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Mercury Computer Systems, Inc. (NASDAQ:MRCY)

F4Q08 Earnings Call

July 30, 2008 5:00 pm ET

Executives

Leslie Shafer - Manager of Financial Planning and Analysis

Mark Aslett - President, Chief Executive Officer, Director

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

Analysts

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Jonathan Ho - William Blair & Co. LLC

[Jim McCary - David J. Green]

Operator

Welcome to the Mercury Computer Systems, Inc. fourth quarter fiscal 2008 earnings results conference call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to Leslie Shafer, Manager of Financial Planning and Analysis.

Leslie Shafer

With me today are President and Chief Executive Officer, Mark Aslett, and our Senior Vice President and Chief Financial Officer, Bob Hult. If you have not received a copy of the earnings release, you can find it on our website 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 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 fourth quarter and fiscal year 2008 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 market place, 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 measures 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

I’ll begin with a review of the quarter and the full year followed by an update on the business. Bob will then review the financials and discuss our guidance for the first quarter. At that point we’ll open it up to your questions.

We continue to execute against our turnaround plan this quarter making measurable progress operationally and delivering financial results at or near the top end of our guidance range. We saw the profitability we expected in the economic core of our enterprise, ACS defense, which posted another good quarter of performance. However, as we anticipated this growth was partially offset by the continuing revenue decline in the ACS commercial coupled with losses in our non-core businesses.

The strategy we’re executing is aimed at eliminating or where possible reversing these losses and unlocking the fundamental value of Mercury’s core. We’re working to rationalize our portfolio of unprofitable and non-core businesses and redirect the resources toward strengthening ACS and developing the new products we need to drive growth. The enterprise must be sustained while this takes place and to do that we need to take costs out of the business, improve operations, improve our profitability and increase our cash flow in the near term. In just a moment I’ll discuss the progress we made this quarter in each of these three areas.

First looking at our financial results, total revenue for the fourth quarter was $55.2 million. This compares with $55.4 million in the sequential third quarter and $57.8 million in the fourth quarter of fiscal 2007. Please note, all historical figures have been adjusted for the discontinued operations relating to the sale of our embedded systems and professional services business as noted in the press release. For the full fiscal year, total revenue declined by 3% to approximately $210 million. This decline was driven by a $30 million drop in the ACS commercial business by divestitures and by lower revenue in Visage Imaging than had been previously anticipated.

As mentioned in last quarter’s call we expected our book-to-bill to be below one for Q4. At [north] .8 times, book-to-bill was below our expectations largely due to delays in some expected defense program bookings in ACS and lower than expected bookings in VI. On a positive note however, through all of fiscal 08 our book-to-bill was 1.04 ending above one for the first time since fiscal 05 and we ended fiscal 09 with a slightly improved backlog.

Operating expenses in Q4 were down by $4.3 million from the fourth quarter last year. Operating expenses for the fiscal year declined by $12.1 million or 9%. Non-GAAP operating profit in Q4 was up slightly over Q3 and for the full year was $560,000 which represents an improvement of $16.9 million from fiscal 07. Non-GAAP EPS from continuing operations came in a $0.01 per share which is at the high end of our guidance range. For the full year non-GAAP EPS from continuing operations improved by $0.52 to $0.15 per diluted share.

By tightening up our operating processes and improving the underlying operations of the businesses, we generated $2.5 million of positive cash from operations in the fourth quarter building upon a strong result in Q3. For the fiscal year operating cash flow was $30.7 million a $24 million improvement from fiscal 2007. Year-over-year our overall cash balance increased by $9.4 million.

Our working capital position has also improved substantially. Inventory for the fourth quarter was down by $3.9 million quarter-over-quarter and DSOs declined from 60 to 54 days due to improved cash collections. We’ve also made it a priority to improve shipment linearity and overall we continue to make progress in this regard. We also now have better integration between operations and sales which should improve our inventory position as well as on-time customer delivery going forward.

