Good day, everyone, and welcome to the Mercury Systems Second Quarter Fiscal 2019 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. With me today is our President and Chief Executive Officer, Mark Aslett. If you've not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that Mark and I will be referring to is posted on the Investor Relations section of the website under Events and Presentations. Please turn to Slide 2 in the presentation. Before we get started, I would like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury's financial outlook, future plans, objectives, business prospects and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements on Slide 2, in the earnings press release, and the risk factors included in Mercury's SEC filings. 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 also discuss several non-GAAP financial measures, specifically, adjusted income, adjusted earnings per share, adjusted EBITDA, free cash flow, organic revenue, and acquired revenue. A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation, and in the earnings press release. I'll now turn the call over to Mercury's President and CEO, Mark Aslett. Please turn to Slide 3.

Thanks, Mike. Good afternoon, everyone, and thanks for joining us. I'll begin by providing a business update, Mike will review the financials and guidance, and then, we'll open it up to your questions. Mercury delivered solid results in the second quarter of fiscal 2019, building on the momentum from Q1. We finished the first half of the fiscal year strong, coming in above the high end of our Q2 guidance for revenue, adjusted EBITDA, and adjusted EPS. In addition, we're announcing today the acquisition of GECO Avionics as part of our continued push in the C4I market. We've now completed 5 C4I acquisitions over the past two fiscal years that have significantly expanded our capabilities and addressable market. I have more to say about the GECO transaction and our C4I strategy later in my prepared remarks. Turning to the numbers. Revenue for the second quarter was a record and increased 35% in total and 11% organically. We now expect 9% to 10% organic growth for this fiscal year, which is up 2 to 3 percentage points from fiscal 2018. Our largest revenue programs in the quarter were F-35, Filthy Buzzard, Predator, the next-generation missile system, and DEWS. We continue to perform well from a bookings perspective also. Total bookings for Q2 increased 29% year-over-year to $173.2 million. Our largest bookings programs included the UAV mission computer, and the next generation ground-based radar. We also booked large orders to F-35, Aegis and MALD Our book-to-bill for the quarter was 1.09, and backlog was a record $522 million, up 39% year-over-year. On the bottom line, adjusted EBITDA was up a strong 39% from Q2 of fiscal '18. Free cash flow increased 279% year-over-year and was in line with our target yield at 50% of adjusted EBITDA. Turning to Slide 4. Mercury's ability…

Thank you, Mark, and good afternoon, again, to everyone. Q2 was another great quarter for Mercury. Bookings revenue, adjusted EBITDA and adjusted EPS increased substantially from Q2 of fiscal '18. Gross margin exceeded our Q2 guidance, and free cash flow was up 279% year-over-year. We concluded the second quarter with record backlog and solid growth momentum. As a result, we're anticipating strong financial performance in the second half of fiscal '19, and we're increasing our fiscal '19 guidance for revenue, adjusted EBITDA, and adjusted EPS. In addition to our organic growth, our strategy of acquiring businesses that fit with our strategy and integrated them into Mercury is delivering results as planned. Our recent acquisitions, Germane and Themis, are continuing to perform well on both the top and bottom lines. The acquisition of GECO Avionics, which closed today, is another example of our strategy in action. As Mark said, it's another important step forward in our plan to expand our presence in the C4I market. With approximately 70 employees and approximately 20 million of revenue, GECO continues to add scale to the Avionics business we've been growing over the past 2 years. Turning now to the metrics on Slide 9. Mercury's total bookings for Q2 increased 29% year-over-year to $173.2 million, driving a 1.09 book-to-bill ratio. We ended the quarter with record backlog of $522 million, up 39% from Q2 fiscal '18. Backlog expected to ship within the next 12 months increased 25% from Q2 last year to $389.1 million. Q2 was a strong quarter for revenue growth, total revenue increased 35% year-over-year to a record $159.1 million, exceeding our guidance of $151.6 million to $156.6 million. Organic revenue was up 11%, and as Mark mentioned, we now expect 9% to 10% organic growth for the year. Gross margin for the…

Thank you. [Operator Instructions] Our first question comes from Peter Arment of Baird. Your line is now open.

