CHELMSFORD, Mass., Jan. 25 /PRNewswire-FirstCall/ -- Mercury Computer Systems, Inc. reported results for its second quarter ended December 31, 2006.
Second quarter revenues were $57.9 million, a decrease of 7% from the prior year's second quarter and a sequential increase of 18% from the first quarter of the current fiscal year.
Second quarter GAAP operating losses were $7.5 million. Second quarter GAAP net losses were $1.0 million. The GAAP net losses were favorably impacted by the receipt of a $2.4 million settlement of litigation relating to a foreign subsidiary and a tax loss benefit of $3.8 million. GAAP diluted losses per share were $0.05 for the second quarter. GAAP net losses include $5.2 million in charges, consisting of $3.1 million in stock-based compensation costs, $1.8 million in amortization of acquired intangible assets, and $0.3 million in restructuring costs. Excluding the impact of these charges, second quarter non-GAAP operating losses were $2.3 million. Second quarter non-GAAP net income was $0.2 million. Non-GAAP net income was favorably impacted by $2.6 million other income, which included the $2.4 million litigation settlement, and was adversely impacted by a $0.1 million tax provision. Non- GAAP diluted earnings per share were $0.01 for the second quarter.
Cash flows from operating activities were a net outflow of $5.3 million in the second quarter. Cash, cash equivalents, and marketable securities as of December 31, 2006 were $136.5 million.
"We continue to be buffeted by head winds in our primary markets," said Jay Bertelli, President and Chief Executive Officer of Mercury Computer Systems, Inc. "However, the investments we have been making in technology such as the Cell BE processor and investments in markets such as 3D PACS in Life Sciences are generating design wins, confirming that our strategy is working."
Backlog
The Company's total backlog at the end of the second quarter was $93.3 million, a $12.5 million increase over the same quarter last year, and a $3.5 million sequential decrease from the first quarter of the current fiscal year. Of the current total backlog, $79.5 million represents shipments scheduled over the next 12 months. The book-to-bill ratio was 0.94 for the quarter.
Revenue by Segment - Defense -- Revenues for the quarter from Defense were $26.8 million, representing 46% of the Company's total revenues. Revenues in the defense business unit continue to be adversely affected by the shift in government funding from procurement of intelligence, surveillance and reconnaissance (ISR) systems to more immediate and tactical requirements. - Commercial Imaging and Visualization -- Revenues for the quarter from Commercial Imaging and Visualization were $11.3 million, representing 20% of the Company's total revenues. The continued decline in the 2D reconstruction legacy business was partially offset by growth in the 3D visualization business. - Advanced Solutions -- Revenues for the quarter from Advanced Solutions were $14.1 million, representing 24% of the Company's total revenues. Advanced Solutions experienced continued strength in its traditional semiconductor business and year-over-year growth in sales to communications customers. - Modular Products and Services -- Revenues for the quarter from Modular Products and Services were $5.7 million, representing 10% of the Company's total revenues. Business Outlook
This section presents our current expectations and estimates, given current visibility, on our business outlook. It is possible that actual performance will differ materially from the ranges and estimates given -. either on the upside or on the downside. Investors should consider all of the risks, including those listed in the Safe Harbor Statement below, with respect to these estimates, and make themselves aware of the risk factors that may impact the Company's actual performance.
For the full year, the Company currently expects revenues to approximate $230 million. This represents a decline from the previously guided range of $235 million to $245 million.
The Company currently expects fiscal year 2007 GAAP diluted losses per share to be approximately $0.85. Excluding the impact of stock-based compensation costs, amortization of acquired intangible assets, restructuring costs, and in-process research and development charges, the Company currently expects fiscal year 2007 non-GAAP diluted losses per share to be approximately $0.13.
For the third quarter of fiscal year 2007, revenues are currently expected to approximate $55 million.
The Company currently expects third quarter fiscal 2007 GAAP diluted losses per share to be approximately $0.31. Excluding the impact of stock- based compensation costs and amortization of acquired intangible assets, third quarter fiscal year 2007 non-GAAP diluted losses per share are currently expected to be approximately $0.18.
Recent Highlights
In the second quarter of fiscal 2007, the Company reported several new customers in life sciences, increasing interest in Mercury's Cell Broadband Engine(TM) (BE) processor-based solutions, and continued adoption of industry- standard technology which Mercury helped to create. These trends signal the growing need for performance acceleration, as well as a growing transition from in-house design and build to third-party solutions, for computationally intensive applications. Organizations are increasingly moving toward optimized, more cost-effective solutions that help to free up valuable in- house resources and deliver faster time to market; and as evidenced in the second quarter, they are turning to Mercury.