During the fourth quarter we completed a cost reduction in ACS and corporate which should take approximately $7.5 million out of operating expenses on an annualized basis in fiscal 09. This reduction includes the decision to shut down our ACS facility in Carlsbad, California, additional cuts at the executive level, and further rationalization of our commercial activities. We expect these initiatives to improve our profitability and cash flow in the near term.

To improve in these areas on a longer-term basis we need to rationalize and optimize the return from our portfolio of non-core businesses. In Q3 we effectively shut down the business of AUSG, our commercial Avionics and Unmanned Systems Group, and in Q4 we closed on licensing AUSG’s intellectual property to Honeywell for $3.2 million. We also completed the sale of ES/PS a small legacy professional services within our Visage Imaging business. Selling ES/PS cleared the way for us to consolidate VI’s facilities in Germany which we expect to complete this month. These consolidations will take additional costs out of the business for fiscal 09, improve our focus in VI, and essentially create a pure play 3D advanced visualization medical imaging software business.

Looking specifically at VI’s operations in the quarter, revenue was up 36% from Q3 albeit of a small base and was driven by sales of our new CS line of integrated parts and 3D 4D client service software. VI’s non-GAAP operating loss declined from $3.9 million in Q3 to $3.3 million in Q4. From a product perspective our new CS software was very well received at the Stanford Shootout Show in Las Vegas in May and we now have 22 design wins to date. However, the sales cycle is longer than we originally anticipated and we still have more work to do in order to grow the top line. That said, our CS sales pipeline continues to expand and on balance we continue to feel good about VI and its prospects.

I prefaced my remarks by saying that Mercury’s non-core businesses have masked the value of the core of our enterprise which is ACS and particularly the defense business within ACS. Our mission is to unlock this value which gives rise to our third strategic objective, strengthening and growing ACS. ACS continued to perform well this quarter and was in line with our expectations despite low bookings and slightly lower revenue than in Q3. ACS revenue represented 89% of Mercury’s total revenue in the fourth quarter decreasing sequentially by $1 million to $49.3 million. Defense revenues were up slightly quarter-over-quarter and now represent 74% of ACS total revenue. For the fiscal year ACS defense revenue increased 17% to $130.2 million from $111.2 million in fiscal 2007. The growth in defense was offset by continued weakness in ACS commercial where revenue in the fourth quarter declined by $2.2 million or 15% sequentially and $30.3 million or 34% year-over-year.

ACS non-GAAP operating income declined slightly in Q4 due to lower revenue and product mix issues. For the full year however operating income increased by approximately $19 million and was slightly over 10%. Our book-to-bill in ACS declined to 9.81 from 1.12 last quarter due to delays in some expected defense program bookings. For the full fiscal year however, ACS book-to-bill was 1.04 compared with 0.85 in fiscal 07 driven by some great growth in defense bookings. Year-over-year defense bookings increased by $35.7 million or 33%.

The areas of the defense electronics business where we’ve participated historically are high-end radar and signals intelligence in airborne platforms as well as naval radar and sonar. Looking at our improved top line performance in ACS defense over the past few quarter, it’s clear that we’re solidly positioned and are taking advantage of the near-term growth opportunities in these markets.

Q4 was another strong quarter for design wins. Of the 12 total wins, nine were in defense. The five-year value of our design wins in fiscal 08 also improved on a year-over-year basis increasing by 37%. Looking forward we currently expect the favorable trends in the defense electronics market place to continue driven by platform upgrades as well as greater electronic content in new platforms. We are now in the early stage of implementing a more formalized and effective sales and business development process designed to capitalize on this potential. However, long times to production revenue is always a factor in the defense market.

And from a product perspective we still have a lot of work ahead of us before we can fully penetrate these opportunities. We continue to enjoy success from products introduced in prior years but if we want to succeed in a market driven by design wins, we need to introduce new products and we need to bring them to market faster with better R&D leverage than we have historically. Improving our performance in these areas will be crucial, not only in defense but also in commercial business within ACS where the top line continues to erode.

We’re fast approaching the end in our legacy medical business in ACS commercial and we continue to see challenges in the semiconductor space which is a cyclical industry in the midst of a downturn. In commercial telecommunications we have and are likely to continue to face headwinds in the single board computing part of that business. Our plan for the commercial business in ACS is therefore to retain existing customers through current design win cycles and to continue with highly selective new business pursuits where we can leverage our existing products or planned product road map.