Good afternoon, Mark, Mike. Congrats on the quarter. Mark, you mentioned C4I is now 30% of revenues. And then, that continues to progress, obviously. And you mentioned an $800 million kind of opportunity. Can you maybe talk a little more color about, I guess, the market, what you're seeing, and some of the success that you're having early on?

Sure. So I think there are a number of different opportunities that we're seeing. The growth in the C4I is really broken down into 2 major areas, as I kind of described a little bit on the call. The first is in the secure, rugged, rackmount server domain. And here, we've obviously Themis and Germane, and grouping those or combining those two businesses together. We've seen opportunities and upgrades associated with upgrades in the naval subsurface fleets, as well as the naval surface fleet, as well as in airborne applications for those types of capabilities. The second area that we've seen opportunity is in the Avionics processing subsystem domain. And that's really the primary rationale behind the acquisition of GECO that we announced this evening. And that really follows on from the other acquisitions that we've done in this space, those being RTL and CES. And so there, we're going after opportunities in upgrades in mission computers as well as avionics processing subsystems. And one of the unique things that we bring to the table is our ability to be able to combine together the safety certifications and the embedded security. And where we're seeing the opportunities for that is particularly in the shift towards more autonomous systems. So net-net, I think, the shift into that space, the C4I market, which is a much larger market than we've traditionally played in, I think, is presenting a significant amount of opportunity for us, Peter.

Thank you. And our next question comes from Jon Raviv of Citi. Your line is now open.

Hey. Good afternoon, everyone. On the organic growth, certainly appreciate the view to land the 10% organic growth this year. Some of your customers are growing almost at that rate, not quite. But given new design wins pushing around, you're talking about now increasing R&D a bit more, what's the prospect for double-digit organic growth at some point in the future?

So as I said in the prepared remarks, I think the range of organic growth that we're now giving for the year is 9% to 10%. So at the high-end of that, we've already been at double-digit rates. We are expecting, I think, a stronger performance in the second half in bookings, and with some quite significant potential. So we'll see how things evolve. But right now, we feel pretty good about the increase that we've just made and the outlook for the remainder of the year, Jon.

Understood. And then, in terms of the margin for this year, just looking at your full year FY '19 adjusted EBITDA margin guidance, you ticked down a little bit from the last 3 months ago call. Is that mostly due to GECO? Or how much of that is from GECO versus R&D? Maybe versus some mixed changes with the higher growth? Do you think you can sort of level set us on the contributors to the lower margin expectation for this year? Certainly appreciate that the EBITDA number is higher, but just on the percentage number. A lot of people are...

Yes. Sure, Jon. I mean, I think if you look at the guidance that we had before, the midpoint of the EBITDA was about 22.4%. You look at the midpoint of our EBITDA margin now, it's 22.1%. GECO doesn't really have a major impact on that. It's about kind of 0.1%. It's small. So you're looking at -- though going from 22.4%, down to kind of 22.2% on the margin decline. That's really driven by the additional R&D investment that we're making in the second half, when you compare it to our previous guidance. And that's about -- that's just a couple of million, but it has a small impact on the margins, probably 0.3%, something like that. So it's really the R&D, a little bit GECO, but it's really the additional investment. And remember that the CRAD that we've talked about in the past can impact gross margins, but that's offset by the internal R&D. So that's not driving any changes to EBITDA from our previous guidance.

Okay. And then, just a quick follow up on that idea of the CRAD versus the IRAD. I certainly understand how they're sort of the two pieces of – two slices of the same pie. But whether you increase IRAD plans for second half, does that change at all your CRAD wins expectations, so to speak? Or CRAD's running high, but this IRAD happened to be picking up a little bit as well?

So we're increasing IRAD to really accelerate the development of some of our own secure and trusted motherboards, associated with the acquisitions of Themis and Germane. So we see an opportunity of continuing to capture new design wins, and we have made the decision to spend a little bit more money in the second half to accelerate that.