In November, Mercury announced three strategic relationships with leading medical imaging OEMs to provide a broad range of solutions based on the Visage(TM) PACS (picture archiving and communications system), Visage VS (volume rendering), and Visage CS (client/server) offerings. BRIT Systems, Koning Corporation, and Genesis Digital Imaging signed agreements with Mercury to integrate Visage systems into their PACS/RIS (radiology information system), scanner equipment, and PACS product lines, respectively. Mercury's robust Visage product line will enable customers to deliver significantly faster and more efficient radiological workflow throughout hospitals and clinical enterprises, outstanding image quality for 2D, 3D, and 4D data, and web-enabled image distribution.
Mercury also signed a strategic cooperation with The Institute of Medical Physics (IMP) of Erlangen for the joint development and commercialization of medical imaging technology deployed on the Cell BE processor. Preliminary results show a 100x improvement in CT (computed tomography) reconstruction speed as well as enhanced visualization of medical imaging data.
Mercury is working with numerous technology companies and educational institutions in leveraging the performance capabilities of the Cell BE processor, to solve various specialized application challenges in seismic computation, video processing, various semiconductor process applications, synthetic aperture radar (SAR), molecular modeling in biotech, and ray tracing. Organizations such as the Lawrence Livermore National Laboratory and the Software Integration and Visualization Office (SIVO) at the NASA Goddard Space Flight Center have purchased Mercury Cell BE processor-based hardware, software, and/or optimization services. Other companies highlighted in second quarter announcements include Boston University and Mentor Graphics.
In November, preliminary results of an order-of-magnitude performance improvement were announced for the joint development effort with the Structural Bioinformatics Lab of Boston University (BU), in which the Mercury/BU team successfully migrated a specialized biotech application to the Cell BE processor, in a smaller system footprint over the previous configuration. The BU-developed approach to drug design is now more commercially viable, and has the potential to revolutionize the cost and pace of new drug development for the industry.
Also in November, Mercury announced its partnership with Mentor Graphics, the worldwide leader in EDA (electronic design automation) solutions, and the development of the first Cell BE processor-based platform for the EDA market. The fully integrated platform combines a standard compute cluster with the Cell BE processor and optimized software, to cost-effectively deliver up to a 20x increase in compute capacity and speed now required for resolution enhancement tool (RET) applications at and below 45nm.
Mercury is actively driving the adoption of the Cell BE processor through a number of other deep customer engagements, and participation in numerous technical forums. To date, Mercury technology leaders have presented on the programmability, performance, and implementation of the Cell BE processor in 44 technology sessions across the globe.
Also in the quarter, Mercury furthered adoption of industry-standard interconnect technology with the selection by Applied Micro Circuits Corporation (AMCC) of Mercury Serial RapidIO(R) Verification Intellectual Property (IP) and Serial RapidIO IP core products. Engineers at AMCC, a leader in network and embedded PowerPC(R) processing, optical transport and storage solutions, intend to use the verification products at the pre-silicon stage to model and simulate interactions with other interfaces in the chip design, enabling more rapid integration of RapidIO technology for faster time to market.
Going into the third quarter, Mercury introduced VistaNav(R)-SSR, a fully integrated Unmanned Aircraft System (UAS) for cost-effective remote sensing applications. VistaNav-SSR (Smart Surveillance & Reconnaissance) comprises a ground station, integrated VistaNav synthetic vision system, a small unmanned aerial vehicle (UAV), and various electronic sensor systems. It is designed to enable customers to perform very high-performance missions at an affordable cost, while significantly minimizing human error, and human fatalities, in applications that include oil and gas pipeline monitoring and forest fire detection.
Conference Call Information
Mercury will host a conference call on Thursday, January 25, 2007 at 5:00 p.m. ET to discuss the second quarter 2007 results and review the financial and business outlook for the remainder of the year.
Use of Non-GAAP (Generally Accepted Accounting Principles) Financial Measures
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides non-GAAP financial measures adjusted to exclude certain specified charges, which the Company believes are useful to help investors better understand its past financial performance and prospects for the future. However, the presentation of non-GAAP financial measures is not meant to be considered in isolation or as a substitute for financial information provided in accordance with GAAP. Management believes these non-GAAP financial measures assist in providing a more complete understanding of the Company's underlying operational results and trends, and management uses these measures along with their corresponding GAAP financial measures to manage the Company's business, to evaluate its performance compared to prior periods and the marketplace, and to establish operational goals. A reconciliation of GAAP to non-GAAP financial measures discussed in this press release, and a detailed explanation of each of these non-GAAP adjustments, is contained in the attached exhibits.
