

And at this time, we have no other questions standing by. I would like to turn the program back to our speakers for any additional or closing comments.

Mark Aslett

Okay. Well, thanks very much to everyone for listening. We look forward to speaking with you again in next quarter. Operator, this concludes our call.

Operator

Thank you everyone for your participation in today's conference. And you may disconnect at this time.

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