Good day, everyone and welcome to the Mercury Systems' First Quarter Fiscal 2015 Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the Company's Executive Vice President and Chief Financial Officer, Gerry Haines. Please go ahead, sir.

Good afternoon and thank you for joining us. With me today is our President and Chief Executive Officer, Mark Aslett. If you have not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at www.mrcy.com. Before we get started, we'd like to remind you that remarks that we may make during this call about future expectations, trends and plans for the Company and its business constitute forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. You can identify these statements by the use of the words may, will, could, should, would, plans, expects, anticipates, continue, estimate, project, intend, likely, forecast, probable, potential and similar expressions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, continued funding of defense programs, the timing of such funding, general economic and business conditions, including unforeseen weaknesses in the Company's markets, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in the U.S. government's interpretation of federal procurement rules and regulations, market acceptance of the Company's products, shortages in components, production delays due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, changes to export regulations, increases in tax rates, changes to Generally Accepted Accounting Principles, difficulties in retaining key employees and customers, unanticipated costs under fixed price service…

Thanks, Gerry. Good afternoon, everyone and thank you for joining us. I will begin today's call with a business update. Gerry will review the financials and guidance, and then we will open it up for your questions. Mercury is off to a good start in fiscal 2015. Our results from continuing operations were significantly stronger year-over-year. We delivered record defense bookings for the third quarter in a row. Total bookings and backlog reached all-time record levels growing 88% and 57%, respectively. Revenue for Q1 was up 7% while adjusted EBITDA more than doubled from the prior year to a level well above our guidance. We returned to GAAP profitability and we continue to generate positive cash flow from operations. Mercury’s success this past year in delivering bookings growth rates well in excess of industry growth demonstrates the strength of the business and technology strategies that we have pursued. Through innovation in our existing businesses as well as our recent strategic acquisitions, we've built a best-in-class portfolio of secure processing products and capabilities across the entire sensor chain. We successfully leveraged this portfolio to strengthen and expand our position with key customers on critical production programs in the right segments of the market. Together with the differentiated technology we’ve developed internally, the businesses we’ve acquired in FY12 have been instrumental to our success in growing the potential value of our franchise programs. Turning to our first quarter growth metrics in detail, total bookings came in at $85 million beating the record of 80 million set in Q4 of FY14. Our total book-to-bill for Q1 was 1.6. Total quarterly defense bookings nearly doubled year-over-year to a company record $82.5 million driven largely by continued strength in our Mercury Commercial Electronics, or MCE business. Our defense book-to-bill in Q1 was also 1.6, up…

Thanks, Mark and good afternoon again, everyone. As a reminder, before we go through the financial results, in the fourth quarter of fiscal '14 the company began reporting the financial results of our Mercury Intelligence Systems, or MIS subsidiary, as discontinued operations as a result of the strategic decision to explore a sale of that business. Accordingly, I will be discussing the Company’s financial results, comparisons to prior periods and guidance to this afternoon on a continuing operations basis excluding MIS, unless otherwise noted. Turning to our results for the first quarter and fiscal 2015. As Mark said, Mercury delivered a very solid first quarter, highlighted by all time record bookings of 85.1 million and a total backlog of more than $205 million. Adjusted EBITDA more than doubled year-over-year on 7% annual revenue growth, and the company returned to GAAP profitability for the first time since the end of fiscal 2012. Total revenues for the quarter grew 3.4 million or 7% year-over-year to 54.1 million versus our guidance of 50 million to 55 million. Looking at the top-line in greater detail. Revenues from defense customers for the first quarter increased 8.2 million or 19% year-over-year, while revenues from commercial customers decreased 4.8 million. Defense revenues in our largest reporting segment, Mercury Commercial Electronics or MCE, increased 9.2 million or 25% year-over-year to 46.2 million. In our Mercury Defense Systems, our MDS reporting segment, revenues were 5.5 million, down 2.4 million from the first quarter of last year. These first quarter fiscal year '15 reporting segment revenue amounts exclude adjustments to eliminate 1.8 million of intercompany revenues in Q1 of fiscal '14 and 0.5 million in fiscal '15. On the bottom-line, Mercury reported GAAP net income from continuing operations of $700,000 or $0.02 a share versus our guidance of a net…

(Operator Instructions) And our first question comes from Tyler Hojo, Sidoti and Company. Your line is open.

Just I want to talk about bookings a little bit – in a little bit more detail first. Obviously very strong results here in Q1 and I get the commentary about kind of a normalization as we move through the year. But could you maybe just talk -- maybe just in generalities, I mean, do you think backlog has peaked here or do you expect kind of book-to-bill ratios to be maybe at 1 or maybe a little bit north of it as we move through the fiscal year?

