Mercury Systems(MRCY)2023-05-03 03:44Financial Data and Key Metrics Changes - Q3 total revenue increased by 4% year-over-year, reaching approximately 253 million in Q3 2022 [41][11] - GAAP net income for Q3 was 0.09 per share, an increase from 0.07 per share in the same quarter last year, primarily due to a tax benefit of over 43.5 million, down from 245 million, yielding a book-to-bill ratio of 0.93, which is lower than the first half of the fiscal year [46][13] - Q3 backlog grew by 10% year-over-year, indicating strong future revenue visibility [40][13] Market Data and Key Metrics Changes - The defense spending outlook remains positive, with expectations for growth in both domestic and international defense spending [35][36] - Supply chain conditions are beginning to improve, with a 30% reduction in supplier decommits observed in Q3 [64][31] - Semiconductor lead times have decreased from a peak of 52 to 99 weeks to a range of 13 to 78 weeks, although constraints still exist in certain areas [31][32] Company Strategy and Development Direction - The company is focused on transitioning from development to production contracts, which is expected to improve gross margins and cash flow in fiscal 2024 [75][76] - A strategic review of alternatives is ongoing, with no new developments disclosed during the call [9] - The company aims to leverage its strong backlog and increased defense spending to drive high single-digit to low double-digit revenue growth in the coming years [80][75] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about overcoming current execution challenges and returning to pre-pandemic margin levels as supply chain conditions normalize [26][76] - The company anticipates a significant reduction in unbilled receivables and improved cash flow as development programs are completed [105][66] - Management highlighted that the challenges faced are not related to end-market demand, which remains strong [26][31] Other Important Information - The company expects fiscal 2023 revenue to be in the range of 1.01 billion, reflecting flat to 2% growth year-over-year [70] - Free cash flow is expected to be negative for fiscal 2023, influenced by cash outflows related to R&D tax legislation [72][62] - The company has made progress in improving manufacturing yields and expects to see continued improvements in Q4 and fiscal 2024 [28][31] Q&A Session Summary Question: Concerns about the change in adjusted EBITDA guidance - Management explained that delays in development programs and follow-on award delays for high-margin business contributed to the change in guidance [87][88] Question: Future bidding approach for development programs - Management indicated a shift towards cost-plus fixed fee structures for new development programs where feasible, to mitigate risks associated with cost growth [90][89] Question: Specific programs driving current challenges - Management refrained from disclosing specific programs but confirmed that the capabilities being developed are critical and unique [94][92] Question: Working capital release expectations - Management projected a reduction of about 60 million expected from other programs [104][99] Question: Confidence in resolving yield issues - Management expressed confidence in resolving yield issues and ramping up production, with significant improvements already noted [108][107]