Mercury Systems (MRCY) 31 Jan 232023 Q2 Earnings call transcript

Good day, everyone and welcome to the Mercury Systems Second Quarter Fiscal 2023 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, Mike Ruppert. Please go ahead, sir.

Good afternoon and thank you for joining us. a this review afternoon. had we press you earlier issued hope chance the to release I and referring If our Investor and The Mark Presentations. website you Relations at will not can website mrcy.com slide find section of presentation under on is posted to them the on I the be Events that With Aslett. is President Chief and our today me Executive Mark Officer, welcome very McCarthy to pleased to Michelle also I'm call. the been President Vice five as Chief active officer for member Senior past our has Serving the team. years, Michelle of accounting and an valuable and Mercury's leadership her I'm position to working looking prior February. forward closely to seamless a Interim with to Officer Michelle Financial in departure in new Chief my transition as ensure

differ includes X I uncertainties release regarding that SEC remind Turning forward-looking X, information risk cause to like results be our the statements forward-looking plans, to Mercury's on actual and financial included presentation. the in outlook, performance subject factors are in These could the filings. in press with business future financial earnings statements Slide performance. statements, the risks anticipated materially. forward-looking prospects future in should Slide cautionary statements All and including today's would presentation and considered conjunction objectives, to Mercury's to you or that

specifically and non-GAAP earnings acquired appendix is release. an I'd in earnings we call, in will also to A adjusted included accordance EBITDA, income, addition principles like adjusted results these GAAP, to non-GAAP during presentation our cash press also measures, mention reporting with financial today's revenue per accounting share, metrics financial the slide adjusted that in several or generally to accepted revenue. discuss organic free reconciliation of flow, and as

to Mercury’s Aslett. Chief the turn to Slide Officer, President Mark and X. now I’ll call Please turn Executive over

for for Typically, about thanks us. Thanks, sign quarter. remarks prepared review the and joining I'd results with up afternoon, everyone Mike. Good

review it the then announcements. from However, begin I'll business. and our financial with given up our a takeaways open will alternatives engaged a we've news enhance underscores decision board's of investment other to cover pursue potential to I key options Mike shareholder to results guidance, all initiate a sale. avenues review for The the including exploring those will of we'll to banks value. questions. and announced range We've two available strategic today, leading then commitment

During the value plan for to creation. strategic on evaluation, board's we'll continue growth our in execute

won't no transaction As you need know, let to have comment will And the this we it I emphasize on assurance from play we that as result the be process can there to out. want review. today. such, further that

don't also is relating or to We intend has approved its a agreement review. or to and disclose this board the terminated specific developments unless process until transaction

few say words Now, a about Mike. let me

an all held Mercury the family reside. including Mike you has accept As your you for saw eight announcement, from opportunity past role. strategy great decided and crew down company years. best to partner Mike contributions to acquisitions. M&A significant step in of Virginia, and many the has Mike He's in he team we entire myself helping Mercury been on in where to a headquartered the privately driver behalf made from our and his wish a new

transition on firm. a executive for to of our leading permanent talent bench with We're the deep a successor of team period. search a finance a initiated assistance search have this We've fortunate during

team. further Upadhyaya that Strategy CFO, will bolstering and Vice we appointment mercury financial Erickson, Nelson Corporate addition Last investor for President joined Vice and announced assume formally has Vivek Senior Michelle to as planning also of relations. as Interim In who our McCarthy's week, development responsibility analysis, our President

and with Michelle handoff. seamless weeks, worked I the Michael to a closely coming Nelson, Over Vivek ensure

discuss quarter second let's that results. our With

line X. with quarter X% second Mercury Slide in was revenue guidance to Turning year-over-year. our growing

flow of quarter. EBITDA cash This positive large fell generated as short GAAP loss and share adjusted customer share loss an and growth and net adjusted to funding our delay per program. organic to a in LTAMDs guidance. for per well earnings return primarily the was we importantly, in as unforeseen to More due

and revenue also After have QX above this and results and or $X delay, margin moves the end of fiscal reduced additional in by which respectively, margin $XX an $XX results lower million $X million guidance revenue QX our high QX of million at to been million 'XX. our would guidance [indiscernible] as

their the with said This large anticipated impacts disappointed this that resolved, obviously confident year. immediate be term are million control. $XX of $XX fiscal in is short new and program our Mercury's revenue for to is fiscal customer recognize will the is the issues outside early delay year. us We million and allowing ultimately That funding our in in time the entire margin

Working this impact of customer, in related the other in will rotated the with delay we second that expect partially we've opportunities half of 'XX. offset fiscal the

full this temporarily margins. our our incorporate we're year to are program the chain shifting timing affecting fiscal supply consider prolonged resulting we and program As and impacts, guidance, outlook half which inefficiencies and the in back delays

that fourth impacts. On fiscal net adjusted EBITDA and while the to with currently the low towards income the now be are believe above We're in fiscal guidance we revenues trending 'XX these plus side, year end. expected our our midpoint dealing of

market to and face not tight related are labor however, delays they're program and short strong. and long end These unique not to demand, we timing related to largely challenges, inefficiencies, semiconductor they're They're continue remain term which related, lead inflation. Mercury. to times, addition In market

to in on CX was microelectronics not program. the the the increased nearly It been XX% for our F-XX, the F-XX environment, QX booking year-over-year, Mercury's order what positioning. the F-XX classified million We the this to $XX for optimistic bookings in largest company's advanced could largest about LTAMDs plan continue we're turn execute we control for can future history. and capabilities

record XX% QX billion the in over growth. the revenue Backlog build to $X.XX the Organic X% $X.XX year-over-year. delay, provisions growing and months. us growth are 'XX. year-over-year quarter bookings booked turned Driven by XX to and was $X.XX customer Despite which increased last X% grew fiscal revenue for in QX positive decline a future XX% well the versus our funding FMS of