As Gerry said on the call, Tyler, we've had basically three quarters in a row of record defense bookings and this is I think the highest backlog and the highest bookings we've seen in the company’s history. I’d love to continue at a 1.6 book-to-bill, but it’s probably not realistic. We are targeting basically having a positive book-to-bill for the remaining quarters of the year. But I’m not going to forecast what we expect the bookings to be at a total year level.

And just from a program perspective, you mentioned kind of expectations for additional Seaward Block 2 orders through the remainder of the year. Is there anything else maybe worth highlighting in terms of kind of being the key drivers there?

So as I said on the call, the top programs, I said this last quarter and I kind of repeat it again this quarter, from a bookings perspective there are really five major drivers for the year, Aegis, SEWIP, F-35, Patriot and then Filthy Buzzard in the Mercury Defense Systems business. As you probably remember, we had a very, very strong year in Patriot in fiscal year '14 after a very weak fiscal '13 and we did $45 million of bookings in '14 alone. We do anticipate some bookings for Patriot as the year proceeds largely related to certain FMS sales. But I think what we’re going to see is really a bleeding off of those bookings that we previously booked. Seaward, we do expect to see additional bookings as the year progresses. That’s tied to our success on increasing or expanding our content on that particular program as well as later in the fiscal year the anticipation as the Block 2 moves into full rate production. Aegis, we also anticipate continued bookings probably towards the back end of the year. We've basically already overachieved the bookings in the first quarter than what we did in the whole fiscal '14. So we are off to a very, very strong start there. And then F-35 I think has the potential additional bookings again given this very strong performance in the first quarter. We do anticipate ongoing bookings as the year progresses. And then finally, Filthy Buzzard, I think we'll see a couple of other meaningful bookings throughout the year. So, neck-neck, I mean those five programs made up roughly 83% of our bookings in Q1 and they are really what’s driving our performance at a year level.

And then maybe just lastly, certainly don’t want to steal any thunder from your Investor Day next month, but maybe you can just talk a little bit about kind of some of the progress made in the AMC.

Sure. So we've had over 40 customers literally go through the facility now. We've had a group of executives in from one of our largest customers here literally yesterday and today discussing not only the processing part of our business but also the RF and microwave. And like we've seen in other customer visits, they're all very suitably impressed with the capabilities that we've built in that particular facility. And that’s really the reason why we’re holding this year’s Investor Day conference up at the AMC in New Hampshire. I think it’s a great opportunity for investors and shareholders as well as the analyst community to see this facility which is very important to drive the growth in the business particularly in some of the larger EW programs that we’ve been successful on.

Thank you. And our next question comes from Sheila Kahyaoglu of Jefferies. Your line is open.

I guess maybe talk a little bit about international mix this quarter. It was slightly lower than it’s been in prior quarters, just timing of that, or was it higher SEWIP sales?

So if you look at on a bookings basis, Sheila, our bookings, international defense bookings as a percent of total was 30% in Q1 versus approximately 17% a year ago. The largest driver there in terms of the increase was actually the Aegis program where we're involved in a number of different foreign military sales. Revenue as a percent -- international and FMS sales as a percent of total revenue was down 3 percentage points, but it really comes down to program mix at the end of the day.

And then just on M&A, it’s clear that you have the increased visibility of maybe putting you back on that track. Can you maybe discuss what you are looking for in potential targets? Is it program mix, is it certain software, certain capabilities that you are looking for, maybe if you could give us an idea?

So I think as we mentioned, I shuffled the team a little bit. Gerry who was running our M&A activities has moved over to the CFO role. And as we announced on October 20th, we've just hired Mike Ruppert who will start November 20th to run our M&A activities. Mike is a very experienced M&A professional having worked at UBS, Lazard and Lehman, all in the aerospace and defense sectors and done some pretty large deals. As it relates to our target areas, we think that our strategy really works. And so we are focusing in on RF and microwave as well as across the sensor processing chain. So it's really sticking closely with the strategy, but looking for synergies both from a cost and from a revenue perspective. And I think we've been able to demonstrate that when we find a target, we are able to generate those synergies with the deals that we've done since fiscal '12.

Thank you. And our next question comes from Peter Arment from Stern Agee. Your line is open.

Mark, I was wondering if I could just dig back in a little bit into the backlog. You've had a lot of progress and a lot of the wins have been in your kind of the key product categories, your traditional processing, or it seems like. How about on the RF and the microwave side? I know this was a big focus of building that out and it comes with a lot of more of an opportunity to build out the content in the future. Are you seeing -- are we beginning to see that tick in to expand your backlog at current levels or we haven’t even touched upon that yet?

