Good day everyone, and welcome to the Mercury Systems First 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, Gerry Haines. Please go ahead, sir.

Good afternoon, and thank you for joining us. With me today is our President and Chief Executive Officer, Mark Aslett. If you've not received the 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 this call about future expectations, trends, and plans for the company and its business constitute forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. You can identify these statements by the use of the words may, will, could, should, would, plans, expects, anticipates, continue, estimate, project, intend, likely, forecast, probable, 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 employees and customers, unanticipated costs under…

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 will open it up to your questions. Mercury’s off to a great start in fiscal 2017. Our acquired and organic businesses both performed very well in the first quarter and we came in at or above the high end of our guidance on all of our metrics. October revenues for Q1 were up 15% year-over-year with our largest revenue programs being Aegis, F-35, LRDR and DEWS, which is Digital Electronic Warfare System. Organically revenue was up 8% year-over-year as expected. Q1 GAAP income and adjusted EBITDA were up 34% and 54% respectively from Q1 last year. Total bookings grew 41% driving a 1.1 book-to-bill and record backlog of $296 million, up 36% year-over-year and our 12 months forward revenue coverage remain strong. Our largest booking in Q1 was Patriot foreign military sales to Japan. We also received major bookings was Paveway, Aegis, which is the advance intrigued defensive electronic warfare suite and the ProVision body scanner. These results demonstrate that our content expansion growth strategy continues to work well. Over the past few years, we’ve successfully leverage internal R&D investments and acquisitions to build the best in class portfolio of products and capabilities. Our improved sales strategies have strengthened our customer relationships and we are targeting what we believe to be the largest secular growth opportunity in the defense industry outsourcing by the major defense primes [ph]. At the same time, we’ve created a business model, we can efficiently scale through acquisition. The strategic deals in RF and EW that we completed since fiscal 2011 has substantially expanded our capability sets and as important our total addressable market. These transactions have enabled…

Thank you Mark and good afternoon again, everyone. Before we go through the financial results, I'll note that we'll be discussing the company's financial results compared since to prior periods and guidance on a consolidated basis, that includes LIT and the Microsemi carbout business we acquired in fiscal 2016. As a reminder, we are now reporting Mercury's financial results as a single reporting segment. Eliminating the historical distinction between Mercury Commercial Electronics and Mercury Defense Systems. Turning to our financials, Mercury is on track for another year of solid growth. We also remained optimistic about our ability to counter the cost synergies, that we anticipated as our integration efforts are proceeding to plan and are even accelerate to somewhat. As Mark said, we are also planning -- beginning to see potential growth opportunities taking shape. Looking at our first quarter results, Mercury deliver a strong start to fiscal '17 on a consolidated basis and organically. Total revenue, increased $29.2 million to $87.6 million, up 50% from Q1 last year, and exceeding the top end of our guidance of $82 million to $87 million, as we continue to see strong customer receptivity to our capabilities and solutions. Approximately $63.3 million of our total revenue for Q1 was attributable to the organic business, which grew 8.4% year-over-year, a rate slightly higher than our organic growth of 8% for all of fiscal '16. The carbout business is acquired from Microsemi also contribute solidly to the quarter generating $24.3 million of revenue consistent with our expectations. International revenue including foreign military sales was 16.1% of total revenue compared to 14.4% in Q1 of last year. Revenue from radar and electronic warfare together accounted for 66% of consolidated total revenue compared with 82% a year-ago. The lower total proportion reflects a larger and more diverse…

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

Hey Mark I was wondering if you wouldn’t mind making a couple of different comments. One, just the budget environment here in the States, the continuing resolution. At what point do you believe a continuing resolution would have a negative impact on you or your customers, as the CR goes beyond such and such a date, it could have an impact on the '17 guidance. And then, can you make some comments just on the integration efforts, particularly on the sales side of things and the marketing. To reflect back maybe on what you’ve achieved here and where do you think you're going from here? There is some opportunities that you’ve identified as you’ve gone through this process that, the goal [ph] that’s more compelling than what you originally thought and you just described as how the sales integration is coming along, whether you’ve identified any additional end markets international, looks a little better just may be more comments on the integration efforts particularly on the sales force would be helpful.

Sure no, problem. So we think at the guidance that we’ve given obviously takes into accounts the fact what we've starting out the year with another budget continuing resolution as expected. I think, our expectations right now is that the CR will head into next fiscal year maybe the March or April time frame. And we’ve taken that into account in terms the guidance that we provided. As you know, we worked hard to actually build our backlog and we got very, very solid revenue coverage going into the reminder of this year. So we feel good about the position at we're in. as it relate to the integration, the feedback that we’ve gotten from customers has been extremely positive. As I said previously, we're in an environment where most of our customers are seeking to rationalize their supply chain and they're really looking to do business with a smaller number of more capable suppliers and I think both Mercury pre-acquisition and the [indiscernible] businesses that we've acquired, we're both seen as very strong suppliers that together become even stronger. They like the capability set that we’ve brought together, they like the additional scale that we’ve brought into the businesses. The sales force has been fully integrated, so we’ve only got one channel to our customer base. The shift from the prior Microsemi distribution sale model to Mercury’s direct sales model has occurred without incidence and we've already starting to see some of the benefits there. The opportunities that we see on a combined basis, really fall into three major areas. You know the first is around embedded security, the second is around guided missions and smart munitions and the third is our continued focus basically expanding our contents in radar as well as EW systems, Jason.