Yes. And to get it - Jon, to get it back into our target model. I mean, you'll see because of all the CRAD, our IRAD in the first half was about 10.3%. And what we want to do is for the opportunities that Mark just mentioned, increased our R&D in the second half to get it back into the range because we're seeing a lot of opportunities.

We are. Right. So I mean, the level of new design win activities I mentioned is literally the highest I've seen since joining the company. CRAD alone is up 62% in Q2 on a year-over-year basis. So there is a lot of new activities underway, and we're well positioned to capture those, which is again, part of the reason that we're actually raising our total revenue guidance organically beyond the acquisitions that we just announced.

Understood. Thanks, guys. I’ll hop back in the queue.

All right. Thank you.

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

Hi, good afternoon, Mark, Mike. Thank you for the time. Just on the Avionics market. How could we categorize how big it is, the addressable market, for you? And then, when we look at the combination of the 3 deals, how they should contribute to the top line?

Sure. So the overall C4I market is slightly over $17 billion, off the top of my head, Sheila, I haven't got the actual breakdown between the various lines, the C2I, the comms market, and the mission computing. But we feel the churn is really across all 3 of those submarkets. And we're actually growing the business substantially in all of them. So it's an area that we focused on strategically, it's an area that we're pretty excited about. As I mentioned in the prepared remarks, we created over an $800 million opportunity pipeline. And the deals that we've done to date, we expect to continue to grow that over time.

Is there any way to think about how big your business is within that?

In terms of the revenue today by market segments, let's have a quick look. So C4I in the fourth -- sorry, in the second quarter, is 30% of total revenue. On an LTM basis, it's around about 27%. So we've created a pretty significant business in really a pretty short space of time. And the good thing about it is that we're obviously able to sell into the same customers on existing programs, as well as into existing customers on new programs. And I think we're bringing the dimension of being able to add security into those solutions. So our customers are pretty excited about the opportunity there.

Sheila, I would just add, if you're looking just at the Avionics, it's really, as Mark said in his prepared remarks, in addition to the whole C4I, it's really CES that is -- that we bought a couple of years ago. And that's really growing well.

That's doubled in size since we bought it.

That's doubled in size. Richland Technologies, which is a smaller acquisition, but gave us really important technology. And then, GECO, today, which we said was about $20 million of revenues. So it's -- we're building up mass in that business, but there's a long way to go and a huge market opportunity.

Yes.

On GECO, who competes for that product line? Would you come against like somebody like a Harris? Or is it tech companies? Who is competing with those guys?

Yes. It's not really our customers, I mean we're selling into the same customer set. We're not looking to compete with our customers directly. But as we've seen elsewhere, many of our customers were actually looking to outsource more of the work that they're currently doing in-house at the subsystem level. And they are focusing on being able to pull together more of the complete solution. So that's the trend that we are pursuing. And we're now pursuing it in the C4I market, as well as in the Sensor and Effector market, which is where we've been historically. So same trend, just different types of computers onboard the platforms.

Sure. And then, last question, I think, Mike, you said, second half free cash flow decelerates, is that right? Or did I misunderstand?

Yes. No -- so free cash flow is still solid. And we still think that free cash flow target of 50% over time is reasonable. For H1, we are right at that level. Working capital as a percentage of revenue is down. So we're happy with where the free cash flow is coming out. What I did say is that we do expect increased capital spending in the second half of the year. That's driven by the consolidation of our West Coast facilities. We're looking at 5% CapEx as a percentage of revenue for the year. We were mid-3% for the first half. So that implies 6% in H2. So we'll have some headwinds, so we might be a little below 50%, but we continue to be happy with how the business is generating cash. And over the long term, we still believe that 50% free cash flow to adjusted EBITDA is a good target for us. But we do have some expansion CapEx in the second half.

Associated with the acquisition integration, which is really what drives our -- the changes in CapEx on a period-to-period basis.