At the same time we’ll continue to redirect our efforts toward defense where there are opportunities for higher margins and growth going forward on a more sustainable basis.

Looking at ACS longer term, our success will depend on penetrating growth opportunities that are more strategic in nature. We see two ways of doing this. First, ACS today is focused on embedded signal processing and high performance multi-computing but is still primarily a hardware-based business in terms of revenue dollars. Our challenge here is to grow the software and services part of our business in ACS and to exploit the adjacent market growth opportunities around the ACS defense core.

Our Mercury federal business was launched to address this latter point. Merc Fed made progress this quarter building out its operational infrastructure as well as expanding its new business pipeline. However, it remains in the early stage of development and will likely not be material to our financial results in fiscal 09.

Second and most crucial to the long run, we plan to move up the value chain within the embedded defense computing and signal processing market. We believe that the next generation of ISR platform architectures will be designed around cohesively networked sensor processing, multi-computings, storage and communications assets that can provide multi-sensor capabilities on a scalable common architecture. Our long-term vision is to position Mercury as the world leader in this space by evolving our technology, product road map and business around a common converged sensor networking architecture. We’re now in the process of laying the groundwork for developing this architecture, not only in terms of our technology and road map but also in terms of our team and employee base.

Over the past eight months or so a number of senior level arrivals and departures have significantly changed the composition of our executive group. In addition, as we announced last week, Jay Bertelli has decided to step down as the Executive Chairman of the Board of Directors and has retired his employee status at Mercury. Jay will assume the role of Non-Executive Chairman until the annual shareholders meeting later this year when he also retires from that role. Since I joined the company as CEO last year, Jay’s support and dedication to Mercury have been essential as we have worked to position ourselves for renewed profitable growth. We’re glad that Jay has agreed to support us on a consultative basis going forward in order to maintain an orderly transition.

We understand that realizing our new vision for Mercury will require intensive effort over the longer term at every level of the company. For this reason initiatives to improve our organizational focus and alignment from the bottom to the top will remain key to our strategy going forward. Fiscal 2009 will be a pivotal transition year for Mercury as we execute against this strategy. In terms of improving the underlying operations of the business, we are driving to restore Mercury to greater profitability during the year. In terms of the portfolio our goal is to exit fiscal 09 as a much more focused entity having divested all non-core businesses. On the product side, our goal is to refresh important elements of our embedded signal processing and multi-computing product lines while building the foundation for a new converged sensor networking architecture.

We believe these activities coupled with a continued focus on working capital will allow us to exit fiscal 09 a much more focused and profitable business and reposition us for renewed and sustained growth in fiscal 2010 and beyond. We look forward to reporting our progress in the quarters ahead.

And with that I’ll turn it over to Bob for the financial review.

Robert E. Hult

I will review revenue for the fourth quarter and full fiscal year of 2008 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 first quarter of fiscal 2009. I will discuss the numbers on both a GAAP and non-GAAP basis.

In the fourth quarter Mercury’s subsidiary Visage Imaging sold its embedded systems and professional services businesses. All historical statements have been adjusted to reflect this discontinued operation.

Fourth quarter revenues were $55.2 million at the top end of our guidance range of approximately $53 million to $56 million and approximately flat with the third quarter revenues. GAAP operating losses were $21.0 million. These losses include $18.0 million in goodwill impairment charges, $17.4 million of which relates to our Visage Imaging business and $0.6 million relating to our AUSG, Avionics and Unmanned Systems Group, business. These losses also include a $3.2 million gain relating the sale of our AUSG intellectual property and associated inventory to Honeywell. Given that the sale of AUSG’s assets did not qualify the discontinued operations accounting treatment nor did it reflect the business unit’s typical revenue activity, the gain was recorded as a contra-operating expense. The GAAP operating losses also include stock-based compensation expense of $1 million, amortization of acquired intangibles of $1.8 million, and $3.7 million in restructuring costs pertaining to a June 2008 workforce reduction in the AUSG deal and the closure of our first Germany office.