We expect to year expected. the whole as growth for to return as organic a

impacts to largest programs said increase PX nature, realize and I tracking largely to mix the F-XX the shift negative and believe continued chain as Our cash begin the guidance these EBITDA due are midpoint, was program adjusted we year-over-year to supply impact free improve including layer], FMS sequentially. customer a EBITDA in with towards was in we the in delay, We are the [NDSA for benefits delays financial were Operating revenue [SAD] trans from trending end conditions and fiscal from adjusted low income both and guidance GAAP other our due margins related declined to measures, revenue quarter although substantial above positive production. further as net flow temporary QX primarily inefficiencies. 'XX low QX program development funding is trending the to improvements and our expect F-XX,

to slightly including FY positive R&D expect breakeven the for flow impact free to 'XX, cash We deliver the tax of legislation.

create House and spending resulting this elections FY spending X, national after a threats. and expected, to the deal the defense report the midterm as to the Turning adopted discretionary bill to risk said was 'XX month in security GOP McCarthy increases including response government between the substantial That appropriations in defense. Freedom approved package focus speaker rules Slide

appears case the the to for for year continuing CR. budget be extended And base GFY resolution scenario a potential including full XX,

don't However, although expect a risk approve does we in to reduction exist, Congress DoD appropriations.

increase support geopolitical appears be to we defense spending. bipartisan strong underlying to face, Given there challenges the

and Looking shows onboard ahead longer the no remains term, positioned sign platform slowing. Mercury this and benefit demand well environment. compute capability defense the of internationally The for believe spending outlook we to that domestically both growth in military in is positive

trends and to from We positioned well increased as include continue platform for also push we're at benefit from subsystem stand We term that believe long supply chain delivery the as level. electronification. benefit ongoing assuring to outsourcing to the well industry

to has adjustable deliver by solutions substantially, movement the to driven chip systems potential Our scale. and processing innovative increased at mission market strategic largely

well. intersection and Our at high positions tech us model, the certainly defense of

the environment to of over and sophisticated end years. affect the chain passes end critical semiconductor about process to to processing business. This from continue XX to rapidly missions. is platform range most X. XX be end in improvement High now Turning weeks. pandemic the term. quarter to fiscal timing opportunity The next where industry 'XX constraints Mercury grow and five processing Despite likely weeks. Locally increased the short part XX represents Slide to in has were of supply challenging the times incremental program continues largest in second end the XX the second XX% to They efficiency. the Prior lead to

a significant fiscal until average in half on Although QX, don't than second we expect see slightly a 'XX. current shorter to times of the lead improvement

peers equates a good Semiconductor challenge of semiconductor believe. supplier far XX% our than the Semiconductors inflationary direct pressures our mitigating We're spend costs. progress we highest in impact with remain making well. as more

supply As helping while with a improve us established effects deal program, enabled part efficiency, we to of disruption. centralized organization. purchasing procurement impact chain our our This the us of

team products multiyear based mechanisms businesses in rates also proposals. We established and our incorporated reprise the standard pricing and adjustment price

risk price we balance we invest the the increase the to used strength working chain our capital microelectronics the in pandemic, addition, supply business. necessary we've across board in to implemented In our best sheet Through of can. mitigate as

over time. deliver to and commitments against Mercury results positioned we result, a stronger customer generate As

Slide XXXX record the our and is to period by could that a next of Demand believe sequestration growth resemble evidenced accelerating absent LTM improving X. significant multiyear bookings we've backlog. strong in The We 'XX. budget profitability. a Turning events years several entered GFY post is period and and

business leadership in So since through and evolved that strengthening 'XX and again. We we time, also our began then. streamlining team most do was continuing by our of to It in impacted once so. fundamentals substantially our enhancements it's organizational early and the strengthening that made structure impact the fiscal at

the this focus on margin pushing also deeper and execution in expansion into their now business. we're business We

our With the execution. these Allen supply last chain, taking continuous of doubled around we've excellence to recent business on execution addition Stephenson Mitch down as and over mission program seeking improvement drive quarter, of head operations and efforts Couture

to have areas these with believe inefficiencies leading affected margins. and headwinds by operating to impacting the These during We will will conditions the program the pandemic, of impact been chain temporarily continue market supply resulting market diminish expansion. and improve, labor delays cumulative and related the

sheets continue capital time, the related focus and off unwind. mitigation, supply balance will substantial business working chain to We the begin impacts cash burned move believe on chain At that the accelerated cash down release. we supply same on and risk to

investment R&D returns. and efficiency is initiative Another

Arizona and addition time. over facility efficiency into facility digital We're on help cost Mesa back footprint QX operations two and manufacturing and will We additional structure site the moving give scalability Phoenix us facilities also our improve In release our and in as the productivity, engineering consolidate ethics office transformation and strategy. better our on planned.