Thank you.

Thank you. And our next question comes from Seth Seifman from JPMorgan. Your line is now open.

Thanks very much. Good evening. Just a couple of quick questions. When you think about that facility consolidation and the work you're doing on the West Coast there, can you lay out kind of the time line? And I guess, maybe, some of the tail on that and whether, as in the past, is there some excess inventory that comes with a consolidation kind of we need to get burned off into the next year, just so we can kind of model that out?

So we expect the opportunity to be complete by back end of this year, early next from an RF perspective. We've got to build out the facility, and then, basically move into it, consolidate some of the operations. We've already gone from three sites down to two, so we closed an additional site -- how long ago was that? Couple of – three quarters ago?

Yes.

And so this is kind of the final phase. We don't expect any inventory write-offs or anything like that associated with it. It's literally just building out capacity on the West Coast to be able to absorb the growth that we see in the business.

Okay. Okay. Okay. And then, apologize if you addressed this, but the additional R&D that you're adding for the second half is focused on which area?

So we're investing pretty modestly. It's kind of a couple of million dollars to really accelerate the development of our own additional secure and trusted motherboards associated with the acquisitions of Themis and Germane.

Okay, great. Thanks very much.

Thank you. Our next question comes from [Pete Stavisky] of Tech Global. Your line is open.

Nice quarter, guys. Hey Mark, the $40 million flight controller contract that you won, it looks like a really nice win, and it sounds like maybe that gave you some upside to get to revenue guidance next year. Can you give us any more detail in terms of whether that's a military platform or a commercial platform? And one thing I wasn't clear about, the $40 million over 10 years in, is that just design? Or is that - or is there production opportunity on top of that as well?

Yes. So we did the military platform. It's a medium altitude UAV, where we won the fight controller mission computer as well as the ground segment. It's working with a non-U.S. front to do that. And that really stems from the acquisition of the CES business back a couple of years ago. So we're working on the development of that. And over time, the program will go into production. So it does have a production element associated with it. It's not really the primary driver of the growth that we're seeing this year. I think the primary driver of the increase in the forecast beyond the acquisition is some of the work that we have won on some next-generation missile systems.

Okay. Okay. Understood. And then, just sorry if I missed this, but GECO, is it going to be accreted to GAAP EPS this year? Or are they a money-losing operation? Could you give a little more color on that?

Yes. No, it's small. So it's effectively on an adjusted EPS basis, just slightly accretive. So $20 million of revenue run rate, but for the year, our guidance has $6 million of revenue. It's about 15% EBITDA margins in there. So a little less than $1 million of EBITDA. And when you look at the expenses, it's really just interest expense so it's making money, but for us, it's relatively immaterial on the EPS line. From a GAAP EPS standpoint, there's, I think, about 700k of amortization just in the numbers. So it might be ever so slightly dilutive there. But on an adjusted EPS basis, it's slightly accretive.

Okay. That's helpful. Last one for me. Just on CRAD, one thing I'm not clear about, what's the percentage of your CRAD revenue? I mean like an '18 or a '19 basis? And I guess, should we assume this could be down in fiscal '20?

So we actually haven't broken out specifically how much it is as a percent of total revenue. But we have increased, particularly, I would say in the last 2 years, as we've seen kind of the increase in the budgets and the focus on our customers modernizing with that customers various systems. And we're, obviously, participating heavily in those upgrades. So CRAD is up 62% in Q2, and it's up 53% on an LTM basis through the end of Q2. So I think it's going to continue in the short-term. It's hard to predict exactly what the growth rate is going to be. But we are seeing a tremendous amount of new design win activity, really, in a number of different areas, significant opportunities in the missile defense domain where we're seeing upgrades of various ground-based radars and new radars coming online that we're participating in. We're seeing upgrades associated with various EYR systems associated with A2AD capabilities. We talked about a little bit about the opportunity that we see in the C4I space around rugged servers and Avionics. Significant opportunities in EW to deal with kind of some of the emerging threats that we see, as well as some small form factors. And then, two other areas that are being pretty rapid growth for us, albeit off a smaller base, is in the smart munitions domain. And then, finally, space, where we've got some very interesting technologies and we're starting to see some new design win activities. So we're involved in a lot of things. We've got some amazing technology that we've been investing in for a period of years now, and our customers see that. And they're supplementing R&D with the some of their own to rapidly adapt that technology to those new and emerging opportunities.

