Good day and welcome, everyone, to the Mercury Computer Systems first quarter fiscal year 2011 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 Senior Vice President and Chief Financial Officer, Mr. Robert Hult. Please go ahead, sir.

Good afternoon and thank you for joining us. With me today is our President and Chief Executive Officer, Mark Aslett. If you have not received the copy of the earnings press release you can find it on our website at www.mc.com. We'd like to remind you that remarks that we may make during this call about future expectations, trends and plans for the company and its business constitute forward-looking statements 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, should, would, plans, expects, anticipates, continue, estimate, project, intend and similar expressions. Such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. These risks include but are not limited to 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, continued funding of defense programs, the timing of such funding, changes in US 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 outsource components, inability to fully utilize the expected benefits from acquisitions and divestitures or delays in realizing such benefits, challenges in integrating acquired businesses and achieving the anticipated synergies and difficulties in retaining key customers. Additional information regarding forward-looking statements and risk factors is included in the company's periodic reports filed with the SEC. We caution listeners of the today's conference call not to place undue reliance on any forward-looking statement which speak only as of the date of this call. We undertake no obligation to update any forward-looking statements. I'd also like to mention that in addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, during our call we will discuss several non-GAAP financial measures, specifically adjusted EBITDA and free cash flow. Adjusted EBITDA excludes interest income and expense, income taxes, depreciation, amortization of acquired intangible assets, restructuring expense, impairment of long-lived assets, acquisition and other related expenses in stock-based compensation costs. Free cash flow excludes capital expenditures from cash flows from operating activities. A reconciliation of adjusted EBITDA to GAAP net income from continuing operations and our free cash flow to GAAP cash flows from operating activities are included in the press release we issued this afternoon. I am now pleased to turn the call over to Mercury's president and CEO, Mark Aslett.

Thanks, Bob. Good afternoon, everyone, and thanks for joining us. I'll begin with an update on our business for the first quarter, Bob will review the financials and discuss our guidance and then we'll open it up for your questions. Mercury continued to perform well in Q1. Revenue and GAAP EPS both exceeded the high end of our guidance range. Bookings and 12-month backlog were up 6% and 45% year-over-year respectively. Adjusted EBITDA for Q1 increased 13% year-over-year and was well above our guidance. Finally, operating cash flow grew to $9.4 million, an increase of 259% year-over-year. Looking at our defense business, total defense revenue, including ACS and Mercury Federal, was in line with our expectations of $37.7 million, down 7.6% from Q1 of last year. Our commercial business more than made up the difference, however, as revenue grew nearly 120% year-over-year to $14.4 million. Defense bookings for the first quarter were up 9% year-over-year. Our book-to-bill in defense was 1.09, up substantially from Q1 of fiscal 2010. With 45% growth year-over-year in our 12-month backlog, Mercury's on track to deliver solid organic growth on the top and bottom lines in fiscal 2011. Our major defense bookings this quarter include an order for the Taiwan Patriot System through Raytheon, continued business on the Aegis platform through Lockheed Martin and additional orders for the ASIP airborne signals intelligence package with Northrop Grumman. Q1 bookings in our commercial business were roughly flat with Q1 last year. Although backlog-driven revenue from KLA-Tencor will be winding down during the year, Q1 was our fourth consecutive quarter of increased revenue from ASML. Overall, we still expect roughly flat revenue in commercial for fiscal 2011 as compared with FY10. In our defense business we focused mercury on key markets that continue to look promising in terms…