With that, over like call Mike. to the to turn I'd Mike?

Mark. again, you, everyone. Thank afternoon good And

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home private, approached the point ago, presented I felt base had a something taken opportunity Virginia. been me, months This out. was in by few is But in sought I my when A team. had a like have company There's was was closer this, not lockstep to this for I'm to in that it I I've at explore. never this I firmly to success. move great time career, years, a our transition and developed finances I my a committed and for to but Michelle making been something recently

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results. Mercury’s to turning Now

our begin then and As quarter with second and always, fiscal 'XX to guidance. I'll move our actuals QX

growth organic Demand As Mark the cash half. we returning generating in to flow delivered QX. discuss second revenue strong line positive entered as to Mercury in with guidance, continues be and

of and months year, backlog XX% to visibility to up quarter, was solid XX remainder Our compared last a the last XX% up providing QX year. compared into the

'XX, bookings to fiscal $X a fiscal we versus For billion revenues organic growth. positive 'XX and a expect to deliver record in book positive increased bill,

the revenue weighted We discuss. all fiscal towards adjusted is to to EBITDA believe said we end currently is heavily as be that our the guidance our As Mark midpoint trending fourth of expect trending quarter. the low performance 'XX while above

our well funded strong supported position remains by franchise Demand on programs.

program and supply constraints, and continue availability delays However, labor chain to inefficiencies. contribute inflation to

fiscal and fiscal expansion post programs, as margin including With shifts 'XX high FMS production fiscal and the pandemic impacts into impacting persisting QX sales experiencing QX through 'XX result. we're a 'XX margin gross and

the revenue the Mark X the What's FMS our Slide that covers impact large delay is bill discussed. program QX booked and bookings and growth revenue. yet that results million customer of approximately $XX backlog on highlighted had an funding

the as deal impacted of Given well customer to million requires in for customers. our program's resulting adjusted the FMS timing the both FMS to by profitability the Mercury. the U.S. the an government which delay $X There's direct as quarter. funding and also been in This relates EBITDA delay approved contracting, alignment margin award our guidance only high profile, and approximately it reflects between nature customer government foreign the list

We in fiscal now 'XX. expect this our program

for we second As adjusted XXX points $XX to Gross 'XX EBITDA mentioned, us impact revenue margins quarter respectively. the fiscal to Mark down million have were and expect year-over-year. and $XX basis an million approximate

consolidation development in margins. had quarter an impact into we to also margin on lower lower of proportion FMS due Gross expectations which margins as was XXX revenue the delay higher gross a the approximately labor basis than coming gross slightly depreciation the our year-over-year. reflected quarter were by site As point efforts. margin expense and margins as an material, primarily expected gross by driven inflation well absorption incremental impacted QX lower

primarily to sale, as and the EBITDA several environment. chips net X% last on program of the FMF result development margins $XX.X in QX lower gross larger was GAAP gross longer well loss year on is a a fiscal high mix expected million quarter, expect adjusted as especially We the of higher in due see second was margin our half than current for QX. to year million in of execution the down $XX.X taking little programs the while This margins. from

in the EBITDA down for margins adjusted basis Our from XX.X% points fiscal XXX QX 'XX. quarter, were XX.X%

guidance. opportunity in for being have discussed of offset in margins EBITDA of cash adjusted $XX received flow Again, their receivables the margins large exceeded our and delay in approximately second Have quarter resulted the was which guidance the behavior our contract, our an FMS from customers and quarter. adjusted base inflow this our Delayed we end fiscal would EBITDA at payment below by adjusted range. EBITDA EBITDA delays QX million, years. the Free despite we customer last payments across partially was factoring adjusted

quarters. Slide balance for X the Mercury's last five presents sheet

programs. and At with strong our balance attractive ended rate equivalents the million strong and levels approximately to cash positioned we've $XXX while X%, Mercury under remains billion funded in is interest under From Our invest leverage performance deliver of sheet approximately obligations perspective, pandemic generation anticipated the delivery sheet critical a our our facilities. allocate We the in continue support of current rates. ensure working million capital debt by $XX to be since $X.X cash capacity balance continuing Driven on to 'XX to expect $XXX business. customers well invested the positions with approximately fiscal HX under revolving the and flow cash million QX to to revolver start the which potentially at capital we credit revolver. significant to of

and inventory a especially as sales. cash of As are to working completed, these capital expect decreased to annualized percentage and unbilled obligations we convert receivables substantially

million of bill from the have cash were QX delays flow their receivables to slightly customers. quarter, flow payments of At $XX of approximately our breakeven quarter Slide receipts through partially XX the Free years. QX, from from in received for million customers cash we QX. point see end million factoring million. forecasted flow delay did we the on XX. at These Turning $XX was receivables. free this we fiscal cash In Last offset positive to $XX our of in

tax related see the in impact impact Given we HX. forecasting our an in R&D to any year we're But HX. now not timing, did fiscal legislation

guidance, now Slide financial to XX. will turn starting I our on QX with

current environment Forecasting remains the in challenging.