Forward-Looking Safe Harbor Statement
This press release contains certain forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995, including those relating to fiscal 2007 business performance and beyond. You can identify these statements by our use of the words "may," "will," "should," "plans," "expects," "anticipates," "continue," "estimate," "project," "intend," and 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, 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 the U.S. 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 outsourced components, inability to fully realize the expected benefits from acquisitions or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, and difficulties in retaining key customers. These risks and uncertainties also include such additional risk factors as are discussed in the Company's recent filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended June 30, 2006. The Company cautions readers not to place undue reliance upon any such forward- looking statements, which speak only as of the date made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.
Mercury Computer Systems, Inc. -- Where Challenges Drive Innovation
Mercury Computer Systems is the leading provider of computing systems and software for data-intensive applications that include image processing, signal processing, and visualization. With a strong commitment to innovation, our expertise in algorithm optimization, systems development, and silicon design is blended with software application knowledge and industry-standard technologies to solve unique computing challenges. We work closely with our customers to architect solutions that have a meaningful impact on everyday life: detecting aneurysms; designing safer, more fuel-efficient aircraft; identifying security threats; discovering oil; developing new drugs; and visualizing virtually every aspect of scientific investigation.
Mercury's comprehensive, purpose-built solutions capture, process, and present data for the world's largest medical imaging companies, 8 of the 10 top defense prime contractors, and other leading Fortune 500 and mid-market companies in semiconductor, energy, telecommunications, and other industries. Our dedication to performance excellence and collaborative innovation continues a 23-year history in enabling customers to stay at the forefront of the markets they serve.
Cell Broadband Engine is a trademark of Sony Computer Entertainment Inc. Visage and VistaNav are trademarks of Mercury Computer Systems, Inc. Other product and company names mentioned may be trademarks and/or registered trademarks of their respective holders.
MERCURY COMPUTER SYSTEMS, INC. UNAUDITED CONSOLIDATED BALANCE SHEETS (in thousands) December 31, June 30, 2006 2006 Assets Current assets: Cash and cash equivalents $16,736 $22,983 Marketable securities 73,916 113,057 Accounts receivable, net 41,449 34,518 Inventory 26,149 19,870 Deferred tax assets, net 6,496 6,495 Prepaid expenses and other current assets 7,655 4,226 Total current assets 172,401 201,149 Marketable securities 45,882 26,162 Property and equipment, net 30,741 32,091 Goodwill 93,971 91,850 Acquired intangible assets, net 19,947 22,876 Deferred tax assets, net 9,513 7,535 Other non-current assets 4,395 4,783 Total assets $376,850 $386,446 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $18,224 $14,196 Accrued expenses 10,097 8,236 Accrued compensation 9,506 9,146 Notes payable and current capital lease obligation 60 10,067 Income taxes payable 1,574 3,247 Deferred revenues and customer advances 13,883 12,844 Total current liabilities 53,344 57,736 Notes payable and non-current capital lease obligation 125,042 125,627 Accrued compensation 1,741 1,564 Deferred tax liabilities, net 7,852 8,732 Other long-term liabilities 979 798 Total liabilities 188,958 194,457 Shareholders' equity: Common stock 212 210 Additional paid-in capital 84,346 77,999 Retained earnings 101,120 113,808 Accumulated other comprehensive income (loss) 2,214 (28) Total shareholders' equity 187,892 191,989 Total liabilities and shareholders' equity $376,850 $386,446 MERCURY COMPUTER SYSTEMS, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Three months ended Six months ended December 31, December 31, 2006 2005 2006 2005 Net revenues $57,920 $62,501 $106,867 $129,401 Cost of revenues (1) 25,249 23,699 47,197 48,218 Gross profit 32,671 38,802 59,670 81,183 Operating expenses: Selling, general and administrative (1) 22,938 21,215 43,621 41,374 Research and development (1) 15,131 14,834 29,584 30,708 Amortization of acquired intangible assets 1,777 2,521 3,549 4,041 In-process research and development - - 3,060 548 Restructuring and impairment of long-lived assets 287 - 1,056 - Total operating expenses 40,133 38,570 80,870 76,671 (Loss) income from operations (7,462) 232 (21,200) 4,512 Interest income 1,601 1,483 3,399 3,052 Interest expense (1,594) (1,050) (2,548) (2,086) Other income (expense), net 2,605 (24) 2,622 (29) (Loss) income before income taxes (4,850) 