Okay. And just so I'm clear guys, CRAD comes through as either 0 market revenue? Or like low single digit margin revenue? Is that right?

It's lower margin in the lower end of the kind of the target model that we have for gross margins. But it's not zero margin.

Okay. Thanks very much.

Thank you.

Thank you. Our next question comes from Ken Herbert with Canaccord. Your line is now open.

Hi, good afternoon.

Hi, Ken.

Mark, just wanted to ask first, if I look at the, either the quarter 11% organic growth or the full year sort of 9% to 10%, is there any way to parse that out by what you're calling out as the driver. I mean, how much of that would be end market sort of fundamental growth versus either share gains you're seeing or as part of the secular trends you've identified? And is there any way to quantify some of the unique opportunities to Mercury relative to the broader industry growth?

Yes. Not necessarily kind of numerically, but we are seeing broad growth over the majority -- in terms of the 2 major markets, Sensor and Effector and C4I, overall. And then, kind of beneath the covers, if you look at the submarkets, we're pretty much seeing growth across all of our major market segments and with pretty strong book-to-bills expected in them also. Beyond that, I do believe that the trends that we've mentioned around outsourcing is alive and well. If you look at the growth in our subsystems revenue in Q2, it was up 109% year-over-year, and our LTM subsystems revenue was up 62% through the end of Q2, which is, obviously, driven some of it by the acquisition, but a lot of it is also just organic growth where we're capturing share at the subsystem level, either through outsourcing or by taking share. We're clearly taking share for a technology perspective in 2 different areas. One is in RF, where we've talked about historically where there's really a flight to quality, where our customers are struggling with a number of different companies, and we've been quite successful at taking away some of that business. Some of it is next-generation, some of it is business, but it's beginning to move into production. And then, the other area is in secure and trusted computing, where we are now on our fourth generation of embedded security. And what we're seeing is a wave of activity there, and we believe that pure computing is now really beginning to cross the chasm, and Mercury is - with some industry-leading technologies, and other companies don't, and we're beginning to take share in that space as well.

Okay. Great. That's helpful. And then, as I look at Themis and Germane, have you talked about or can you provide any more detail on when you expect, with the ramp there and the improvement, if they start to hit sort of company margin levels? What should we expect -- or how should we view that sort of headwind to taper down over the next few quarters?

We haven't been specific, right, about the actual timing of it. But I'll tell you that the integration of those 2 business is progressing extremely well. I would say, we're actually slightly ahead of where we thought we were going to be, in terms of our integration activities of Themis into Mercury, and then Germane into Themis, and Mercury as a whole. So there's a lot of work underway. The team is performing extremely well. We're seeing a lot of opportunity. And if you would like to comment on that, Mike.

Yes. Ken, what we did say is when we announced the Germane acquisition, which was on our Q4 earnings call, so we closed it in July, that we expected a run rate of $5 million of cost synergies and that we would hit that full run rate by the end of fiscal '20. So that can provide you some guidance in terms of looking at their revenue and those synergies when we think they're going to get back to the EBITDA range. But we haven't provided a specific quarter. But...

We're on track to do.

We're on-track to hit the synergy plan that we announced and talked about on that call when we announced the transaction.

Yes.

Great. That's very helpful. And just one final question. You've talked, Mark, a few times or mentioned that bid and quote activity seems to be the highest you've seen it in quite some time. Have you seen any acceleration now into sort of fiscal '19? And is there any - sort of any reason to expect that, that elevated level of activity wouldn't sort of maintain, at least through calendar '19?