Our and the associated supply constraints the impacts potential inflation incorporates can with ongoing guidance to headwinds. material labor we chain extent and

the FMS QX. of coupled result margin QX high is to and a As weighted inefficiencies fiscal moving program to contributing 'XX into the and headwinds program with delays HX more

to execution with the in we last program of to several in $XXX contracts. year, growth compared million. expect range and QX and QX as we in of QX, million margin regard headwinds, At margin lower across revenue current midpoint award we cautious the the execution gradually timing, more For development the quarter to increase complete dramatically currently this expect approximately to remain third industry although is $XXX flat gross our we

especially The and be revenue is margin programs sales. as higher QX by HX expected as growth in to well production license driven

results $X.X a We net of million million. GAAP QX loss to of from to range $X net expect income

EBITDA adjusted revenue impacted contracts. the being million, $XX XX% in expect midpoint. as And FMS million as EBITDA higher a our $XX sale, We the development of representing of delay to well to are approximately proportion QX by I've as adjusted at margin the said be

near will certain. But guidance fiscal now our strong to it's be full previous continues far year the these environment continued dynamics EBITDA. for two turn 'XX on maintain revenue XX. across for Balancing demand remains will to term adjusted and momentum. the our bookings the by industry The I year guidance and highlighted our outlook Slide from

FMS million year-over-year This 'XX. Based towards revenue slip expected 'XX expect net represents on GAAP this X%. revenue, partially at $X.XX be up second From despite X EBITDA guidance approximately X% 'XX and to in to The reduction the range X% billion of our $X.XX still $XX.X We're in end 'XX. to remains fiscal the expected stock expense $XXX.X share. company perspective, midpoint is range the to revenue EPS million depreciation our $X.XX $XX.X $X.X of based approximate growth. to is growth $XXX see the for maintaining function range. fiscal flat to of X% a and per fiscal demand by current billion $XX we to the of total with 'XX environment, high low end in in the fiscal from organic income of to fiscal incremental million million, quarter, our to GAAP adjusted a lower offset X% compensation. million guidance

per a includes the in range for we While targeting slightly share. of adjusted the legislation end high adjusted to as EPS the well also incorporated our chain is inefficiencies which The FMS flow expect mix is delays also end program of perspective, we're approximately driven expect year. we've flow breakeven impacting the expected free the XX now at to tax function we revenues free From guidance supply $X.XX into This lower related reduction the of positive This in now to the range, trend incremental outflows margin. from the range. program toward second R&D cash as and depreciation of to primarily our cash cash by and EBITDA $X.XX EBITDA related prior be in guidance. sale is including quarter. to expense a million the HX Adjusted

Mercury to and at the briefly fourth key to guide touch Based 'XX quarter. actuals we which record HX metrics. until But can quarter will guidance, for and I expect forecast fiscal an across next XX. Turning a QX QX arrive we on not to for formally we implied our all want quarter. QX on Slide be

and This at approximately the QX approximately fourth our midpoint ranges, record be last from at an guidance would of XX% midpoints revenue the million. is our QX of XXX 'XX increase quarter Looking fiscal year.

and coverage, basis backlog anticipated the current QX bookings current enter our we to guidance. expect is with forward backlog for in Given our QX which

XX%. EBITDA margin weighted revenues. GAAP be and production EPS $X.XX driven expansion, approximately will would million the per share approximately GAAP are approximately margins would licensing million and and mix net adjusted $XX be results adjusted reflecting XX midpoint. These toward QX and respectively income the margin gross EBITDA by higher programs be at

a We created a also the expect adjusted EBITDA leverage a to strong free we the we've margin From in of operating improvement see expect perspective, cash flow rebound QX. business. result in as

path clear a have achieve We to guidance. our

call the to that, With Mark. back I'll now over turn

Mike. Thanks,

is strong growth We second strong Turning quarter. in organic stronger. flow getting and generated is positive to Mercury delivered bookings returned and XX. challenging still now Slide cash Demand the and to environment.

Our and record robust provide visibility backlog fiscal second of the HX us into half substantial revenue fall coverage with 'XX. bookings, good

risk short the term a remains in more larger as however, subsystem we Timing, complex deals. win

larger Given associated the delays fourth we impact FMS program, of have than anticipated. previously quarter the the a with

in high first result level the and associated our fiscal rotated we're We additional adjusted a have of maintaining the the and 'XX and we've as our fiscal EBITDA to a of ability of the guidance. in 'XX opportunities confidence into half recognize margin revenue plan, revenue

is as said low above and to toward next the chain guidance program earlier, year supply of of QX. To revenue delays lot bookings EBITDA and end adjusted I midpoint, is of trending towards the expected come a result strong in As a waiting while we driven inefficiencies. likely the

It for billion expect fiscal should begin 'XX supply positive chain We organic return the well growth, position time. eclipsing X conditions to and revenue book first as normalize. us bill to for with the to a

strong additional growth future We GFY 'XX of and expansion capital, and years. and organic expect for for presents released margin creation position the disruption improved in That defense all around timing cash and which flows a appropriation risk. the deliver the value to should level working further potential said, is growth, of budget us

years Looking next further to strong. outlook ahead, our the five remained

defense and increased domestically expect internationally. We spending

the part single right right rates. the double programs. right and Mercury market the well-positioned capabilities digit of to organically the digits its can that low are believe We We high grow on but in strategically will

execution five as conversion. as stronger as impact. to and content improved well addition growth M&A our working driven capital well It the year improved and should mix cash In efficiency as industry lead and subside, by to profitability related plan includes as organic better program margin headwinds expansion,

than longer For more executed successfully strategy. decade, on a we've term our

organically growing M&A disciplined by margins business supplemented integration. improved with We've the and full

for As and our to our a and the expect performance closing, success second the like I'd Mercury shareholders to created commitment In value we've doing in continue strong to recognize significant team's so. quarter. result,

all you. Our of to sincere thanks

over your you turn results. I focused the our please to it Q&A, with keep With questions ask please we Before proceed on earnings operator, Q&A. that,