The GAAP net loss of continuing operations for the fourth quarter was $19.5 million resulting in a loss per share of $0.90. The miss from our guided range of a loss of $0.30 to a loss of $0.22 is attributable to the $18 million goodwill impairment charge as noted previously.

On a non-GAAP basis for the fourth quarter operating income was $331,000. Non-GAAP operating income excludes stock-based compensation expense, amortization of acquired intangible assets, the goodwill impairment charge, the gain relating to AUSG, and restructuring charges. We used a non-GAAP tax rate of 30%. Non-GAAP net income from continuing operations was $184,000. The non-GAAP diluted earnings per share for the fourth quarter were $0.01 at the top end of our guidance range primarily due to lower operating expenses.

The non-GAAP gross margin for the quarter was 56.8% slightly below our guidance range of approximately 58% to 59%. Gross margins were adversely impacted by a change in product mix within the quarter. Our non-GAAP operating expenses for the quarter were $31 million below our guidance of approximately $33 million due to the June restructuring action and the slowdown of research and development expense given a change in R&D priorities.

The book-to-bill ratio for the quarter was 0.8. The book-to-bill for the full fiscal year however was a 1.04.

Backlog including deferred revenue was $87.1 million, an $8.5 million increase from the same quarter last year but a $10.9 million sequential decrease from the third quarter of this fiscal year. Of the ending backlog $80.6 million or approximately 92% relates to shipments expected within the next 12 months.

Full year fiscal 2008 revenues were $209.9 million, a 3% decline from revenues of $217.2 million in 2007. Remember that these revenues exclude ES/PS discontinued operations of $3.6 million as reported in fiscal year 2008 and a $6.5 million exclusion as reported in fiscal year 2007. The non-GAAP gross margin was 60.7% versus 56.4% for the full year 2007.

Now I will discuss our business by segment for the fourth quarter and the full fiscal year.

Advanced Computing Solutions or ACS which consists primarily of our defense, semiconductor, communications and legacy medical businesses reported revenues of $49.3 million or 89% of the total corporate revenues for the quarter, down approximately 8% from the year ago period. The decline is the result of a year-over-year drop in ACS commercial revenues from approximately $20.3 million to approximately $12.7 million. This drop reflects a decline in the sales of commercial communication applications, semiconductor solutions, and legacy medical systems. The drop was partially offset by an increase in year-over-year defense revenues from approximately $33.1 million to $36.6 million. Sequentially ACS revenue decreased $1 million or 2% from the third quarter of fiscal 08. ACS book-to-bill for the quarter was 0.81.

For the full year this segment had revenues of $188.5 million or 90% of total company revenues, a decline of approximately 6% from last year. The full year mix was 31% commercial and 69% defense. The full year ACS book-to-bill was 1.04. The full year defense book-to-bill was 1.1 versus 0.96 last year. The full year commercial book-to-bill was 0.91 versus 0.71 last year which is a function of the significantly lower fiscal 2008 revenues.

For the fourth quarter Visage Imaging, which is our wholly owned subsidiary that focuses on the 3D medical imaging market, reported revenues of $2.5 million or 5% of total corporate revenues, up approximately 45% from the year ago period. Sequentially VI revenues increased $655,000 from the third quarter. VI’s book-to-bill for the quarter was 0.92. For the full year VI had revenues of $8.7 million, approximately flat with last year. Again, all historical figures are adjusted for discontinued operations.

The combined revenues for Mercury’s other business segments totaled $3.4 million. Our Visualization Sciences Group or VSG, which sells development toolkits and visualization applications for geosciences, engineering and manufacturing, and other markets, reported $3.1 million in revenue for the fourth quarter of fiscal 2008, up approximately 25% from the year ago period. The combined revenues for our other emerging businesses totaled $324,000. For the full year the combined revenues for Mercury’s other business segments totaled $12.7 million with VSG representing $11 million of this $12.7 million.