So I don't see a reason why it wouldn't continue. I mean, I think as I said in the prepared remarks, after organic revenue growth target, 2 to 3 points versus last fiscal year, now we're kind of expecting the range of 9% to 10%. There's a lot of new design win activity, and a good example of that are a metric that you can point to is just that increase in CRAD that I just went through the statistics on it earlier. So we feel really good about the position, we feel really good about our capabilities, the markets that we're in, and our ability to continue to take share. Now given the some of the early stages of those design wins, they're obviously not going to go into production for some time because we're working on some next-generation capabilities. But there's a lot of new activity underway.

Great. Thank you very much.

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

Hey, good evening, guys. Thanks for taking the questions, nice quarter. Mark, just to maybe stay on the topic. I mean, you guys have talked now, I mean, there's been a lot of Q&A here about the design wins, the bid and quote activity you just covered being so high. I mean, what are your thoughts on the pending fiscal '20 budget? I mean you've got to feel pretty good here. And I mean, that kind of gets complemented I guess with the missile-defense review, where some of your big programs seem to be getting even more priority? And maybe even if you can talk about, is there going to be any potential opportunity for you guys on the radar and sensors that are going to be needed for both the hypersonic strike and counterstrike systems?

Sure. So multiple questions there. I think, on the budget side, we'll see what ends up playing out for fiscal year '20. Obviously, there's a kind of range of what the alternatives here might be. We continue to believe that if you look over a multiyear period, we're still going to be operating in kind of the low single-digit growth on a compounded basis, depending upon what your starting point is. We also believe, however, that our ability to grow above that, as we have been doing remains very strong. We are seeing opportunities in missile-defense. So we're seeing a, I would say, probably three or four upgrades, as well as new potential missile-defense systems. And I think with our processing capability, we are well positioned in a number of those. We're also involved in a number of next-generation missile systems. I'm not going to mention which ones they are or what type of weapons they are, but a big reason -- or a primary driver of, actually, the increase in organic revenue this fiscal year is being driven by one of those new design wins that is moving relatively quickly. So I think we see a lot of opportunity in missile-defense, in missile systems, whether it be as a replenishment or new technologies and capabilities that need to be added to those systems. We're seeing a lot of work that is underway related to dealing with anti-access capabilities that will lead to investments in new EO/IR systems. We're also seeing similar investments in EW where we think that we're really pretty well positioned. So, yes, I really like how we're positioned right now with respect to how the world is evolving and where we think the monies are going to flow, Mike.

Got it. Got it. Makes sense. And then, maybe just one last one here, and shifting gears, I think, you commented around opportunities for working capital efficiency. I mean, is there anything else you guys are looking at along your supply chain? What could be insourced? I know you've kind of talked about that already on prior calls, but maybe talk more about what you can do to optimize and create more efficiencies in working capital?

Sure. It's just not working capital. So I think as I mentioned in my prepared remarks, right, in Q2, early Q2, Amir Allahverdi joined the company. Amir ran operations for Meggitt and had a very expansive set of factories on a global basis across the world. And Amir was really responsible for introducing what became Meggitt operating system, which is what ended up kind of leaning out their manufacturing operations. One of the biggest changes that's occurred to Mercury, or occurred inside of Mercury over the last 5 years, is the buildup of our own domestic manufacturing capabilities. Some of which were existing that we've expanded, in particular, in RF. Orders are relatively new, such as from the custom microelectronics that we acquired with Microsemi, and then we build out the digital SMT manufacturing facility in Phoenix. So as we are kind of entering into this next phase, it's all about looking at improving not only our working capital efficiencies, but the manufacturing operations themselves. And that work is really just beginning. And that's what we brought Amir onboard today. So we do see an opportunity, and we're already seeing some of the results. I'll give you an example. In the U.S. alone, which is our facility, manufacturing facility, in Phoenix, the new one that we stood top, we had a record output in terms of the amount of COGS that was shipped in the second quarter. And that was a record shipment in terms of the number of boards. We've seen a pretty significant increase in terms of on-time delivery. We've already begun to see a reduction in work-in-progress. So we're on a journey, but it's not just the facility in Phoenix. We're going to go after improvements in all of our manufacturing operations given that we think that they're strategically important to our ability to deliver what our customers’ needs in terms of domestically developing produce technologies, and also the impact it can have on our financials. So that's where we're currently at, Mike.