Thank you. line Instructions] Baird. from Peter Arment question [Operator first Your the comes of with

Your open. line is now

Yes. The million this Good impact that program when you you've targeted and million out Mark call Mike. about talked afternoon, $XX net and savings $XX quite previous to a think on bit to you've 'XX. about to I look calls, fiscal be

million the wondering just your I'll today. around $XX you at I still know the Thanks. done? to given that up, your that achieve kind slide stands And fourth that just and efforts the grow the the out then follow as kind fiscal just year. you've you've just least shifts? Can quarter all Just customer there where first of ask could confidence had given that now that of much mixed in also from is impacts FMS in

for Peter. question, So thanks the

impact absolutely I on we're So for think target the savings.

some program's think of ahead we thought at where of well. schedule anything, think forward. in substantial offsetting be aren't and there's we're and on the slightly in think probably upside track Unfortunately, the lot I a were compared are associated up If really showing to facing, delivered, I simply our of this right headwinds we we're results going that extremely the the we've the are time. efforts they with programs to point now we but doing it that financials going because

As margin from offset and the some rotated it that some of in to with we and were funding. the we additional able QX have of revenue customer relates as delay million quarter, FMS the fourth due working of in million revenue $XX shortfall to rotate the that FMS, partially and we yes in to $XX QX the do

do yes So the is in head. of off you? the revenue be up my I’d top fourth the Mike quarter, coming there number on

$XX slipped out say, break revenue we the something million would I specifically. margin magnitude than and not lower that is million revenue that of It's But we Peter, gross XX of the much of have the out.

color. Thanks. Appreciate

the comes Seth with line JPMorgan. Seifman Your of next question from

Your line is now open.

Thanks week, Intel's semiconductors it economy half guess Good guys. think long? maybe that just on saw very wondering what like makes seems quickly free I industry. take and I'm up. of of of topic really chips, in evening, I defense a makes capacity that is you the drying year of last for what availability takes 'XX. that And demand second Or the digital much. until the guess, kind would the results We up the that would more

Yes.

XX we times that's lead end, that end lead of quarter, particular, processing, see the on in So the first of ability to have getting, Seth last think happen the they and those quarter specifically talking going out coming high of We of is some from Intel of terms what feedback based all, I stuff improvements, companies the based the some the in in upon did capacity semiconductor semiconductor were incremental weeks. second the that some to think were XX we're upon the high and their and TSMC, to supply. times

average XX quarter, weeks. This see down the did come we XX to

far long longer still what saw in XX than the and is it's we XX So pre-pandemic, extremely week which to range.

are and go. got to average see but see long coming still way we a please the the it's down, So improvement

All right.

the is types Thanks. as then, have insight we about as margin, only offers mix about customers, anything be can it, categories, look of bit there different we've quarter it more between sales sales we of anything we the September seen, margin mean, as the more little quarter, into sales profitability sales? types different when products, the aware gross filing, compression that's the a there of data And into the in the, but a through guess, kind of gross of sales there different up, changing, at fewer as different that that just look to terms of, I Okay. is that of breakdown guess, the that in into radar lock out comes far whether these applications about of and the so fewer last I we follow thinking it's components I

the specifically levels macro Not Seth.

operating anything, just pandemic and the effects are of on cumulative if delays what the that think, resulting under seeing I programs inefficiencies. we is we've and seen the

cost impacting taking is So the seen what is longer. things and are growth, that clearly, margin. We've

of some chain. we is and of more As of start improvements out phase as there, kind coupled these said, probably into production to mix see development with programs forward better some look margin we've we'll shifts supply some and and get efficiencies the

continued and a balance as less to drive then forward. go headwind, really from what's impact So going of margins we the is

anything know, So add I if you'd don't to that? like Mike, to

I really margin then programs in these expect production, we've in It that I environment. programs out subsystems to not think terms see out going we starts of anything over cue the that this see detail fiscal time 'XX. there longer going you'll stand when going that said as the No, correct, Mark transition that's be mean, significant what little of And degradation. to a talked new to development it's in about, is transition modules, is, as driver the just the to comes to components the taking they're

in the we're expecting 'XX. in So cue, nothing's around specifically fiscal Is trend. to QX more and the going in just that

second pretty FMS providing high half we're we're a of Seth royalties. pickup licenses That And the well. we into the that do includes see as upon was that as and Obviously the going based moved. that program margin IP capabilities that

So that of in that terms really matter. capabilities, the and it's in customer programs $XX And the the revenue has do move this of out year. and delay million unfortunate the funding the million $XX mix here

much. very you thank Okay,

Herbert question next the of Ken RBC. comes from Your line with

Your open. now is line

second in half implied on the to wanted quarter? million Mike. about it. Mark as if half guidance free in second How what's the Or you I call third of the think sort of year. year? a of Mark I'm the positive cash that But between split sorry, does the Hey the and ask cash I the flow missed it guidance and the breakeven, $XX cadence of fourth for slightly

one, it's take I'll that Ken Mike. Yes.