Thank you, Mark. This was another solid quarter and a good start to our fiscal year. Mercury's total revenue for the first quarter of fiscal 2011 was $52.1 million, exceeding the top end of our guidance range of $48 million to $50 million. This compares with $47.4 million in revenue for the first quarter of fiscal 2010. GAAP income from continuing operations for the first quarter of fiscal 2011 was $3.7 million with $0.16 per diluted share on approximately $23.4 million outstanding. This was well above our Q1 guidance of $0.03 to $0.06 per share. For the first quarter last year, Mercury reported GAAP income from continuing operations of $4.4 million or $0.19 per diluted share. The upside from guidance was due to three factors: first, higher revenues; second, higher gross margins due to favorable product mix and lower other costs of goods sold; and, third, a modest under-spend in operating expenses. Breaking it down by operating segment, revenue in ACS including both defense and commercial for the first quarter of fiscal 2011 was $51.9 million, up 15% from $45.3 million in Q1 last year. Revenue in our services and systems integration business within ACS for the first quarter of 2011 was $3.9 million compared with $5.1 million in Q1 last year. As we've said, SSI is still a new business and somewhat lumpy in terms of bookings. We enter FY11 with a lower backlog than in FY10 and we continue to expect SSI's revenues to be lower year-over-year. In our Mercury Federal Systems business Q1 fiscal 2011 revenue was $1.9 million, down from $3.1 million a year ago. As Mark said, our bookings and revenue in MFS are likely to be concentrated on a single large customer in the near term and we're modeling flat revenue for full year…

(Operator Instructions). Your first question comes from the line of Mark Jordan - Noble Financial.

I guess one of my first questions would be relative to the first quarter's performance. You obviously were ahead of your expectations. Specifically, was the higher level of revenue derived out of the commercial side? Could you give us a sense of what kind of visibility you traditionally or typically have on commercial revenue as you enter the quarter?

Yes, so we actually did well in both commercial and defense this quarter, Mark. From a visibility perspective, with commercial, if you reflect back to the end of last year, Q3 and Q4, we had really good bookings in those past two quarters which meant that the backlog for commercial coming into this year was pretty high, which gives us the confidence and the visibility that we need to kind of continue to predict what we said for the last couple of quarters which is modeling roughly flat commercial revenues year-over-year.

What percent of your business is booked and shipped in the same quarter?

Roughly 20%.

Not even.

Not even that. It varies.

I mean, we like to target 100% to have in the backlog, Mark. I think our comfort range is when we're hunting booking and shipping 15% or lower we've got a high degree of confidence and it tends to run that way.

While you don't give any guidance beyond the first quarter, I mean, last year you had a real anomaly with relatively weaker earlier quarters, a weak third quarter and a very strong fourth. Is this your -- should we just assume that there should be just modest sequential improvement as each quarter evolves, or is there any unique pattern that might occur this year?

Yes, I mean, typically the way in which the business is evolved is that Q1 has been our seasonally weak quarter and Q2 has been progressively stronger, Q3 has been better than Q2. Then a couple years in a row I think we had a fall back in the fourth quarter. That's typically the way in which the business has evolved and that's the way in which we expect it to play out this year based on what we know today.

A final question, just relative to the share count -- your guidance for the first quarter was, for share count, 23.7 million. It came in at 23.4 million. You're now at 23.9 million for the second quarter, which would be 0.5 million increase in the share base. It seems a bit high to assume that type of sequential growth.

Well, I think -- well, I mean, don't forget we still hit some options under water, so there's a complexity factor to this. I think your best option is to go with the guidance. I don't think we'll be higher than that, certainly, Mark, but I wouldn't shave it on the downside second guessing us. It's our best effort.

Your next question comes from the line of Tyler Hojo - Sidoti & Company.

First question, just in regards to the defense business, I think last quarter, you guys indicated that the defense business in fiscal '11 would be up high single digit, low double digit. I heard you kind of talk about commentary for SSI and Merc Fed, but just didn't hear just a commentary on the overall defense business.

We typically don't give guidance in total, but nothing has changed from what we said last quarter. We still believe that at total company level we're going to demonstrate good growth at a total company level as well as in defense. We feel pretty good about where we're at right now, Tyler.

Then, just to dig a little bit deeper on the commercial side of the business, so what exactly happened this quarter for the sales to come in so much stronger and then kind of still have the flat expectation in the year?

