Good day everyone, and welcome to the Mercury Systems Third Quarter Fiscal 2017 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, Mr. Gerry Haines. Please go ahead, sir.

Thank you, operator. Good afternoon and thank you everyone 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 mrcy.com. We’d like to remind you that remarks that we may make during the call today 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, possible, potential, assumes and other 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 weakness 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 or in the U.S. Governments' interpretation of federal procurement rules and regulations, market acceptance of the company's products, shortages in components, production delays or unanticipated expenses 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…

Thanks, Gerry. Good afternoon, everyone and thanks for joining us. I’ll begin today’s call with a business update. Gerry will review the financials and guidance and then we'll open it up to your questions. Mercury delivered strong bookings, record revenues and record adjusted EBITDA in the third quarter of FY ’17. Our organic and acquired businesses including CES all posted strong results. We came in at the high end of our Q3 guidance on all of our metrics and we’ve raised our guidance for the full fiscal year. Mercury’ total revenues grew 63% from Q3 of FY ‘16 to a record $107 million. We continued to deliver strong growth organically. Excluding the CES business acquired in Q2 revenues was up nearly 53% from Q3 last year. Adjusted EBITDA on a consolidated - consolidated basis was up 71% year-over-year ended more than 23% of revenue, one percentage point inside our recently updated target financial model. Our largest revenue programs in the quarter was SEWIP, Patriot, a large ground-based radar, Filthy Buzzard, Golden staff and Aegis. Our largest bookings programs in Q3 was SEWIP, F-16 SATA, Triton, Aegis and F-35. In addition during Q3 we received a five year sole source, $152 million basic ordering agreement from the Navy for Filthy Buzzard. This is really important win for us, giving us great visibility on a major EW program for an extended period of time. We also booked a second full rate production order for SEWIP Block 2 value to close to $16 million. The first full rate production order came in just two quarters ago, so receiving the second order within a year is very beneficial. International defense bookings for Q3 including foreign military sales were up more than 2.5 times versus a ago, up total backlog exiting Q3 was strong, up…

Thank you, Mark. And good afternoon, again everyone. Before I go through the financial results, I'll note that unless otherwise stated we’ll be discussing the company's financial results, comparisons to prior periods and guidance on a consolidated basis. The historical results include the CES business we acquired in Q2 of this fiscal year, but exclude Delta Microwave which we acquired early in Q4. This is another busy and very successful quarter for Mercury. In addition to once again delivering strong financial results, we relocated our headquarters, completed a very successful capital raise and also finalized negotiations for the Delta Microwave acquisition to put a portion of that newly raise capital to work. Turning to our financials, Mercury's revenue for the third quarter of fiscal ‘17 exceeded the $100 million mark for the first time in the company's history, even before taking into account the contribution of CES. Total revenue increased $41.4 million to $107.3 million, up 63% from Q3 last year and just above the high-end of our guidance of $103 million to $107 million. Excluding the impact of CES, revenues would have been $101 million, an increase of $35.1 million or 53.3% year-over-year, which itself would have been a record. International revenue including foreign military sales was 18.2% of total revenue compared with 21% in Q3 of last year. Revenue from radar and electronic warfare together accounted for 64% of consolidated total revenue compared with 87% a year ago. Once again, this quarter the lower proportion versus Q3 last year reflects the larger and more diverse revenue mix for the quarter resulting from the addition of several new businesses and the associated expansion of our addressable market and revenue base. Q3 radar revenue was down 16% year-over-year, while electronic warfare revenue more than doubled. Bookings for the third quarter…

Thank you. [Operator Instructions] And the first question comes from the line of Jason Gursky from Citi. Your line is open.

Great. Thank you. Good afternoon, guys. Just a quick...

Hi, Jason...

Housekeeping question if I might, you mentioned organic growth a few times throughout the discussion and through - and gives a few numbers. But I didn’t quite catch what you guys believe the underlying organic growth number was for this quarter?

So we said that the organic revenue total for the year was expected to be 400 to 404, which is a lift from our prior organic guidance, which did not include Delta of course.

Okay, great. And then just to know more further detail on the specific quarter?

We didn’t give more detail to break it out for the quarter, no.

Okay. That’s fine. Just wanted to make sure I didn’t miss anything. And then, perhaps just stepping back and thinking about some of the recent wins here, the opportunity set this year in front of us, as well as the more recent acquisitions. Can you just maybe provide us a quick update here on the glide path to your margin targets and whether the timing on that remains intact or that you can pull it forward given the recent wins and the opportunity sets in the acquisitions, just kind of a general updates on the things that have gone on since you set those targets and whether that is moving things around to be honest?