Turning to the balance sheet and cash flow statement cash, cash equivalents and marketable securities at the end of the fourth quarter totaled $166.5 million representing a $4.3 million increase from the end of the third quarter. This increase includes a net operating cash inflow of $2.5 million, $4 million relating to divestiture proceeds, $1.6 million from capital expenditures within the period, and a $900,000 unfavorable mark-to-market adjustment of our auction rate securities.

Included in the company’s $166.5 million cash, cash equivalents and marketing securities balance is $47.2 million of student loan auction rate securities, $50.25 million at par. As discussed last quarter these debt securities are all highly rated investments with AAA ratings. Since mid-February 2008 auctions for all of the company’s auction rate securities have continued to fail. We believe that the current illiquidity of these investments is temporary in nature. It is our expectation that these ARS investments will eventually be liquidated to successful future auctions or called redemptions at par plus accrued interest. We assert that we have the financial ability and intent to hold these investments until successful liquidation as described above.

The combination of our cash reserves, future cash flows from operations, and proceeds from portfolio divestitures will be more than adequate to fund the corporation’s cash needs over the next few years and to meet the potential put to the company for repayment of the outstanding $125 million Mercury convertible debenture in May of 2009. We have increased our margin loan facility to $23.7 million with UBS who manages our cash investments. Fourth quarter day sales outstanding were 54 days. Accounts receivable declined from $38 million to $33.1 million driven by improved shipment linearity and collections within the quarter. Inventory turns were 3.8. Inventory decreased $3.9 million during the quarter from $28.6 million to $24.7 million. At the end of the quarter the total employee population excluding contractors was 670 employees versus 745 at the end of Q3.

Guidance. As previously mentioned we will not longer be providing full-year guidance.

I’d now like to move to first quarter fiscal 2009 guidance. For the first quarter of fiscal 2009 we currently expect a revenue range of between $47 million and $49 million. We anticipate the Q1 gross margin to be approximately 58% to 59%. Operating expenses are currently anticipated to be approximately $30 million on a non-GAAP basis. The GAAP earnings per share are currently expected to approximate break-even for the first quarter of fiscal 2009. GAAP shares are projected to be approximately 22.8 million. The impact of stock-based compensation costs for the first quarter will be approximately $1.6 million. The amortization of acquired intangibles will be approximately $1.4 million. And restructuring charges are estimated to be approximately $200,000. The restructuring charges include remaining AUSG and ferc closure adjustments. The non-GAAP tax rate is 34%. The rate has increased from our historical rate of 30% due to significantly lower R&D tax credits. The non-GAAP diluted shares are projected to be approximately 22 million. As a result first quarter fiscal 2009 non-GAAP per share estimates are currently expected to be in the range of a loss of $0.07 per share to a loss of $0.03 per share. Cap ex for the first quarter is 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

(Operator Instructions) Our first question comes from Stephen Levenson - Stifel Nicolaus & Company, Inc.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

In terms of the delays on some of these defense items, is this something that you think is going to be sort of a permanent push-out to the right or is it more likely that there’ll be some catch up along the way?

Mark Aslett

I think the push is grouped into two categories Steve. Two of the pushes that we saw were due to funding delays. We expect that those deals should come in during FY09. The other was to do with a program that we believe that we are a part of that was contested. So that one is a little bit uncertain at this point because we don’t know exactly what’s going to happen with the result of the protests.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

I’m going to guess that that’s broad area Marine surveillance?

Mark Aslett

That would be correct. If that contest is withheld, the timing is a little uncertain. If the contest is turned down, then we should proceed here shortly.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Within the last few days there are some reports coming out that the Department of Defense is looking to reprogram about $1.3 billion to intelligence surveillance and reconnaissance projects and programs. Do you think that might help you and if so, how?

Mark Aslett

We think probably yes. We have a focus on that part of the market going forward. The concept that we’re working on around the converged sensor networking architecture is really directly targeted at the ISR space. So hopefully we will benefit from the funding redirection on a go-forward basis Steve.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Is that something you think you could see that could add to revenue in 2009 or do you think it’s more likely to take more time?

Mark Aslett

Hard to tell at this point. My gut would say it’ll probably take a little bit longer than that.

Operator

Our next question comes from Jonathan Ho - William Blair & Co. LLC.

