Good day and welcome everyone to the Mercury Computer Systems, Incorporated third quarter fiscal 2009 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Senior Vice President and Chief Financial Officer, Mr. Bob Hult. Please go ahead, sir.

Good afternoon and thank you for joining us. With me today is 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 third 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. Finally, we will also briefly remark on our proposed option exchange program, which is described in our proxy statement dated April 13, 2009. We have not commenced the exchange program. If the exchange program is approved by shareholders, we will provide eligible participants with written materials explaining the full terms and conditions of the program and will also file these materials with the SEC. When these materials become available, participants should read them carefully, because they will contain important information about the program. Once file, the materials will be available free of charge at www.sec.gov and by contacting our investor relations department at 978-256-1300. I am now pleased to turn the call over to Mercury's President and CEO, Mark Aslett.

Thanks Bob. Good afternoon everyone and thanks for joining us. I'll begin with an update on the business. Bob will review the financials and discuss our guidance for the fourth quarter, and then we'll open it up for your questions. As part of our strategic turnaround, we’ve been working toward the goal of divesting Mercury’s unprofitable non-core businesses by the end of fiscal 09. In fiscal 2008, we shut down AUSG and sold the ESPS business. Earlier this fiscal year, we sold the assets and IP have sold our pharmaceuticals. On our Q2 conference call, January 27, we announced the sale of our largest non-core business, VI, which generated the majority of our operating losses. The sale of our last remaining non-core business, the Visualization Sciences Group, will conclude this process. We have moved VSG into discontinued operations this quarter and anticipation of the sale, which we currently expect to close by the end of this fiscal year. This will be another milestone for Mercury as we work to focus the company and position ourselves for renewed growth. We’ve also treated VI as a discontinued operation in this quarter’s financial statements. As a result, from a reporting standpoint, we have finally unmasked the true profitability we’ve been delivering in our core business. Overall this was another successful quarter for Mercury. Our total revenue and non-GAAP earnings both exceeded the high end of our guidance range. From a revenue perspective, we guided $48 to $50 million for the quarter, which excluded VI, but included VSG. Excluding VSG would have adjusted our guidance to $45 to $47 million. Revenue, excluding discontinued operations came in at $50.6 million for the quarter, which was substantially above the high end of this adjusted guidance. Our non-GAAP earnings of $0.20 a share were also well above…

Thank you, Mark. As a reminder, I will be discussing our third quarter results and fourth quarter guidance on both a GAAP and non-GAAP basis. In addition, as Mark said, both VI and VSG are treated as discontinued operations in our financial statements for the third quarter. So the numbers I will be discussing relate only to continuing operations. Mercury executed well this quarter. Total revenue was $50.6 million, coming in above the top end of our guidance range of $48 million to $50 million, which included VSG. We have run VSG through discontinued operations and after subtracting VSG’s actuals, our Q3 guidance would have been $45 to $47 million. On that basis, we substantially exceeded our original revenue guidance. Non-GAAP earnings for the third quarter were $0.20 per share, also above the high end of our guidance range, which was $0.05 to $0.09 per share. We seen good success in growing bookings, revenue, and operating profit and our third quarter results reflect this progress. We’re also continuing to do well from an operations perspective. Operating income in our ACS business was up by $2.1 million year-on-year and $4.1 million sequentially. Mercury generated $1.5 million in free cash flow for the quarter. We redeemed $119.7 million of our convertible senior notes on February 4, 2009 and we notified the holders that we would be redeeming the remaining outstanding $5.3 million of notes at par plus accrued interest on May 1, 2009. Now that we divested four of our non-core businesses and treated the remaining VSG as discontinued operations, our income statement clearly reflects the value at the core of the enterprise and we now have a clean and incumbent balance sheet. Breaking down our $50.6 million in total revenue, ACS revenues for Q3, including both defense and commercial were $49.4…

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

I’d like to talk a little about the capital structure here and see if I understand your position. You said you ended with $40.6 million in cash and you have the adjusted rate securities which you’ll receive applaud for the middle of next year. Against that, you have the line of credit of 33.4. So in essence, we were looking at your company, it’s fair to say you have cash or quasi-net cash of about $52 million and therefore don’t have any immediate financing needs. Is that a proper view?

That’s a very proper view, Mark. We certainly feel that we’ve got sufficient cash to run the business.

So while you have that shelf in place, there is no need to do anything unless it’s on an opportunistic basis?

The shelf we feel is just a good tool to have in the corporate finance tool kit and a prudent thing to do, you know, hence the filing.

Stock comp has come down in the third quarter. Obviously the discontinuance has helped that, but you’re looking for $200,000 the fourth quarter. Is there a change in philosophy for the use of stock for compensation and what type of stock comp expense might be reasonable for 2010?

I think overall you have seen a decline in the stock compensation expense. We’ve had a number of senior executives leave the business over the last year as we kind of rebuilt the management team. In addition, as you state, we have divested ourselves four of the non-core businesses at this point that clearly reduce that number also. I think, you know, what are trying to do or how we using our equity? We believe that from an employee perspective, we’re trying to focus that equity to get the best return from an employee perspective. So we are looking to see some changes. From a stock comp expense going forward, I’ll hand that over to Bob.