641 (17,727) 5,449 Income tax (benefit) provision (3,815) (592) (5,039) 1,144 Net (loss) income $(1,035) $1,233 $(12,688) $4,305 Net (loss) income per share: Basic $(0.05) $0.06 $(0.60) $0.21 Diluted $(0.05) $0.06 $(0.60) $0.20 Weighted average shares outstanding: Basic 21,174 21,006 21,150 20,984 Diluted 21,174 21,376 21,150 21,435 (1) Includes stock-based compensation expense, which was allocated as follows: Cost of Revenues $122 $22 $51 $168 Selling, general and administrative $2,378 $1,599 $4,135 $2,976 Research and development $590 $374 $1,128 $935 MERCURY COMPUTER SYSTEMS, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Three months ended Six months ended December 31, December 31, 2006 2005 2006 2005 Cash flows from operating activities: Net (loss) income $(1,035) $1,233 $(12,688) $4,305 Depreciation and amortization 4,533 4,888 8,939 8,678 In-process research and development - - 3,060 550 Other and non-cash items, net 1,445 (4,767) 2,914 2,327 Changes in operating assets and liabilities (10,252) 1,289 (12,971) 4,483 Net cash (used in) provided by operating activities (5,309) 2,643 (10,746) 20,343 Cash flows from investing activities: Sales (purchases) of marketable securities, net 13,638 7,949 19,903 48,781 Purchases of property and equipment (1,545) (2,842) (4,076) (5,399) Acquisitions, net of cash acquired, and acquired intangibles (115) (2,095) (1,612) (69,535) Net cash provided by (used in) investing activities 11,978 3,012 14,215 (26,153) Cash flows from financing activities: Proceeds from employee stock option and purchase plans 586 3,337 1,058 4,789 Repurchases of common stock (50) (6,029) (69) (12,284) Payments of principal under notes payable and capital leases, net (9,858) (254) (10,704) (462) Gross tax windfall from stock- based compensation 25 97 46 180 Net cash used in financing activities (9,297) (2,849) (9,669) (7,777) Effect of exchange rate changes on cash and cash equivalents 24 125 (47) (16) Net (decrease) increase in cash and cash equivalents (2,604) 2,931 (6,247) (13,603) Cash and cash equivalents at beginning of period 19,340 26,609 22,983 43,143 Cash and cash equivalents at end of period $16,736 $29,540 $16,736 $29,540 UNAUDITED SUPPLEMENTAL INFORMATION - RECONCILIATION OF GAAP TO NON-GAAP MEASURES The Company provides non-GAAP operating (losses) income, non-GAAP net income (losses), and non-GAAP basic and diluted earnings (losses) per share as supplemental measures to GAAP regarding the Company's operational performance. These financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. The adjustments to these non-GAAP financial measures, and the basis for such adjustments, are outlined below: Stock-based compensation expense. The Company incurs expense related to stock-based compensation included in its GAAP presentation of cost of revenues, selling, general and administrative expense and research and development expense. Although stock-based compensation is an expense of the Company and viewed as a form of compensation, these expenses vary in amount from period to period, and are affected by market forces that are difficult to predict and are not within the control of management, such as the market price and volatility of the Company's shares, risk-free interest rates and the expected term and forfeiture rates of the awards. In accordance with SFAS No. 123R, stock-based compensation expense is calculated as of the grant date of each stock-based award, and generally cannot be changed or influenced by management after the grant date. Management believes that exclusion of these expenses allows comparisons of operating results that are consistent with periods prior to the Company's adoption of SFAS No. 123R, and allows comparisons of the Company's operating results to those of other companies, both public, private or foreign, that have not adopted SFAS No. 123R, are not required to adopt SFAS No. 123R, or have adopted SFAS No. 123R at a later date than the Company. Amortization of acquired intangible assets. The Company incurs amortization of intangibles related to various acquisitions it has made in recent years. These intangible assets are valued at the time of acquisition, are then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management after the acquisition. Management believes that exclusion of these expenses allows comparisons of operating results that are consistent over time for both our newly-acquired and long-held businesses. In-process research and development. The Company incurs in-process research and development expenses when technological feasibility for acquired technology has not been established at the acquisition date and no future alternative use for such technology exists. These costs do not relate to the Company's ongoing operations and generally cannot be changed or influenced by management at the time of or after the acquisition. Management believes that exclusion of these expenses allows comparisons of operating results that are consistent over time for both our newly- acquired and