Jonathan Ho - William Blair & Co. LLC

With regard to the book-to-bill, this seemed to come in a little bit lighter than what you guys had talked about. Can you talk about just maybe the shortfall relative to your expectations and where that took place?

Mark Aslett

Yes, sure. We thought last quarter and we said on the call that we expected the book-to-bill to be below 1. It did come in slightly lower than expected at 0.8. However as we said I think if you kind of step back and you look at the big picture, the book-to-bill for the year is 1.04 which is the first time it’s been above 1 since fiscal year 05. So the delays or the reason behind having the book-to-bill at the 0.8 level is really primarily due to the program bookings in defense that I previously mentioned being pushed out.

Jonathan Ho - William Blair & Co. LLC

Have you guys seen any of those covenants that’s taking place or is it still kind of hanging out there at this point?

Mark Aslett

The two that were funding related have pushed further into FY09. As I say the one program that was contested, it’s a little uncertain as to the timing yet because it’s really outside of our control. At this point we believe it’s going to be within the FY09 financial year.

Jonathan Ho - William Blair & Co. LLC

Taking a look at the discontinuing of some of the businesses, can you sort of walk us through what you think is the timing for that and exiting 09 what those expectations are at this point?

Mark Aslett

We haven’t set specific timing Jonathan regarding some of the remaining non-core businesses. What we said is that we expect to exit the full-year FY09 as a much more focused business. We think we’ve got a couple of assets here that have got value and we’re going to run a systematic process for those, but saying much beyond that we don’t think is prudent at this stage.

Jonathan Ho - William Blair & Co. LLC

With regard to VI, what type of traction are you guys seeing there with the arrangements that you have and what’s the visibility at this point of the accelerated ramp in revenue?

Mark Aslett

I think we’re definitely making progress with VI. Revenues were up as we said over 30% on a quarterly basis. That is very much driven by a new client in service software, the CS product line. In addition the pipeline continues to grow. We feel good about the growth in the platform. I think the uncertainty is around the conversion of our pipeline to revenues and the timing associated with that. It appears that the timing of getting some of the deals through the pipeline is taking slightly longer than what we originally anticipated. But overall I think we feel good about VI’s prospects and the direction in which it’s heading.

Jonathan Ho - William Blair & Co. LLC

On gross margins, it came in a little bit weaker than we were expecting even though we saw higher defense revenue. Was there any mix issue or anything within the ACS space that might have impacted margins this quarter?

Mark Aslett

It was purely mix related. Again, I think looking at what the product mix was and the mix of programs dictates really where we’re going to end up at a gross margin level. If you look at where we were in Q4 and what we’re projecting in Q1, we’re expecting to bounce back here in a little bit.

Operator

Our next question comes from [Jim McCary - David J. Green].

[Jim McCary - David J. Green]

Nice job generating some cash Bob. And I wanted to follow up with two questions in that regard. In terms of the restructuring charges for the year, could you tell me how much was cash restructuring?

Robert E. Hult

The total restructuring for the year was $3.7 million there; about half cash, a couple million. It did not all hit in the June quarter. Some of it will hit here in the September quarter. But roughly half is the cash outflow.

[Jim McCary - David J. Green]

As we look at working capital, how are you thinking about that for the upcoming fiscal year?

Mark Aslett

From my perspective Jim, it’s certainly an area of focus. I think if you look at what we’ve done over the last couple of quarters, we’ve made some pretty significant progress. In Q4 inventory was down quite substantially; we got the DSOs down by improving the linearity and having a pretty intense focus on cash collections. We’re going to continue that operational discipline going into 09 so we believe that we’re going to be able to sweat additional cash flow out of the working capital. But it’s probably going to be at a lower rate than what you’ve seen in the last couple of quarters combined.

[Jim McCary - David J. Green]

Yes. You’ve made some progress but it’s tougher going forward.

Mark Aslett

Correct. Yes.

Operator

It appears that we have no further questions.

Mark Aslett

I’d like to thank you all very much for listening and we’ll see you again next quarter.

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Source: Mercury Computer Systems, Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript
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