So if you go back to really what's happening -- so semi bookings were up 19% year-over-year but were down 71% sequentially. Semi revenue at $10.9 million was up 152% year-over-year but down 9% sequentially. So big picture, if you look at what's going on, there's really two things. From a revenue perspective we had very strong bookings with KLA-Tencor in the third and fourth quarter of last year. We're basically burning off that backlog. At the same time, ASML is continuing its ramp and we saw a 40% sequential increase in the revenues from ASML and more than a five-fold increase in the revenues from ASML year-over-year. We expect that the revenue from KLA-Tencor is going to start to decline in line with kind of what we've described historically on previous calls. So you kind of net out all of the moving parts in the commercial business. We're still sticking with that we believe that our commercial business is going to be roughly flat on a year-over-year basis. So we've just got a lot of moving parts.

I guess some of the uncertainties on the budgetary side of things isn't concerning you too much? I mean, was that the correct read?

Yes, I think from a -- right now we feel pretty good. We've got decent visibility. As I said, though, we, like everyone else in the industry, waiting with bated breath for the defense budget to be passed post the elections. So we've got pretty good visibility from a revenue. If there is any concern that we have it may be around the timing of bookings associated with the approval. But we feel good about where we're at.

Then, just lastly from me, on the federal side of the business, you mentioned your one key program there. I was just wondering if you had any sort of timing in terms of when that program could take kind of the next step.

So we think that we're in a pretty good position from the work that we've done and that we believe that we're likely to be the company that's down selected to work on the new system for phase two. Right now, the whole program itself is held up in the budget cycle, so between the House and the Senate. So we're not going to really know any more until the budget is approved, which is going to be hopefully sometime in the fall. But that's what we know at this point.

But, I mean, is it correct to assume that you think it could perhaps be a fiscal '11 event for you guys?

Yes, if it's likely to happen, if the House and Senate agree that it is an important program, if it's funded, we think it's going to happen this year, but there's elements outside of our control at this point.

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

So my first question is on the JCREW 3.3 program. You guys talked a little bit about sort of your expectations around that. Given that we're already pretty far into October, do you think the award is imminent? What should we think about in terms of the approximate magnitude between the two sides here?

Yes, so at this point there is really no new information. We're still waiting for the government to make an award to one of the primes. We think it is going to be a single down select, as we've said. We've got more content with one of the primes than the other. We haven't been specific in terms of the amount or the magnitude difference. So at this point I think we'd prefer to just kind of wait until the government makes their selection and the announcement is made at which point we can start being a little bit more forthcoming with additional information.

On the commercial side, do you guys have any more clarity in terms of KLA's next gen system and whether you have a chance to get onto that platform?

Yes, not really. We still believe that overall it's doubtful that we're going to be involved just given the way in which things played out. That is baked into our numbers. We're assuming that we're not involved and, as a result of that, our commercial revenues will be roughly flat year-over-year. But we should know shortly. But I would just stick with what we're seeing at this point assuming that it's unlikely.

Final question is on just your Patriot expectations with Saudi Arabia and Turkey. If you were to receive sort of the bookings order for that, would that substantially change your outlook for the year, or is that already sort of baked into your expectations for defense, or would this be more of a multi year contract to begin with?

Yes, so we -- it's partially baked into our expectations. So a lot depends on the timing of it. So I think if you listen to what Raytheon is saying they're pursuing both Saudi and Turkey. We're just going to have to wait and see. But we did get Taiwan this quarter which is what we're anticipating, which was a good thing for us.

Your next question comes from the line of Steve Levenson - Stifel Nicolaus.

Just in relation to some recent transactions, I think one of your customers was acquired by Boeing and another one has retained a banker. Would a change of ownership in either case have any impact on Mercury one way or the other?

Well, if you look at the Argon, Argon's been a great customer for Mercury. We continue to provide them with what we believe to be important technology. We continue to win new design wins with them including one this quarter. If anything, I think the acquisition by Boeing on Argon -- we see upside potential longer term, particularly given Argon's strength in the Sikkens domain and Boeing's expertise in the airborne domain. Those two things together could be a pretty powerful combo. So we're continuing to work with them. We think there's more opportunity. As it relates to the other announcement that was made, given the amount of business that we're doing, it really -- we don't see any meaningful impact there.