is R&D coming to seeing the between R&D in give think the weighted and in, look think be QX second to what prior to And it right tax prior QX We factoring going you we we tax when split to I'll which So between to be and a breakeven lot QX QX. QX at half, to going prior more that's slightly is expected those like QX to look but the we now. to we're payments, QX positive. the

Now, be $XX that's million million in $XX to the the to million mentioned to pre the estimate going tax which remarks. get it's prepared in to XX QX that we in it's going QX, we be R&D payment,

and we cash outflow So magnitude what unbilled in $XX difference, working And cash income, QX is especially for at release going up QX expect and free make the driving we're is of capital QX up And in income. the net higher a which actually we the inventory, is million. to flow to looking higher see the as the year. in

swing any the the year be quarter. ramp embedded quarter maybe to sort program either of or it could fourth anything helpful. or a full pretty or Thanks, significant that like they sounds Is earnings, aggressive specifically payments that fourth in should that, in around obviously a you'd ramp the fourth keep And there factors mind in in earnings, or out like Mike. for cash in that's are like Yes, as we progress pretty call hit the help potential number risk obviously going and cash seems quarter. what's significant material or

Go Yes. Mike. Go ahead ahead.

QX. programs backlog that QX. 'XX and FY news, that specifically two it is good coverage as We've do the our make good balance we I aren't into definitely is now good was a going have the quarter in to look feel backlog up visibility Ken into the just HX, large going The got at say into we of it good. right we and

So we're designed in entering on. with majority are coverage strong recurring of remaining backlog which were programs, for programs the

visibility we supply We think briefly, in and we and also have than the touched I coordination Mark it on into had have improved chain HX.

feel it, about we still So risk but around better it.

execution into that sight a of some revenue in key of key we've then couple drive on QX milestones line And got programs.

and our QX chain, items the talked a can, just just We're to that cautious of margin that's control. feel profitability as good well. that from out are program's expansion contracting we've to in about obviously environment still And in drive but control delays, in on about. demand we expect perspective, we're the what overall going flow the there's environment So uncertainty cash supply working things we we

okay. Yes,

[applied]things this Just right. of following kind up

talked So as second in we the royalties various a the have higher margin half in pickup program and some mix -- we programs. do IP high margin licenses on

second and supply fewer delays quarter. chain incrementally We in the execution We say and would are inefficiencies. improve saw anticipating some

the so there. continues as condition And and pick fewer think got up, we headwinds stabilized hiring I to as

our just And got better that QX will Impact, the We've initiatives lead relating early procurement and continued overhead savings. that the I consolidation got We've pricing to got We've finally higher better consolidation. here. in further think largely some as obviously, a some And this footprint undertook we facility in leverage, revenue. result quarter, and had year. then we of savings. continues savings absorption to

we the a what's So quarter, know work although increase. big think drive it's the done I and to we've going

color. you the Great, thank for all

of next comes question the line with from Blair. Jonathan Your Ho William

Your line is now open.

good afternoon. Hi,

to payments seeing some some Or wanted from everybody's the were that that maybe facing? just of of you your you persist? management the sort sort out flow start customers. guidance building are delayed of into seeing around given Are challenges you Just that that of behavior cash your with

in of on Sure, call, Jonathan. it QX. a little bit more little earnings it in We saw saw bit a QX the about talked We we it QX.

fiscal our remember year QX Now end. customers’ our is

due held all of quarter QX. for We've receivables managing received in we as we and we is quarter. So that them the that the see was to XX of at us in the us, did already mentioned, saw, that end million about

or of less straddle fiscal delay So years. weeks just couple calendar than as a and it they week was their a

think Going customers of a good we've on group forward, got really time. I that pay normally

And with we're that managing so them.

factoring that that's our in us, We cost that we exactly in behavior. to in financials, our use very to this our order a also and low of of because reason, was I it cash statement financing Jonathan, mentioned, we flow on have, a facility for tool put customer which the mitigate the impacts

So to use continue. also in feel should have to tool it, we a good behavior factoring we an see position manage the from should this that standpoint, need we we in but a we're organic facility, it

of terms Got that some how about, of as it. Got be flows through but know, any helpful, taken of of thinking well there's the should color variety be pricing both as that you've That's thank magnitude the would like you. actions we it. then like, of how the helpful. services different across in And timing, and the sort a products, pricing of actions I

obviously has major of the impact pricing the So program. a been one elements of

of In best And strategic up the and actually amount a drive pressures depending so upon commercial we both cost job. the portfolio estimation, And to a and stood pricing business. of pricing of the part that pricing things. practices seeing try of we're and in excellence, the center semiconductor done a the inflationary I good team's really think on we're significant offsetting side the

value So based the validity. pricing. quotes the focus at on and We're looking discount

pressures our really of inflation the price major on of commercial do see and the And on the the I the the products mentioned, increase as we that driver I across there. board, is did call, at that we start think, year, offsetting last

some disclosure slightly it's portfolio the It's non-commercial business. cost the here. the right of of the different type On largely

scope mainly and costs through to material we're job well. well as and monitoring both as passing do that labor see in a better inflation the creep monetizing focused Here we can, we really on wherever those, trying the possibly with customers as

what's the depending those through difference and to I a pretty the type job. doing be to Now ability backlog overall, the there costs upon good could obviously But there. already think pass be team's in a able contract of time

what be like that the do think Mike into year. to aren't inflationary with you to headwinds I as anything? could we the coming detrimental the add work done, we've thought they