Are you talking the adjusted EBITDA model that we have Jason?

Yes, that’s exactly...

Yes. So if you think, we’re 11 months into the acquisition of the Microsemi cave-out and when we did that deal, we took the opportunity arising target model to the 22% to 26% range. At the time when we announced the deal we thought that we would be able to get into the target model, low end of that range in the current fiscal year. And I think as a result of the increased growth that we’re delivering in the business, both on organic basis, as well as the acquired business, as well as the success of our integration efforts, we think that we’ll be well inside of that range on a year-to-date – sort of by the end of this fiscal year. So we’re actually slightly ahead of where we thought we were going to be when we did the deal a year ago.

Okay. And do you think that that will sustain itself over the next 4 to 6 quarters, there is nothing unique about the recent wins, the opportunity set in front of you that would change your ability to kind of be solidly in that range from the point that you achieve it?

No, I think we’re in – I think we’re in a good spot. So we’ll continue to recognize the synergies for the work that we’re doing. Obviously, anyhow in this quarter, as well as next fiscal year, as Gerry said in his prepared remarks. So you know, the target that we gave about 22 to 26 is obviously a multiyear journey like we done in the past and you know, we actually feel really good about the progress that we're making.

Okay. Good. Thanks, guys.

All right.

Sure.

Thank you. Our next question is from the line of Seth Seifman of JPMorgan. Your line is open.

Hey. Good afternoon. This is Benon, sign on for Seth.

Hi, Ben

I was hoping you guys could talk a little bit about you know, maybe the risk of the current budget situation and you know, what kind of might happen to your outlook under an extended continuing resolution if we don’t get a budget by Friday and maybe what happens under like a full year continuing resolution?

Yes, we – given the backlog that we have and the programs that we’re on, we kind of looked it through the lens of a continuing resolution and we actually feel pretty good about you know, where we’re positioned right now, you know, hence also raising our guidance for the remainder of this fiscal year. So we feel good Ben.

And might there be any risk to like FY ’18?

Not that we see right now, but obviously we’re in the midst of our planning and we’ll have more to talk about it at our fiscal year ‘18 guidance on our next earnings call.

Okay. Thanks.

Thank you. Our next question is from the line of Peter Arment from Baird Equity Research. Your line is open.

Yes. Good afternoon, Mark and Gerry.

Hi, Peter.

Mark, you had some great contract announcements this quarter, is there a way to kind of break it down on a percentage basis of what – what is new versus what is kind of follow on. I mean, it looks like a lot that awards are follow-on or maybe the scope is expanded, so in and itself may be a new win. But is there a way to view that?

It’s hard to say, you know, in terms of the actual awards themselves, I mean, if you look at what we see hopping in a very high level, what’s driving the growth is really the industry trends that I talked about all in my prepared remarks, specifically the flight to quality, which is a pretty big deal and we are taking share and there is a number of specific things that either we have won or are in pursuit in the radar, as well as in the EW domain that you know are important programs for us. The second one is clearly our customers are outsourcing more and you know, it’s not just about affordability that clearly seeking companies that are able to innovate and I mean, Mercury is a very innovative company and we’ve seen that on existing programs, such as Patriot where we continuing to chip away and win more business on the program, likewise on SEWIP, where again, we’re continuing to win more content on both Block 2, as well as Block 3. The one that haven't really spoken a lot about, that I think is really in the early stages is the de-layering of supply chains inside of our customers, as well as the government, is they are seeking again greater affordability, and to gain access to more innovative companies. We think that this is a potentially significant opportunities for us longer term, as we kind of moved up the value chain from that tier 3 to mid tier 2. Beyond that, what we’re also seeing is really growth in our five major kinds of market segments, its radar and EW modernization is alive and well. We’re seeing some great opportunities there. The move into the C4I with the introduction of our new secure rackmount server, we’re pretty excited about, we think that could potentially be faster time to money than some of the more embedded secure processing applications, as well with the acquisition of CES, we pick up some new market expansion and potential content expansion opportunities there. The other thing that I would say that we're seeing is that we are clearly seeing demand for – in the missiles and munitions domain. I think in the short-term that is being driven by you know, higher use in theatre. But we’re also talking to our customers about the potential of bringing new capabilities to bear on some next-generation systems. And I think the final one is that we saw [ph] a pretty significant increase in our international and foreign military sales and that we expect to continue here. So, I mean, without mentioning specific programs, we feel just based on where we’re at with the trends and how we've aligned the business, we’re in very good shape.