We have modestly moved our forfeiture rate up here in the third quarter from approximately 9.5% to 10.5%. That’s brought the expense down a few hundred thousand dollars. Mark noted that we’ve had a number of senior executives leave the company this past year. That’s had an equal impact on bringing the overall expense down. Looking forward, I think I’d like to hold off on that until the July call. I think a rough takeaway at this point would be our stock base compensation expenses have been moving down this past year, compared to FY08. They should move down a bit again in FY10, but I want to stay away from the numbers for the moment.

Looking at the commercial business, clearly you’re expecting a decline sequential from the $13 million in the third quarter. Where and when do you think that commercial businesses is going to bottom out?

I think a big piece of it, Mark, is dependent upon what’s going on with the overall macro economy. As we said, in the prepared remarks, the largest part of the commercial business today is semiconductor, which as we all know is in the midst of a pretty significant downturn. There appear to be some potentials or glimmer of hope looking forward. I think there was an interesting article in the Wall Street Journal about maybe the memory market, one of the earliest parts of the semi market that would recover. So maybe it’s a leading indicator. The customers that we’re dealing with are still clearly down substantially, but they’re feeling a little bit better. Whether or not that translates into bookings and revenues the next couple of quarters, it’s still a little bit early to tell. I think as we’ve said overall for our commercial business to really recover, we do need a rebound in that sector. We had a couple of pretty substantial design wins. One with KLA10 core in terms of their next generation design. And two, pretty substantial wins with ASML. So we need that part of the market to recover before we start to see a recovery in commercial.

As you develop your systems integration business, how do you manage the potential for channel conflict with the prime?

We’re not actually competing with the prime. If anything, I think the primes want Mercury to take on more of the complete system. So this program I mentioned, this grand base radar program, working closely with one of the big primes. They basically came to us and asked us to take over more of the systems integration activities. So I think there’s an opportunity for us. We’re not looking to compete with our customers; we’re looking to provide more value add.

We’ll take our next question from Tyler Hojo with Sidoti Company.

What was the gross margin implied in your guidance? Was it 56% for the fourth quarter?

No, for this next quarter, fourth quarter, it’s a range of 52 to 53%. We said that we felt that the full year would come in at 56%. We’ve had very strong gross margins throughout the year. 56, 57, 58%. 52-53% for the fourth quarter. So full year will be 56%.

Clearly these results were at least much stronger than I was looking for. Did most of that come from the commercial side?

The decline in commercial, quarter over sequential, we did have the large commercial radar booking that wouldn’t repeat on a quarter-over-quarter basis. In addition, we did get some pick-up I think as we’d been talking about in Legacy Medical business where the large medical OEMs are actually looking to extend the life of the equipment that they have in their field on behalf of customers, because customers aren’t buying used stock. So, that we may benefit, but probably not to the extent that we did this quarter. So that’s really the dynamic that’s occurring along with a slight decline in semiconductor sequentially and then we actually had a good quarter in defense again.

I get all that, but what I guess what I’m trying to understand is what specifically is driving the margin down from the 58-59% we saw in the first three quarters of the year.

So this quarter coming up, Q4, there’s a high percentage of services in systems integration business than we’ve had historically. So it’s really a product and business mix this quarter.

Would you expect this to be a more normalized business mix on a go forward level or too early to tell?

I think it is lumpy, but this quarter, we’ve got more of that type of business than we’ve had historically.

The really solid performance in Merc Fed, obviously $5 million in bookings and a huge increase sequentially in revenue. If you could talk about what your near term expectations beyond this quarter are for that business?

We think that we got three major growth drivers in the business. One is the number and the value of the design wins. I think we’ve been putting some pretty good numbers up on the board there. The second is around systems integration and services and we believe that we can continue to grow that business going forward and it’s certainly an important part of us adding more value to the primes and scaling the ASC business potentially faster than we have been. The third as you mentioned is Merc Fed. We had a really good quarter in Merc Fed this quarter. The largest booking that we had was the second phase of what we believe to be a next generation persistent ISR platform. We’ve had some early bookings in 2009 associated with that. This was the second phase. Looking forward, we believe that we’re going to continue to grow that business. Q3 was particularly strong. So we don’t expect the same sort of number in Q4, but when you look at it from a year-over-year perspective and you say 400,000 of bookings for the whole of 08 to over 10 through the first three quarters of 09. It’s a pretty impressive performance.

What was the operating margin in the ACS business?

14% non-GAAP this quarter.

Was the big swing factor there the Legacy Medical?

No, it’s largely product and business mix. The gross margin has been increasing over the last few quarters. We’ve got a lumpy business depending upon what’s in there kind of affect our gross margins. This was favorable this quarter.

We’ll take our next question from Jonathan Ho - William Blair.

How scaleable is the Merc Fed business? Is this mostly a boots on the ground type of a business? Is this a good sort of proxy in terms of lead generation for future hardware and software sales?

