Mercury Systems(MRCY) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Mercury's Q2 revenue grew 4% year-over-year, aligning with guidance, while organic revenue turned positive with a 1% increase compared to a 13% decline in Q2 of fiscal '22 [5][13] - GAAP net loss for Q2 was $10.9 million, with adjusted EBITDA at $35.7 million, down 6% from the previous year due to lower gross margins [55][26] - Free cash flow for Q2 was approximately $22 million, despite delays in customer payments [27][26] Business Line Data and Key Metrics Changes - Bookings for Q2 increased 14% year-over-year, with significant contributions from F-35 and F-18 programs, marking the largest booking in the company's history at nearly $60 million for the F-35 order [6][32] - Backlog grew 17% year-over-year to a record $1.12 billion, providing solid visibility for future growth [13][32] Market Data and Key Metrics Changes - The defense appropriations bill was approved, leading to substantial spending increases in response to national security threats, although risks to FY '24 discretionary spending remain [45][46] - The semiconductor supply chain continues to face challenges, with lead times ranging from 36 to 72 weeks, although some improvements were noted [47][68] Company Strategy and Development Direction - The company is focused on executing its strategic plan for growth and value creation, including exploring strategic alternatives such as a potential sale [10][40] - The five-year plan includes margin expansion through better execution and improved program mix, aiming for stronger profitability and working capital efficiency [33][46] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about returning to organic growth for the year, despite short-term program delays and inefficiencies [12][44] - The outlook for defense spending remains positive, with expectations for increased domestic and international defense budgets [46][87] Other Important Information - The company is undergoing leadership transitions, with the appointment of an interim CFO and a search for a permanent successor [11][22] - The impact of R&D tax legislation is expected to affect cash flow in the second half of the fiscal year [30][27] Q&A Session Summary Question: What is the status of the impact program savings? - Management indicated that the impact program is on track, with savings expected to offset some headwinds faced [35] Question: How does the free cash flow guidance split between Q3 and Q4? - Free cash flow is expected to be breakeven to slightly positive in Q3, with a stronger performance anticipated in Q4 due to higher net income and working capital release [73][76] Question: What are the expectations for bookings in the second half of the year? - Management expects strong bookings in H2, with a positive book-to-bill ratio, driven by a robust demand environment [111][106] Question: How is the company addressing semiconductor supply chain issues? - Management noted incremental improvements in lead times but emphasized that significant challenges remain, with expectations for better conditions in the second half of fiscal '24 [68][119] Question: What pricing actions have been taken to mitigate inflation? - The company implemented across-the-board price increases on commercial products and is focused on strategic pricing to offset inflationary pressures [81][103]