No.

it. got You

Thank you.

from Sheila with Kahyaoglu comes the of line question next Jefferies. Your

Your line now is open.

you evening, the Good time. Mark. Thanks. And, for thank Mike,

well. So lot internally. seems to and with just how can there's the and us chain? Maybe you like all going You internal on the it what mentioned just in a us R&D focused both externally most as the its bit could balancing it Is talk of come on you're If you're ensuring talk sales now about that? board factors a you little Mark, supply business? the about just through to terms

Sure.

a it's So question. good

So the strong. environment continues I demand to think be

So very, we're top the on focused very line. still

along and growing the had that XX% confidence So the with bookings, QX. and year-over-year. the QX were which XX%, over we last quarter coverage backlog we said, pretty bookings months a X.XX, X.XX up the bill as gives in of We've expect us good XX and in

FMS It made what back is that loaded. talk we the right coverage end half on second So delays half. coming those unfortunate is more the that fiscal is far But got year. the execution the clearly, which had last about the has team very we what in now we higher second did we've focused saw which than was into year the

to a to row. improved. better on incrementally we'll lead think and quarter the in continues Hiring, focus So continue I mitigating challenge, times which chain third albeit for a is supply be the the semiconductor

people the looking the with growth it's the positions continue as more industry. fill along hiring at those in for still We rest going to than us important wrecks forward. are and actually of business open leaving And so. But got we're we to the

focus the focusing Sheila. execution, team say the just is business that I with to on on deal focused So very pandemic, effects and the continuing cumulative of growing would on the

And you follow that's million with that no, in FMS that helpful. know don't if of could right? of I and up, this that I was the $XX you answer out, said the mentioned Sure, associated Was sales slipped sale million earnings question, it. if XX

in million same QX QX. Yes. XX the and correct. That's in

about pretty terms that's thinking a that. Okay, high margin contracts so in of

is. It

mix a it's of So capabilities.

the associated But with royalties. hardware that capabilities there's revenues again, and So is also based upon it.

you. thank Okay,

the next Your from Ciarmoli with Michael line of Securities. question comes Truist

line Your open. is now

kind of questions on internal what guys. of on. Kind Hey, taking with going here. lot staying good external Thanks for the was asking Sheila evening,

think kind of I how Just you think of managing ball about tight. kind do I this begin that do guess with? disruption off now? right about managing more, of loss? How And so execution focusing potential you the on talent alternatives? strategic and add risk take can't that employees the mean, been right now? To doesn't announcement Talent labor's

Yes.

that look, of possibility, I of hiring got company. a I amount just what we've fair now. momentum with So But it's think are we mean, obviously, a the do inside

us growth there's I lot we're I ahead think to great and of company a think obviously a work for. of

that I with respect side retention, think will challenge is the And really direct focused things. made sorry, around a we're I on One of the sort an only side things of this morning, thoroughly don't have process of we to So announcements see areas. major at really I two that potential nothing impact here the believe afternoon attraction labor this on don't there.

upon I challenging we've more But pretty going feel employee I confident that side. just proposition. And need. a highest again think to engineering the great make areas based the value on actually we momentum the the we're able got Probably be to do that

Got it. separate. just up it Got entirely And to follow it.

back year, about obviously, guys the half the the last several quarters. about environment, You environment have thinking you demand a you Bill, bookings a the seen we've are with very especially book now talked budget strong over How of the place? in to

Yes.

chips we're anymore that HX, the growth with think expecting, just given seen some of we've movements the in to Mike, growth just with quarter, I the sequentially bill. bookings think of but the positive expecting fourth falling we're some over I strong reasons HX a again, So year-over-year strong book

the of issues, issue. demand a is these Obviously, very a term and effects anything, not is this the really think short result strong. cumulative of of kind demand I the If are pandemic. So environment timing

million Got year, it. saying. Then can to booking be think do guys what clear, second almost do you're you can last that, half you better XX than XXX, think and you that you

So this look than year. if stronger far prior the HX was you year, at

waiting the more So balanced. bookings was far of

a year-over-year in I expect just HX, given story be waiting think of substantially than the bookings sequential to HX. year, it's for it do HX, So the up is more really we

Got it. Helpful. Thanks, guys.

Yes, thanks, Mike.

Your of Moeller comes from next line question Canaccord. the with Austin

open. now Your line is

Mark, afternoon, and Mike. good Hi,

you? Hey, are Austin, how

great. Doing

question recession we we come my I supply inventory if Do I from you stockpiling it second costs incremental do was lead if come expect the first quarter, to times continue mean, as here, here, reducing in potentially it's lead down topic still the that of And an so chain, if just expect improvement stay going you know Just see fall? Mercury? of times go be but notable. down materials do the into we to sort a might you're continue on to

take I the and one. will second the take first you Mike,

Yes.