Yes. That’s helpful color. And just on the international bookings itself, I think you mentioned it was up, I believe 2.5 times in the quarter. Is there an even specific there you can point to?

Yeah, I mean, on an LTM basis, international defense revenues, including FMS is actually up 41% year-over-year, Patriot, is a big piece of that, as well, you know, we’ve seen some strong revenues associated with [indiscernible] as well.

Terrific. Thanks. I’ll get back in queue.

Okay.

Thank you. Our next question is from the line of Michael Ciarmoli of SunTrust. Your line is open.

Hey. Good afternoon, guys. Thanks for taking my questions. Maybe Mark or Gerry, just a housekeeping back to that target model. I think you talked a couple times about higher R&D and more estimate [ph] should we assume that you’re still going to be in sort of that a 11% to 13% range for R&D or just anything shift around given maybe that focus?

So we’re actually higher than that right now Mike, and may stay a little elevated that 11% to 13% is the longer term target for us.

Okay, okay. On the continuing resolution, it sounds like you're comfortable with the revenue, but you know, the bookings you guys have been putting up have been pretty tremendous here, do you see any impact from an extended CR or budget environment hitting the bookings and you know, maybe even separately, do you think the bookings environment can hold sort of this volume that you’ve been running at?

So, I mean, we’ll see. We feel like Q4 could be a strong quarter for us, as we kind of look forward we haven't completed our planning. We do expect that the first half of ‘18 could be a little weaker than the second half and that is very consistent with what we've seen in the past two or three years, so really no change there. We had literally and probably in the last seven years. So we didn’t see any significant changes. I think that the rhythm of the business will be what it is being in years past.

Got it. And then just last one for me on Delta, I think you guys said they had a $22 million, backlog, can you give us any color on how that’s trended and I think even the maybe the implied renewed run rate looks to be about $5 million a quarter, which seems to be up from where they were running, just want to make sure I got the math square on that?

Yes. So I’ll talk at it at a high level, then Gerry can kind go through the numbers to say. So the – it’s a great business. I think we are pretty pleased to been able to acquire. It’s audited to the capabilities that we have and so some great programs. The business is on a pretty significant growth trajectory. We see the opportunity of harvesting some pretty significant synergies on a cost basis, as well as benefiting from the tax. And so you know, when you look at the price that we’ve paid on a net basis, we think we got a great deal. But I’ll hand it over to Gerry, who can maybe kind of enumerate some of the things that we see there.

Yes. So we highlighted some of the synergy side and the tax benefit side which are fairly substantial numbers relative to the size of that acquisition. So we think that's a nice way to go into it and that - you know, the uptick is certainly what I’d say not representative of the past for that business and that’s part of what made us interested in it. You know, it’s the size of that $22 million, backlog relative to the 12 [ph] revenue they had at December 31st is obviously a pretty clear in balance. We diligence pretty hard when we look at the acquisitions to validate what we see is the pipeline of opportunities, as well as the technologies and capabilities that they have and so on and then we think about how can we leverage that inside of our channel. So we like what we saw and you he picked up, you know, we expect about a $5 million revenue contribution for the year which is all Q4, which is the only period of ownership of that acquisition. So, kind of step function there if you will in the overall growth rate of that business. And then as we begin to fork in the synergies over time, I mean, kind of harmonized with our model, some of that means we’ll invest like in R&D, some of it means we’ll take advantage of our channel and try to help them continue to grow in a way that they have. So we’re very excited about it.

Got it. Thanks a lot guys. I’ll jump back in the queue.

Sure.

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

Hi, good afternoon. Just wanted to start out in terms of the Phoenix facility and just maybe get a sense from you in terms of a little bit more color on what the strategic differentiation could come from that facility and you know, what it allows you to do differently than before you have the facility?