That's helpful. Thanks.

Thank you. Our next question comes from the line of Jonathan Ho with William Blair. Your line is open.

Just wanted to start out with one housekeeping question, not sure if you have this, but can you guys give us what the actual growth rate was for the Microsemi business for the quarter?

So, we honestly didn’t own it did in the competitive quarter a year before. As we said, earlier when we announced the acquisition, the growth rate historically was a little less than the growth rate for Mercury, particularly in fiscal '16. Kind of the low single digits. And basically, you know what we're pretty actively doing is focusing on the integration because we believe we can inflect the combined growth rate upward, so that it is more than the sum of the growth rates of the two, and you know based on our update to guidance that's exactly what we believe is happening for the balance for the year.

So let me just add a little color there. I think the business performed right in line with our expectations. Historically, you’ve said that the business is grown low-single-digits and that’s largely because we believe the way in which Microsemi went to market for this type of model wasn’t a great fit. The upgraded guidance that we gave for fiscal ’17 on a pro forma basis would result in our revenue is growing between 5% to 8% at a total year level and we expect both the organic businesses as well as the acquired businesses to grow with inside of revenue range. So we believe that we’re already beginning to see some of the benefits of the stronger Mercury channel.

Got it. And then you just talk a little bit about the accelerated manufacturing investments and CapEx investment that you intend to make. Can you maybe give us a little bit more color in terms of where those investments are going and maybe what the longer term margin application is, once you’ve completed this investment?

Sure. Think of it this way, we’re really investing for growth in the business, because of what Mark just got finished talking about in his last response. So largely what we’re focusing on is adding equipment on the manufacturing side within existing location. So we’re not expanding our footprint to new locations. But we’re driving hard to build out some of our capabilities both to get more efficient with manufacturing and also to support growth that we think is a very real possibility as we move forward and see some of the accelerated rates. So setting aside the build-out of the Andover headquarters which Mark talk about in his remarks, which will produce some CapEx temporarily in the year, the rest is really focused on again additive capabilities that bring to bear both what we’re already doing today, but also expanding the set of capabilities through the Phoenix location of the acquired business where we’ve got a DMEA trusted facility already and we think that there is a lot of leverage that we can apply to that. So what we see is more significant benefit essentially they leverage of those manufacturing capabilities as revenue begins to inflect in a positive direction.

So just kind of expanding that on a little bit. As Gerry said in his prepared remarks, we do see that on a relative basis, the business will likely perform stronger in the second half, in the first half. As I said in my prepared remarks, we expect this given the updated guidance that we provided that we now anticipate landing inside at the revised target business model albeit at the lower end of that range. Which gives us the opportunity overtime to harvest additional synergies from the investments that we’re making as the business continues to grow in the future years. So it’s all about creating platform for growth, as well as increased operating leverage, which I think we’ve demonstrated ably that we’re able to do.

Excellent. Thank you.

Thank you. Our next question comes from the line of Peter Arment with Robert W Baird.

Nice quarter. I guess, I just really want to focus on the kind of the legacy, the precision guidance business. Is this an area where given what’s going on in the budgets and what the priority spending has been, certainly what we're seeing in terms of use on precision mutations that we should be seeing this being one of your fastest growth areas or is there a lot of legacy programs in there rolling off, maybe if you could just give us a little color on how should we be thinking about that?

So, we do think it's going to be an area of growth. I don't think there're really legacy programs there that are rolling off. The programs that the acquired businesses are involved with, programs such as MALD, which is the miniature air launch decoy, they're on Small Diameter Bomb II which is really just getting going. They're also involved in the transition basically the large caliber dumb munitions into smart munitions on programs such as PGK. That said I think we believe that probably the fastest growing part of our business will remain likely electronic warfare and again we've made significant investments through the acquisitions of core NEW, as well as certain acquisition in the RF and microwave domain and we're seeing a lot of opportunity in that space.

And then just regarding I think you mentioned LRDR, just give us a comment update on what's going on there?

So, the LRDR program is basically ramping, we expect it to be a significant driver of growth, we got a substantial bookings during fiscal '16 and that it's beginning to turn to revenue this fiscal year. So, that's right on track and it's progressing as we expected Peter.

Thank you. Our next question comes from the line of Brian Ruttenbur with Drexel Hamilton. Your line is open.

A couple of questions, first of all it's my first quarter on with you guys after a while, so congratulations [multiple speakers]. Just a couple of questions around the tax gap -- tax 35%, why the lower tax and moving forward I assume that tax can be maintained in the fiscal '18 or was there something one-time this year?