Just in terms of big picture looking forwards, with new contracting rules and acquisition reform, obviously, that's something that should help you. Could you give us a little detail on your opinion there please?

Sure, yes, I mean, we feel that the whole shift of improving defense acquisition is going to be a really important thing for Mercury going forward. We've been talking about this for a -- really since 2008 and we set up our business model in light of what we thought was going to occur that is now absolutely occurring. So the ACS, SSI business is critically important. We set it up to capitalize on the outsourcing trends by the primes that we believe would be driven by defense procurement reform. Then Mercury Federal Systems we set up as being much more of an ISR business to add even greater value to the primes through more value added subsystem solutions. So we think the defense procurement reform will be a good thing for Mercury and provide more opportunity and we're actually seeing that in terms of the growth in our pipeline. So it's a good thing.

(Operator Instructions). Your next question comes from the line of Jim McIlree - Merriman.

Bob, can you talk a little bit about the gross margin levers for Q2? So what goes up or down that makes the gross margin decline quarter to quarter?

It's almost completely mix, Jim. In terms of the [OCOG] elements of gross margin, the earlier investments in, as I've noted, in engineering methodologies and supply chain infrastructure, I believe we've trapped those on a sustainable basis. So we're not losing any ground on that front. So the movement that you'll see -- and you're going to see it quarter-to-quarter -- it's simply product mix or business unit mix could play a factor there too. But with regards to Q2 specifically, it's a product mix. It's not that much movement. It's only a few hundred basis points.

Is there a big movement because of the change or, is there a movement because of a shift from commercial to defense?

That's part of it. I mean, if you look at the mix changes that Bob's talking about -- so commercial and defense is one, ACS, MFS is another, you've got old and new product, which is a third and then you've got specific programs within ACS. So we really have got a number of different moving parts of the gross margin line and to date we've managed it pretty effectively from a guidance perspective.

Yes, we've been running substantially above our target model of 54% plus. But just to give you a little bit of an assurance there, we drop right down to the order/program level in the products and services that we're planned and forecasted to deliver for the next quarter. So I don't want to make it sound like a big spreadsheet but it actually is. So we've got a fair amount of detail there. Again, I think I'd caution people to second guess us on that one. It's our best estimate but then you'll hear us on occasion talk about orders that we thought were going to go in a quarter get moved to the following quarter and equally orders that we thought were in the following quarter customers are asking us to pull those into the quarter. So the mix shift continues right through the better part of the quarter. It's a little bit of a changing landscape.

We've managed it pretty effectively though. I mean, I think if you look at our guidance we believe our process works.

Well, I ask you this question every time I speak to you, so I didn't want to disappoint you. Mark, I think Mark Jordan asked a question about the progression of results throughout the year by quarter and you responded Q2 better than Q1, Q3 better than Q2 and Q4 dropping off. What were you referring to -- total company or ACS or defense or what?

Total company, so we typically had a bit of a sore tooth in the business and that's the way in which we expect it to play out this year, so total company.

So this will be a pretty dramatic change from last year in that you had a big skewing into Q4 last year because of the Aegis delivery.

Yes, so Q4 -- .

Does that imply that the Aegis deliveries are more evenly spaced this year?

Well, we would certainly hope so. If you -- last year really was -- Q3 and Q4 were an anomally and the way in which we kind of look at it is really $9 million or $10 million that we delivered in Q4 should have been delivered in Q3 had we not had the challenges from a funding perspective or had our customer not had the challenges from a funding perspective. So strength in Q1 through Q3, dropping back a little bit in Q4 is I think what we've seen on a historic basis and that's what we anticipate at this point based upon what we see as we look forward.

The commercial progression, it was a very strong September quarter. Is it reasonable to think that that just kind of glides downward or do you have a big drop off in a quarter as that transition between KLA and ASML takes place?