long-held businesses. Restructuring and impairment of long-lived assets. The Company incurs restructuring charges in connection with management's decisions to undertake certain actions to realign operating expenses through workforce reductions and the closure of certain Company facilities. The Company incurs impairment charges of intangible assets based on events that may or may not be within the control of management. Management believes these items are outside the normal operations of the Company's business and are not indicative of ongoing operating results, and that exclusion of these expenses allows comparisons of operating results that are consistent across past, present and future periods. Adjustments for related tax impact. Finally, for purposes of calculating non-GAAP net income (losses) and non-GAAP basic and diluted earnings (losses) per share, management adjusts the provision (benefit) for income taxes to tax effect the non-GAAP adjustments described above as they have a significant impact on the Company's income tax provision (benefit). Management excludes the above-described expenses and their related tax impact from its internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to the Company's board of directors, determining the portion of bonus compensation for executive officers and other key employees based on operating performance, evaluating short-term and long-term operating trends in the Company's operations, and allocating resources to various initiatives and operational requirements. The Company believes that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in its financial and operational decision-making. These non-GAAP financial measures have not been prepared in accordance with GAAP, and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. These non- GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. The Company expects to continue to incur expenses similar to the non-GAAP financial adjustments described above, and investors should not infer from the Company's presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring. The following tables reconcile the non-GAAP financial measures to their most directly comparable GAAP financial measures. (in thousands, except per share data) Three months ended Six months ended December 31, December 31, 2006 2005 2006 2005 (Loss) income from operations $(7,462) $232 $(21,200) $4,512 Stock-based compensation 3,090 1,995 5,314 4,079 Amortization of acquired intangible assets 1,777 2,521 3,549 4,041 In-process research and development - - 3,060 548 Restructuring and impairment of long-lived assets 287 - 1,056 - Non-GAAP (loss) income from operations $(2,308) $4,748 $(8,221) $13,180 Three months ended Six months ended December 31, December 31, 2006 2005 2006 2005 Net (loss) income $(1,035) $1,233 $(12,688) $4,305 Stock-based compensation 3,090 1,995 5,314 4,079 Amortization of acquired intangible assets 1,777 2,521 3,549 4,041 In-process research and development - - 3,060 548 Restructuring and impairment of long-lived assets 287 - 1,056 - Tax impact of excluding the above items (3,906) (2,139) (3,615) (3,091) Non-GAAP net income (loss) $213 $3,610 $(3,324) $9,882 ` Non-GAAP net income (loss) per share: Basic $0.01 $0.17 $(0.16) $0.47 Diluted $0.01 $0.16 $(0.16) $0.43 Non-GAAP weighted average shares outstanding: Basic 21,174 21,006 21,150 20,984 Diluted (1) 21,464 25,511 21,150 25,570 (1) When calculating diluted earnings per share, convertible debt must be assumed to have converted if the effect on EPS would be dilutive. Assuming a 30% tax rate, dilution occurs when net income is $3.0 million per quarter. Accordingly, for non-GAAP net income for the three months ended December 31, 2006, diluted shares exclude the conversion of the convertible debt as the effect would be anti-dilutive. For the three months ended December 31, 2005, diluted shares assume the conversion of the convertible debt as the effect would be dilutive. Accordingly, for the three months ended December 31, 2005, 4.1 million shares have been included in diluted shares and $0.6 million of net interest expense and deferred financing costs have been added back to net income for the diluted earnings per share calculation. MERCURY COMPUTER SYSTEMS, INC. RECONCILIATION OF FORWARD-LOOKING GUIDANCE Year ending June 30, 2007 Earnings Per Share - Diluted GAAP expectation (0.85) Adjustment to exclude stock-based compensation 0.50 Adjustment to exclude amortization of acquired intangible assets 0.33 Adjustment to exclude in-process research and development 0.15 Adjustment to exclude restructuring and impairment of long-lived assets 0.05 Adjustment for tax impact (0.31) Non-GAAP expectation (0.13) RECONCILIATION OF FORWARD-LOOKING GUIDANCE Quarter ending March 31, 2007 Earnings Per Share - Diluted GAAP expectation (0.31) Adjustment to exclude stock-based compensation 0.13 Adjustment to exclude amortization of acquired intangible assets 0.08 Adjustment for tax impact (0.08) Non-GAAP expectation (0.18)
Mercury Computer Systems, Inc.