Absolutely we are. If you look at the SEWIP program, we have been hugely successful growing our content and expanding our position on Block 2 into a derivative program as well as expanding on Block 3 and that's pretty much all RF and microwave. And that program is hundreds of millions of dollars of revenue potential over its life to Mercury. And so at our Investor Day on November 12th up at the Hudson AMC, we are going to lay out what we believe to be the proof points around the success of the strategy in not only RF and microwave, but also in the processing dimension. But SEWIP is probably the best example given the enormity and the fact that it's probably the next big program that’s going to drive growth in the business.

And so is the RF – so would that not begin to show up initially? Is it more of a book and ship type business or would you see that initially continue to flow through to the backlog?

It’s not necessarily book-ship. We did 8 million of bookings for SEWIP in Q1. As we talked about, we have seen some delays on LRIP phase 2 in fiscal '14. So we got the booking as we anticipated. And actually SEWIP was our largest revenue producing program in the first quarter at over $9.5 million. So I think we are already shown that we have got a pretty significant and healthy growing RF and microwave business.

And Gerry just quickly, what is the tax rate assumed for the year for your GAAP earnings projection?

The ECR as I mentioned, at least for Q2, is 40%. I think that’s going to move around for the year. There are a few different things going on. It was very low in the first quarter. For the year on balance, it should not be 40%. It will be lower than that, probably more normalized rate in the mid-30.

Thank you. And our next question comes from Michael Ciarmoli of KeyBanc. Your line is open.

Mark, maybe just a little bit more on kind of the M&A environment. Are you guys going to be looking to sort of -- you've got two big competitors out there I guess. I mean are you guys going to be looking to consolidate this market at all? I mean is that part of the strategy for synergies or is the driver going to be more looking for key technologies that can get you on to key programs platforms?

So if you look at the first phase of the acquisition strategy, the way which we described it, it was really a capability and program driven strategy. And I think we very successfully found companies that were non-overlapping that gave us the complete capability end to end to build pre-integrated sensor processing subsystems. What we’ve been focused on as part of our acquisition integration plan is really creating a platform that we can scale. And so I think the dimensions of that will be in processing where we do see the opportunity of looking to continue to acquire in that dimension, but also in RF and microwave. So those are probably the two primary pillars, Mike, of kind of what we’re focused on, because we believe that we've built a business platform that will allow us to profitably scale and we’re going to be looking for deals that have got both revenue as well as cost synergies.

And then just on -- obviously you guys are getting tremendous strength and growth here on these five programs. Can you give us a sense -- I mean should we think about the backlog being diversified maybe around those same kind of five programs? And I am kind of looking at the concentration here. Is that something you guys are looking at as you're maybe looking to develop new products? You’ve got the big anchors out there, but clearly there is going to be some concentration, some risk around those programs. But maybe what else are you doing to try and diversify some of that risk?

I would look at it from a slightly different perspective, Mike, and say, our strategy has been to target programs that are very well funded, that are in production, that are right in the middle of the DoD’s new role of emissions, because if anything, I think those programs represent lower risk than trying to go after new design wins of which there are probably few and far between in this environment. And I think that strategy is serving us extremely well. We have grown the backlog substantially and I think we've reduced the volatility in the business and we still see more opportunity for growth. So we're clearly pursuing other programs, but that’s -- the strategy that we’ve been pursuing is working very, very well for us.

Last one for me, just can you comment maybe on sort of the cadence of or even the run rate on your kind of book-ship business, if you’re seeing any changes there with kind of your level of fair activity or even amid kind of current continuation resolution, are you getting more confident in that business or are you seeing a pick-up at all?

I don’t think there’s really been any change, Mike, versus the last few quarters. It kind of moves up, it moves down a little. As you know, given the impact that we saw in fiscal '13, a key strategy was to basically build the backlog so we were actually less dependent upon book-ship that would help us manage and navigate through this difficult environment more effectively. And you can see that in our backlog numbers and so we're less reliant on book-ship than what we’ve been in years past and I think that’s generally a good thing.

Thank you. And our next question comes from Jonathan Ho of William Blair. Your line is open.

Just given the visibility that you guys now have to some of these larger programs, is there any lumpiness that maybe we should expect from a revenue perspective? I mean it seems like some of the booking came in a little bit earlier than expected, so just trying to get a sense from you whether if the seasonality pattern might change at all for the balance of the year?