because circumstances, cash deliver inventory think some an So And with inventory been we've unlined the supply we parts. also we've as regards turns chain increase unbilled an normalizes, in balance sheet, as do and where receivables, those been there's inventory expect to unbilled really the of that to in accounts normalizes flow unable and both we discussed, a we decrease, adding into in expect long times Austin, to stronger our QX lead that of see impacting or which even once shortage is fiscal 'XX. why but has

chain be reduction supply once normalizes. that normalize, to again, working As should in there things we significant capital that expect begin a

marketplace the on end, the And side on things, going part of as consumer lower semiconductor result electronics of then largely average, the on is over on the semiconductor I think a rolled what of is is clearly, on I side it's high as still pre-pandemic. little it time, from than it's it's down a far bit longer was although mentioned, of come The still softened a things. end, lead what somewhat

price increases from if are haven't from high at And semiconductors seeing prices we going there Xilinx, devices. end so much other seen anything, fact, the all the Intel, movement in still. analog The and way from

pricing challenging. is so high still And is end pretty the still

But of the negotiate it's some we market. there have On side on the end able in out Austin. pretty lower parts challenging the been things lowest still better to of pricing

just up Okay, on follow and that. a then

said you what's that? half the you how fiscal anticipating of in remarks, about end in from you I What lead to the we that are confidence been improvement Or that you're on should of year gives sort think timing there? the 'XX. and times think seeing TSMC you second in year the communicated Intel? in Is

Yes.

are with fogged other TSMC facilities obviously various the from well actually we're dealing as not facility, offshore whose chips the contact in as directly, we're it's TSMC companies So companies. in with other

we've seeing believe the right now, we on they high XX, is, are we to end mentioned times POC that semiconductors. is the so that XX to respect what got the with And

of are FPGAs logic that devices, the And systems. these processing into go our so many the

And come seeing. from so we're suppliers things what to getting now we'll continue to If Hopefully, what they as And happens. continue. they're the down. input our see

great. details into Okay, there. for diving Thanks the

Austin. Thanks,

next Poponak comes Sachs. from Your with Noah question the Goldman line of

line open. is Your now

and the with good spending for Hey, years evening, all with Mike, and best us And, working forward. the going us time everyone. thanks over

Thanks Noah.

of more back XX when to volatile margin and two window been half recalibrate you a of is actually and The of it. does kind where It's it's profitability kind to really quarters the guess, that, how never and flow months line? try years. severe There bad. revenue actually line cash volatile of of all or that severe. of more Relative year why change the I square that, so a really working significant the out kind flow it. the do look this a I in then is and in zoom very And XX much And a pretty top changes top to I for sort that's If the that got is more three few and year. then significant. kind at where is distinct the the And little than decline not capital, cash particular, funky

Sure.

So I question. good think it's a

slightly of QX has in 'XX, bookings, quarter. a had in and this fiscal X%, different organic been has growth the terms year actually impact it in versus the organic so bottomed been third each bottomed I XX% out and quarter year So of We growth out, think decline. years few

various the head in got metrics direction. beginning right we've So to

result If respect think, you look what's bit at a of happened a little I the margin with it’s profile, linearity. really kind it's to of

the business then an push facing. impacts you've with the had impact So perturbations dramatically a supply created it to first And the inefficiencies the over more and in the decommits, of on see is we've part in terms lead general increased. we associated into as HX which been course obviously started times supply chain pandemic got the obviously of the margins just in just the of that

pretty the from the to And margin, ongoing with as of I into look shift we that. business. is There the mix, opportunities nothing think as benefits production, see substantial build as we the effects the for underlying related all pressure the if much well pandemic impact, So forward of development result is a the margin growth. associated anything, as and

the then I increased to on very again make times became then unbilled. sure you an supply side flow, cash the chain lead And as actually we with of on sheet where that off again the possible, up as saw customer balance wherever is think the effects challenging of we shortages part balance the know, conditions could tied working things which more type much leveraging up sheet inventory far our as ended side in commitments capital that's we meet unbilled the and

that's we you the And everything. to greatest Mike, collects where cash want ultimately in tilting. So saw if ball jump there?

measuring starting with around adjusted to and EBITDA Mark fiscal given we some hit just down that's, 'XX, became you I numbers, mean, a just think look No, if I I think 'XX, and look into back, 'XX, profitability, all XX% dropped 'XX, were fiscal it. XX%. back

as I we we've had or a about result chain of supply that points publicly talked XX about inflation. so basis think

probably were and guide at XX.X% fiscal basis impact. midpoint point our look You 'XX inflation similar the a and is at have XX

'XX, two about. reduction would And and 'XX is 'XX of talked the you to to programs 'XX, down the 'XX we've from put that from and a really result XX%. those So XX%, at there development

see we margins we to when do forward, for our opportunity we said, expansion. EBITDA at get the guide when EBITDA and 'XX Mark as so And we'll going fiscal look QX margin but

expenses anything's the to at movements fiscal 'XX from you of had as you more this quarterly a in sale, term, the EBITDA, which like for through We've looking long business the I impacted is a our basis. a don't then programs our the gross the think gross beyond. over there's volatility. margins, know. same going in some movements When and upside mix, key a development fundamentally profitability we the at on had in We and optics and some look physical So production quarterly gross think between makes, metrics running structurally again, with changed perspective. program things lot margins. opportunity business profitability again creates We've fiscal acquisition, and COVID had margins on FMS couple But 'XX basis,

Appreciate there. it you. I'll Okay, color. leave Thank the

Mr.

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

taking thank from the Okay. us very this much you Well, of Lots to join time news Mercury. for evening.

again next we to speaking Thank quarter. you forward look Now to you.

today's you This call. concludes conference for attending. Thank

disconnect. now may You