Got it. Helpful, guys. Thanks a lot.

Thank you.

Thank you. And we do have a follow-up question from Jon Raviv of Citi. Your line is now open.

Thanks for taking the follow-up. I'll keep it brief. Just on capital allocation. GECO looks good. But any perspective on doing something transformative? How you're thinking about equity versus debt funding? And then also, how have conversations changed, if at all, in recent month there. It seems that budget constraints have started away on multiples for this space?

Okay. So I'll start it off, and I'm sure Mike will want to chip in. So we see a very robust pipeline of opportunities, and this particular opportunity, we've been in conversations with the owners of GECO for quite some time. It's a proprietary opportunity that we uncovered and we've worked the relationship and developed the relationship that led to the deal that we announced today. The way which we think about M&A is really thematic. So we've got, as I mentioned, a couple of different themes underway in the C4I space. Those being rugged servers, where we did the 2 significant acquisitions, Themis and Germane, to create one of the industry's leading rugged server manufacturers and developers. And the other theme is the one in Avionics processing, where we prosecuted three acquisitions in the last two fiscal years alone. We're going to continue to acquire in that space. And there are additional opportunities that will expand those themes as they develop. And I'm not going to go into specific details as to the sort of things that we're pursuing there. But we do see the opportunity to create a potentially significant businesses through future M&A. We're also going to continue to acquire in the other part of the market, which is Sensor and Effector. We've done several acquisitions in the RF domain. We are very choosy what type of acquisitions that we do there. And we're looking to not just gain scale for the sake of it, but to have added capabilities that will matter to our customers, with the margin profile as much as what we're trying to do. We've also done work in the custom microelectronics domain. We've dramatically grown the business that we acquired through Micro Semi under Mercury, and we see additional opportunities for us to continue to grow in that domain. And then, beyond that, there are probably 3 or 4, or maybe even more, themes, that we are considering and potentially pursuing at some point. So there's a fair amount of opportunity for us to continue to grow. For Mercury, it always starts with strategy. It's not just about gaining scale, it's about creating value, and how we create value through the strategy that we're pursuing. So I'll throw it over to Mike to maybe kind of add.

Yes. Well, Jon, I'll give you a little bit more. So that's the strategy just from a tactical standpoint. You asked about the pipeline, the pipeline's really active. We're seeing deals of all sizes, small, medium, large. We're very active in terms of sourcing new deals on a proprietary basis. GECO is a great example of that, because M&A is such an important part of our strategy, we have a very active outreach program. And as Mark said, for us, it's just sticking to our strategy in finding good strategic acquisitions, paying fair prices, and then, recognizing the cost of revenue synergies. What we've done a good job at, we think, is being disciplined in prices we've paid over the last couple of years, even when trading multiples were relatively higher or higher than they are today. And acquisition multiples were high as well. So we've passed on quite a few deals over the last couple of quarters and years due to valuation expectations, and prices ultimately paid. We'll see if the recent re-rating of defense trading multiples impacts transaction valuations at all. From our standpoint, we're just going to keep continuing to do what we've been doing. And that's remain disciplined on valuation and acquiring companies that stick with our strategy.

And where we can also really extract cost on revenue synergies. That's been a really important part of our strategy. We're prepared to pay fair market price as -- where we think that we can create value for our shareholders by fully integrating the businesses into Mercury. I think as we outlined in our Investor Day in November, when you look at the growth purchase price versus the net of the acquisitions that we've done over the past 4 or 5 years, there's a substantial delta there. And we think our strategy is working, Jon.

Thanks a lot, guys.

Thank you.

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

Okay. Well, thank you very much for listening this evening. We look forward to speaking to you all again next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.