Yes. It’s a great question Jonathan. So the biggest thing is that is a sort of trusted manufacturing facility and if you move from just generalize processing into secure processing which you know is a major area of focus for us, more and more the government wants and our customers, the Primes want to be able to see that not only the technology, the problem to the technology, but as a trusted supply chain associated with it, in terms of the development and the manufacturing. So we’ve had a number of customers kind of walk through that facility, literally and we’re still completing to build out and one particular customer on a very large naval radar pursuit that we’re going after literally walk out and said you guys are 15 years ahead of the other company that is the incumbent on the program. We clearly see that Mercury is leaning in, investing not only in RF, but also in the trusted manufacturing associate with secure processing. So you know, for us it's something that we've been doing for some period of time. This facility came through after the acquisition of Microsemi and we’re pretty excited of the potential that it provides on the couple of major secure add ph one processing opportunities that we’re in the midst of pursuing right now. So you know, we think it’s an important part of our business model, Jonathan.

Great. And then just going back to the CR, I mean, it seems like your confidence level is much higher this time around relative to the last round of continuing resolution that we saw few years ago. I am just wondering you know, what is it about the business at this juncture, is it the backlog, what is it that's giving you that sort of stronger visibility and better control over the business?

Sure. So we clearly have got a much higher backlog than we’ve had in years past. As you know, that is been an area of focus for us because it’s a means by which we can de-risk the business. We’ve also said at our annual investor day, that we now have got a much bigger business. We’ve got many more programs, so we got greater program diversity and we’ve got more programs producing its higher rates than what we had in the past. I think beyond that, as I said in my prepared remarks, we also feel that our business model is working extremely well. We are taking share and we’re seeing a lot of activity based upon the capability set and the investments that we've made. So not to say that there isn’t risk because there is, but we feel that we’re monitoring it well and we wouldn’t raise our guidance with Q4, had we felt that we wouldn’t be able to deliver that. So right now we feel in pretty good shape.

Great. Thank you.

All right, Jonathan.

Thank you. And our next question is from the line of Brian Ruttenbur of Drexel Hamilton. Your line is open.

Yes. Thank you very much. Couple of quick questions. So just to summarize, you see no changes in kind of your near-term revenue, fourth quarter revenue, because of – or due to changes with the budget to CR, it again kicked down for the whole government fiscal year, what about sequestration, what about if the government does pass a fiscal budget by Friday and let’s say they call in a supplemental, give me some levers that oh, this is good, this is bad and maybe help me gauge by how much are not at all any of this in the fourth quarter?

Yes. I mean, ultimately it comes down to the to the programs that we have in backlog that we’re executing against you know, for the fourth quarter and as I say, we kind of went through and we scrub the programs themselves, so any potential impact with respect to a CR in Q4 and we’ve taken that into account in the guidance and we’ve obviously raised the guidance, you know, excluding CES and then we have Delta and then we are adding Delta on top. So right now we obviously feel comfortable and confident with the increased outlook that we have just given.

I think it’s important to note that when we talk backlog right, we are talking funded backlog and I think that's a critical point, it's unlike the sort of multiyear backlog that you might see in some larger businesses which are funded on a you know, the year-by-year basis. So it's just not the same. And you know, it’s a biggest risk in a sequestration situation is – sorry, in a CR situation is lack of new programs starts, but as Mark pointed out we’re much more reliant on programs that are actually ramping up in production. So they are at different phases of their lives not new program starts for the most part. Of course, we look for new program opportunities all the time, but you’ve heard us talk for a long time about content expansion, capturing share from competitors and so on. Those aren’t new program concepts, those are existing program concepts. So we’re heavily weighted on that direction and that’s what’s helped to fuel our backlog.

And you will see what happens when the administration submits the FY ’18 request which I am hearing is kind of in the mid May timeframe. So we’ll see what that looks like and we’ll compare what they submit with the internal plan that we’re in the midst of building for next fiscal year and beyond.

Okay. All right, thank you. Just a follow up on acquisitions plans, and what are they in the near term, do you need time to digest before you make any additional large acquisitions or should we expect only small bolt-on as in $20 million in revenue size that side or do you feel prepared to take on large acquisitions at this point in time?

So as I said in my prepared remarks, I think we – the internal team that we have doing the integration is doing an amazing job. I mean, the speed at which we are converting legacy ERP applications and building out you know, the facilities with the new manufacturing capabilities that are important for us to continue or harvest long-term synergies, they are just doing great. The speed at which we’re able to move on the smaller ones is much more rapid. So we are doing a good job there. As it relates to the size of acquisitions, nothing is really changed. We’ll continue to look at the smaller ones, as I said on the call, as well as we’ll continue to look at building a pipeline of larger opportunities. That's why we went out and raised the money to be able to do both of those things.