The Merc Fed, the way in which we’re approaching our business is to really look at scaling it profitably. A number of businesses we didn’t scale profitably. We were sucking a lot of profit out of the business. So we’ve taken a more conservative approach with Merc Fed. We’re kind of winning the business and having the resources as appropriate. We believe that we can continue to scale it going forward. As it relates to how we’re using Merc Fed. Merc Fed, because they’re doing business, largely directly with the government but then also a prime subcontractor as it relates to the smart processing, it gives us the opportunity of getting much closer to the funding flows as well as some of the new program starts and getting involved in those programs much earlier than what we would have done historically. So it is a form of BD and we believe it’s having a positive impact on our business model.

Are you already seeing the Merc Fed results beyond the systems integration and BD side, but also in sort of these design wins that you’re talking about that. Has that flowed through already at this point?

Absolutely. So I think this program that we mentioned, one of the number that we’re pursuing. This one is further along than some of the others, but this one particular contract is a great example of how the hybrid business model works. Merc Fed is actually doing the upfront work and there’s a subcontract with some of the engineering work back into the ACS business. So it’s kind of proving out at a very early stage that this hybrid business model is actually we feel the right way to go and take the business going forward.

In terms of the margins, can you talk about the differences or just give us a rough ball park ranges between the services margins versus your more traditional product margins?

Clearly it’s a different pro forma business model. Merc Fed looks more like a prime model in terms of the costs are really in the O-cogs line as opposed to the operating expense line. From an operating income level, both businesses will be double digit we believe.

My last question is on the software leverage opportunity for 2010. Can you give us more color on how you see that developing?

Mercury I think had lost a lot of the design leverage. We were designing specifically for customers, programs and platforms with very little design reuse. It’s a pretty inefficient way of doing it. So what we’re doing is now doing much more modular base design where you kind of lay out a computer process or architecture and be able to reuse that technology across multiple different platforms, markets, and programs. We’re going to do the same thing on the software side of things, which is it’s basically designed reuse. If you do it effectively, it allows you to be more efficient from an R&D expense perspective, but probably more importantly going forward, it allows you to go after more design wins which is clearly a focus for us as we’re trying to scale a top line. So we think it’s the right approach and we demonstrated that we can do this in the hardware side of things and 2010 we’re going to do it in software.

Defense Secretary Gates talks about changing the current model to favor more fixed price contracts. How do you think about that shift and whether it’s beneficial to Mercury?

We believe it is beneficial. I think clearly the cogs model makes sense when you’re trying to contain costs. We’re developing the majority of the technology on our own nickel, which the government can benefit from. As we’ve seen this part of Secretary Gates’ reprioritization, we believe that we try to sidestep the programs and platforms that were cut and were net beneficiaries of the increases such as missile defense and the increase in more generally in ISR. So we feel pretty good about how we’re positioned, that we’re on the right programs, we’re on the right platforms, and in the right sectors.

We’ll take our next question from Stephen Levenson - Stifel Nicolaus.

Did you have any ten percent customers this quarter and if so, how many?

We did. We had four, all in defense.

On the design wins that you’ve captured, do you think they were more related to processing power, temperature management, price, or was it something else?

I think we’ve been working steadily during 09, refreshing parts of our signal processing and model computer product lines. Some of the design wins this quarter were related to the new products that we’re bringing out. So we feel pretty good about the fact that the products that we’ve been working on are starting to get some traction.

With the increased focus on ISR, what do you see as the demand picture for the next year? What’s the competitive landscape like?

Clearly I think we feel good about ISR in general. I think if you look at what Gates did in terms of funding, more monies for ISR R&D. We’re a part of that through Merc Fed in terms of the persistent ISR program. It’s kind of a next generation approach. So we feel good that we’re on some of the leading edge there. But then in terms of the platforms that we’re on, programs and platforms such as part of the global haul, the B. platform again will be net beneficiaries. So I think we see and expect to see increases in ISR as a result of the prioritization and we feel good about the position that we’re in.

Competitors, do you see other ones or this is where you’re sort of blocked out?

We feel pretty good about where we’re at. I think we’re getting stronger from a product portfolio perspective. I think we’re adding more value from a systems integration perspective. We’re going to have a competitive advantage over time. So actually I feel pretty good about the progress that we’re making.

We’ll take a follow-up question from Mark Jordan - Noble Financial,

Bob, given the dust has settled here on the divestitures, how much of tax benefits do you have or how much pretax profitability can you shelter, on a GAAP basis, you’ll start to show a beating for tax rate?

Not much. We’ve been carrying things back consistently here the past couple of years. So we’re going to become a tax payer fairly quickly.

Can you pick a quarter in the next 12 months?

I won’t try to pick a quarter, but it could have in FY10.

Gentlemen, there are no more questions at this time. I’d like to turn the call back over to Mr. Aslett for any additional or closing remarks.

Okay. Thanks very much, Brandy, and thanks to everyone for listening. We look forward to speaking with you again next quarter. This concludes our call.

Thank you for your participation in today’s conference call.