It's probably going to be a slower progression. We're not expecting a cliff.

Then, I think my last one - so when I think of the revenue buckets, you have commercial, which you've said is probably flat for the year; SSI, which is probably down for the year; MFS, I think you've indicated is flat for the year. So that big all else is -- sounds like -- and that would include Aegis, Patriot, ASIP, et cetera. I mean, that is expected to be a nice solid growth business this year. Is that a fair assessment?

I think you've hit the nail on the head. We expect good performance in the ACS defense business in FY11. We've got a couple of things that may change the color, in particular in MFS if that large program that we are involved with is funded as part of the budget cycle, the president's budget cycle. But at this point we're not going to know. They're roughly flat to slightly down that we're expecting in MFS is kind of baked into our numbers. If that other program happens the way in which it may then that might give us a little upside potential.

Do you need -- in order to get that ACS defense business you characterize as solid, do you need something special? Do you need the budget to get passed? Do you need Saudi Arabia to buy the Patriots? I mean, do you need something really big to happen in order to make that, or is it kind of a normal business thing where it's you just need your normal share of good stuff offset by your normal share of bad stuff to happen?

It's the latter. It's kind of business as usual. We feel we've got pretty good visibility right now, certainly from a revenue perspective. The bookings is more of a charge just given everything that's gone on with the defense budget but we think that's just really a timing issue, that we're on the right programs, we're on the right platforms. I think from a business model perspective we set ourselves up very, very well in light of what's happening in a macro level with procurement reform. If you look at our performance on design wins this quarter just as an example, it was the strongest that it's been since I joined the company in 2007. We had 13 defense design wins and the five-year value of those design wins was up over 300% on a year-over-year basis. So we feel actually pretty good about the business right now. I think things are going well. They're clicking and we're involved in some nice things.

(Operator Instructions). Your next question comes from the line of Jim McIlree - Merriman.

So when you look at -- so, when you're -- when I'm thinking about the year, I'm thinking if you get lucky with MFS and the big program gets funded and that's a nice bit of upside and I kind of know where my downside is. Maybe it just gets pushed to the right or Saudi Arabia doesn't buy, something like that. But is there something else within ACS defense that could be a big game-changer, either -- not game-changer, but a solid change to your expectations either up or down? Like ASIP - does ASIP have a chance of getting pulled in and doing a lot more business this year, or is it possible that CREW 3.3 actually has an impact this year, something like that?

Yes, I mean, we're on a lot of programs. I wouldn't say there's one silver bullet. It's the ups and the downs. So I think we do expect good growth in the ACS defense business. We do expect good growth in the business in total. I wouldn't single anything out in particular. We certainly don’t think it would be the JCREW thing, as an example.

Given that you have a very strong balance sheet right now and a lot of capacity to do deals, where are you in that process in terms of evaluating deals and potentially putting out offers?

Yes, we're pretty active. We've been talking to a lot of companies. I think there's some pretty interesting assets that are out there. We are staying away from auctions. We don't think they're the right thing for us, so we're finding companies that are under-banked, not over-banked and we're in discussions with a number of different companies. I'm not going to kind of throw out any timelines as to when it is that we may or may not close something but we're pretty active and I think the new corp debt team that we brought on board is making a difference.

Is there anything about the tax law change, potential tax law changes that would happen -- that might not happen before year-end that would suggest that you might do a -- you might have something completed by the end of this calendar year?

Yes, I'm not going to be specific in terms of the timing. I mean, some of the potential sellers are more sophisticated than others in terms of what a potential change in the tax rates may mean. I wouldn't say that is the only factor they're considering but it's certainly something that is on their mind.

(Operator Instructions). At this time we have no further questions. I'd like to turn the conference back over to Mr. Mark Aslett for any additional or closing remarks.

Thanks, [Jay], and thanks to you all for listening. We look forward to speaking to you again next quarter. Operator, this concludes our call.

That does conclude today's conference. Thank you for your participation.