So, in summary, you feel prepared to take on the large acquisition in the very near term or do you need more timing to digest?

Well, you know, we’re busy with the two that we just acquired, but if the right acquisition came along, you know, we would take a run at it.

Okay. Thank you very much.

Thank you. Our next question is from the line of Ronald Epstein from Bank of America Merrill Lynch. Your line is open.

Hey. Good afternoon, guys. It’s Kristine Liwag, calling in for Ron.

Hi, Kristine.

Hi. As you move up the supply chain to be a mid tier [ph] provider, is there a structural difference in margins compared to being a lower tier supplier. For example, do you anticipate any changes in contracts, structure, or do you take on more integration risk or perhaps as a higher R&D or integration or investment required?

Not we see right now. I think that the value that we are bringing as we kind of move from modules and subassemblies into subsystems is that you know, we are in effect integrating our own technology or pre-integrating our own technology. So you know, we’re providing better affordability to our customers and then doing it in-house. Our solutions typically end up being delivered more quickly at lower risk and you know, we’re already doing that, you know, it’s a big part of our revenues today and we don’t see a significant change as we continue to see that part of our business grow.

And then – that’s helpful. And then maybe to clarify, you mentioned in your prepared remarks that you have a $100 million in your revolver and $110 in your universal shelf filing. I was wondering is this before or after the Delta Microwave, acquisition?

So all of that is after Delta and its 173 left on the shelf that’s just untapped you know, issue ability if you will. The $100 million revolver obviously is something we can borrow and repay from time to time, but it's unused so far and then we have the Q3 reported number on the balance sheet, its little over $270 million of that 40.5 was used for the Delta Microwave acquisition.

Okay, great. Thank you very much.

You’re welcome.

Thank you. [Operator Instructions] Our next question is from the line of Sheila Kahyaoglu from Jefferies & Company. Your line is open.

Hi, good evening. Thanks...

Hi, Sheila.

Hey. How are you Mark? So I know it’s a little bit harder to quantify now that Microsemi is almost fully integrated. But is it fair to say excluding Microsemi and the organic profile of the business in the quarter was low double-digit?

So if you look at maybe on an LTM basis, I think, so actually – so I am not going to mention on a quarterly basis, but if you look at the underlying growth rate in the business itself, where its pretty consistent with what we’ve seen you longer term. So it's high single-digit, low double-digit.

Yes. As you pointed, Sheila, it’s a little bit unfair in a sense to try to segregate them, once we really lean into the integration activities. But you know, I think another way of saying it is, if you look at the pro forma combination of the two businesses based on historical growth rates, the total is growing faster than the pro forma total would have suggested on an historical basis.

Okay. Understood. That’s why the ranges giving out numbers. And I guess, as we head into 2018, how do you aid or have to quantify what your revenue growth is going to be as you think out year, but how do you quantify growth maybe or give us what you’re thinking what growth from versus new market share wins or additional wins?

So we’ll have more to talk about that next quarter, we’re really not going to comment on fiscal year ‘18 at this point.

Okay. And then I guess, just to follow up on one of the last questions that was asked, that you mentioned that you are just starting to go to market with the Rack Server offering...

Yes...

I was just wondering, is this – if you go to, does the sales force go to market in the same ways, is there any change in - I guess, that you think about your target SG&A model is it still the 16% to 18% range?

Yes, there shouldn’t really be any change in our SG&A. I think the difference between this particular product and some of the work that we do in the embedded systems domain, this is more of a product sale targeting what we have discussed in the past where with the likes of IBM exiting the blade server marketplace and as our customers are seeking you know, more domestic capabilities and secure processing from trusted suppliers, that’s left a gap in the marketplace that we are seeking to fill with both our rackmount server, as well as our blade server opportunity. And we’re seeing opportunities there in various market segments of large ground-based radars where historically we haven’t participated, launch surveillance platforms there to be used different types of computing versus what we have provided historically to undersea activity. So these are potentially new areas for us with this the capability. So we’re pretty excited about the opportunities that obviously things take time, but right now based on the feedback that we've gotten, there is a definite market need and we’re well-positioned to fill it.

Great. Thank you very much.

You’re welcome.

Thank you. And Mr. Aslett, it appears there are no further questions. Therefore I would like to turn the call back over to you for any closing remarks.

Okay. Well, thank you very much for taking the time to listen. We look forward to speaking to you again next quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everybody have a great day.