So, we expect that rate to be pretty steady through time. Obviously what we don't guide on are special items that are one-time in nature. So, we're looking at an effective rate that should hover right around 35%. One of the things that obviously we deal with is we don't have significant international operations and some of the other traditional opportunities to get some tax arbitrage in the game. So, I don't think there is anything unusual going on there. There was some benefit in Q1, that brought their rate down a little bit again because it would have been one-time items, things like the stock based compensation and so on under the new rules.

And then the second question on the CR, can you talk about what programs specifically that could be hurt or benefitted from passing a CR quicker or delayed? And if you just mention one or two, I just wanted to track some of those programs out there. If there is an acceleration and passing the CR sooner or a delay in the CR?

We actually don't really see a major impact in either direction Brian and I think we've got very strong visibility given the backlog that we have, CR from what we see right now, won't impact the major programs that are driving the revenue. So, we’ve done a pretty thorough analysis there.

Thank you. Our next question comes from the line of Mark Jordan with Noble Financial. Your line is open.

The first question is on CapEx, you talked about first quarter, I think it was $6.2 million peaking at in the second quarter at 13, obviously I guess being driven by your investment in your headquarters. Could you talk about what you expect for the full years in terms of CapEx and how much of that is really non-recurring again tied to the headquarters move or sort of one type investments that are not repetitive?

Yes, so we said it was really driven by three items, one of which you mentioned which is the Andover headquarters build out which started in Q2, and will continue into Q3 and will sort of be diminished by Q4. The other two items were obviously the incremental addition of the new business, so there is just the step in CapEx that came with the business, that certainly will continue. The other major driver is the manufacturing expansion of capabilities which I talked about a little bit earlier in the call. We didn't guide CapEx for the year, but what I will tell is that we expect it to, as I said peak in Q2, H2 as a whole will be lower than H1 and by Q4 we’re expecting to be essentially at a normalized rate, as we get over the hump on couple of these onetime items.

Okay, second question for me, can you talk a little bit about the order flow at the acquired Microsemi operations. Typically how do those orders -- it is a book and ship business, is there a backlog or how long is the average duration of orders that the Microsemi businesses will see?

So, we’ve got more book shipped then what the organic business is or has. And that's largely because since fiscal '13 we worked very hard to grow our backlog and lesser on reliance on book ship that said I think they’ve got a strong diversity of programs, we're going to continue to do with them that we have done with ourselves, seek to grow that backlog overtime. And the business actually performed very strongly from a booking perspective during the first quarter. So, the business is performing the way in which we expected it Mark.

Okay, final question for me. Relative to other income you had a larger than normal gain there, could you define what that is and should that go back to sort of the typical you know $1,000 type range moving forward or are there other largely items that could flow through there?

Yes, we don’t expect anything significant in the way of other income i.e. non-operating items. You know there is -- the real change I think to the CR for the first time we’ve got, things like interest income and expense coming through them was driven by the acquisition. There is a little bit of foreign exchange activity, but it's really not significant, so I wouldn’t really focus too much on it.

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

Hi, just the follow up on the last question. Do you have the core bookings or organic bookings in backlog for the quarter?

We don’t break out the booking in backlog on organic and acquired basis. Couple of reasons for that. One is as I said the lines are blending quickly as we see more and more, what I would call combined opportunities to bring the technology package to bear. Second is that as Mark said, I think what the important thing was from our perspective is the bookings performance is solid and the answer is a resounding yes. We’ve been extremely pleased both for the two month period that we owned them last quarter and for the full three months that we owned them in Q1. So they actually coming very much in line with organic Mercury and that’s really what we want, and I think that was pretty amply illustrate about the 1:1 book-to-bill that we have for the quarter on a combined basis. So bottom-line is we’re very happy with the way they’ve come along.

Sure. And I apologies, if I miss this earlier. But it seems like the core business is driving the revenue guidance range. Can you maybe get a little bit more granular and what it is. And then also with the Japan Patriot upgrade is that expected to be converted into revenue in 2017 or is that a ’18 items?

So as I said, previously Sheila, when you look at the revised guidance on a pro forma basis assuming that the acquired business did approximately $100 million of revenue in fiscal ’16, meaning we had owned it for the whole year. That would translate into a pro forma growth rate of between $0.05 to $0.08 year-over-year on a combined basis. We expect both the organic business and the acquired business to grow within those growth ranges. For the acquired business that would results an increasing growth versus where they were last year before we owned them. From a Patriot perspective, we did receive a large order for Patriot during Q1. And we have increased our revenue forecast for the Patriot program versus where were last quarter.

Okay. And then on Paveway, is that a new program and I guess how do we think about maybe that your content a Paveway versus the future or another missile?

Yes. So Paveway and existing program for them, they received a large booking, we received a large booking during the quarter, as well as a long term supply agreement with [indiscernible] which we’ve very pleased about. I’m not going into comment specifically about content per program or per missile, but we are providing some innovative technology across several of the programs that I previously discussion.

Okay. Thank you.

Thank you. 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.

Well, thanks very much Andrea and thanks everyone for listening. Again we hope to see our Investor Day in New York City on November 8th. That concludes the call.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may now disconnect. Everyone, have a great day.