We don’t believe so. I think we’ve obviously delivered the results in Q1 and we’ve guided for Q2. So you kind of get a perspective on what H1 versus H2 looks like. And the year is progressing, as we planned other than the fact that we got some of the booking earlier, which we view as a good thing not a bad thing. So we’re on-track and we’re confident in our ability to deliver the year.

And then can you talk a little bit about what was the reason why the commercial business was down? Was this just sort of a tough comparison? And should we -- how should we be thinking about sort of the level of activity for commercial going forward?

It's such a small part of our business overall, Jonathan, it’s really not a driver at this point. And depending upon what happens with some of the legacy business in the commercial segment, it can be up a little, it can be down a little. I wouldn’t read too much into it.

And just in terms of the actual AMC cost savings, you guys talked about sort of being able to realize the rest of the cost savings. Is there anything else that we should be looking at in terms of revenue synergies maybe driving the rest of the business over the course of the year as well or some type of margin improvement that you see from the facility?

You're just trying to steal my thunder from Investor Day, right?

Sorry.

So seriously, I think at Investor Day, we’re going to lay out what we believe to be the proof points and the success around the acquisitions that we've done, the investments that we've made in the AMC. We’re going to tie that back to key programs and to enumerate the potential volume associated with some of those key programs overtime. And you’ve got to come to see the numbers, but it should be pretty cool.

Thank you. (Operator Instructions) And our next question comes from Noah Steinberg of G2 Investment Partners. Your line is open.

This is actually Josh Goldberg for Noah. So I guess just a couple of quick questions. Obviously your bookings have been very strong and it seems like you are having quite a bit of visibility into this year. Just curious with the amount of backlog that you’re going to ship this year, what’s the reason why your revenue growth even at the high end will just be, call it, 10% to 12%? I mean your bookings, especially your backlog, is up north of 50% year-over-year and to me it would seem like those numbers should come a little closer to each other.

So our guidance is our guidance. It is our best estimate at this point in time. And clearly it’s narrowing of our revenue guidance range in the first quarter. And if we continue to be successful, we are hoping that that guidance range will continue to narrow as the year progresses. But the guidance that we gave for the year is what we believe right now.

And I guess your comments about book-to-bill to be above 1 also gives you confidence that you’re not going to see a big fall off in your bookings for the back half of the year?

So we've had three great quarters in a row. We are expecting, as Gerry said in his prepared remarks, that bookings are to normalize relative to revenue. So we’re anticipating the 1.6, 1.5, 1.4 book-to-bills that we’ve seen for the past three quarters.

And remember, Josh, the 12-month backlog ratio that I gave you is the rolling 12-month. So not all that is going to ship in this fiscal year.

But with there being, call it, $64 million above last year’s number, even if you take a big haircut, you’re still pretty comfortable into the year with just the backlog right now?

So I think hopefully we expressed that we feel good about fiscal 2015. We're executing against the plan. We've narrowed our guidance range for the year and we believe we’re off to a very strong start in Q1.

And just one last one for me. When you were doing $40 million of EBITDA a couple of years back, your stock was $18 to $20 a share. Today it’s closer to $12. Obviously there seems to be a valuation disparity now versus then. Why aren’t we seeing any more aggressive buyback in place, especially since you're generating so much cash and you have $50 million of cash on our balance sheet?

Well, so we've been generating positive free cash flow literally since the second quarter of fiscal '13, but it’s in the low single digits. I think as Gerry said in his prepared remarks, cash flow year-over-year is up 8 million. And we feel that we’ve got enough cash to run the business. And looking forward, we believe that the primary use of cash will like be further M&A. Once we get through our acquisition integration plan and as the EBITDA continues to building the business as the year progresses.

Just one last one for me. I mean obviously a few years back your gross margins were in their high 50s and now they're closer to 44%. I know obviously some of that is because of acquisition. But do you think that as you grow your company and your top-line, your gross margin can sort of get back to maybe the 50% level in the near future?

So if you look at our annual pro forma target model, the gross margin range is in the 45% to 50% and I think we’re within that range this past quarter and I think that’s the range that we see right now.

And Josh, one thing to keep in mind there is that you pointed out there is a -- our margin profiles kind of blend now from the historic Mercury and the acquisitions. As applied to gross margin, that’s a little bit of a geography issue. So don’t be misled by just the gross margin, because in the RF side of the business you see a lot more customer-funded R&D effort which move up into cost of goods sold, which will depress gross margin but it washes out of the operating income line.

Thank you. And Mr. Aslett, we appear to have no further questions. Therefore, I would like to turn the call back over to you for any closing remarks.

Okay. Well, thank you for taking the time to listen to our call today. We hope to see you at our Investor Day at the Hudson AMC on November 12. That concludes the call. Thank you.