Mercury Systems Inc · NASDAQ:MRCY
Mercury Systems — Investor Day (December 2015)
55 slides from Mercury Systems's investor day presentation, Dec 2, 2015
Slide 1: Mercury Systems FY16 Investor Day Presentation
© 2015 Mercury Systems, Inc. Mercury Systems FY16 Investor Day Presentation December 2, 2015 Nasdaq MarketSite New York, NY
Slide 2: Forward-looking safe harbor statement
2 © 2015 Mercury Systems, Inc. Forward-looking safe harbor statement This presentation contains certain forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995, including those relating to the products and services described herein. You can identif
Slide 3: Agenda
3 © 2015 Mercury Systems, Inc. © 2015 Mercury Systems, Inc. Agenda • Strategy & Business Update – Mark Aslett President & CEO • Program Update • Financial Update • Q&A
Slide 4: Pioneering a next generation defense electronics company
4 © 2015 Mercury Systems, Inc. …to address the industry's challenges and opportunities Pioneering a next generation defense electronics company… • High-tech commercial business model • Secure and sensor processing subsystems • Serving defense Prime contractor outsourcing needs • Deployed on 300+ pro
Slide 5: Acquisitions have transformed Mercury into a pure play provider
5 © 2015 Mercury Systems, Inc. …provider of outsourced defense electronics subsystems Acquisitions have transformed Mercury into a pure play… • Acquired capability expands total addressable market • Moved up the value chain • Facilitates greater customer outsourcing • Accelerates customer supply cha
Slide 6: US based design, manufacturing and integration footprint
6 © 2015 Mercury Systems, Inc. US based design, manufacturing and integration footprint… …is vital to supply chain trust, integrity and increased outsourcing MDS: Cypress, CA Develops integrated secure, EW and SIGINT subsystems, often including classified application-specific software and IP for the
Slide 7: Deployed on 300+ programs with 25+ Primes
7 © 2015 Mercury Systems, Inc. We are deployed on 300+ programs with 25+ Primes RADAR EW EO/IR – C4I Triton; NATO AGS Global Hawk Aegis Aegis Ashore Patriot F-16 F-35 Global Hawk SEWIP Badger/Buzzard F-15 AH-64 Apache F-35 Fury P-8 F-16 Reaper/Gorgon Stare
Slide 8: Critical steps to growth and pioneering a new model
8 © 2015 Mercury Systems, Inc. Critical steps to growth and pioneering a new model Focused on economic core - defense electronics Divested Non Core Assets Expanded addressable market and moved up value chain Pioneered secure embedded open systems and advanced middleware Built redundant, scalable dom
Slide 9: Defense will likely remain a $500B+ industry
9 © 2015 Mercury Systems, Inc. Defense will likely remain a $500B+ industry… …despite the ongoing political and budget uncertainty Crowding Out of Defense Spending and Investment: Rising interest rates, healthcare and social spending; MilPer expense growth, aging military platforms’ O&M costs rising
Slide 10: Defense budget outlook improving
10 © 2015 Mercury Systems, Inc. 487.5 496.1 525.0 527.0 531.0 544.0 558.0 530.0 495.0 496.0 496.1 534.3 547.2 556.4 564.3 570.0 450 470 490 510 530 550 570 590 2012 2013 2014 2015 2016 2017 2018 2019 2020 PBR16 500 512 Prev BCA 2015 BCA Base Defense budget outlook improving Deal adds $25B GFY16 and
Slide 11: Innovation critical to maintaining technological superiority
11 © 2015 Mercury Systems, Inc. …as near peers increase defense spending and invest asymmetrically Innovation critical to maintaining technological superiority… • Threats rapidly proliferating • The “Three Nots”* – Technological superiority is not assured – R&D is not a variable cost – Time is not r
Slide 12: Prime outsourcing is our largest growth opportunity
12 © 2015 Mercury Systems, Inc. …representing 19x addressable COTS merchant market Prime outsourcing is our largest growth opportunity… • Defense electronics is a $35 billion dollar market • Captive market is 19x COTS merchant supply • Outsourcing growth not tied to increased defense spending • Prim
Slide 13: Investment highlights
13 © 2015 Mercury Systems, Inc. Investment highlights Successful business transformation, double-digit defense revenue growth with improved profitability Proven Management Team Pure play defense electronics company embedded on key growth programs aligned to DoD priorities Leading Market Position Pac
Slide 14: Mercury's vision
14 © 2015 Mercury Systems, Inc. Mercury’s vision is to be the… Leading high-tech commercial provider of affordable secure and sensor processing subsystems designed and made in the USA
Slide 15: How we operate as a high-tech commercial company
15 © 2015 Mercury Systems, Inc. …serving the US defense electronics industry How we operate as a high-tech commercial company… • Internal R&D funds the development of modular, reusable open innovations • Pre-integration improves affordability, time to market • Rapid customization and adaptation to p
Slide 16: Business model built for speed, innovation and affordability
16 © 2015 Mercury Systems, Inc. …as customers seek more affordable outsourced subsystems Business model is built for speed, innovation and affordability… • Traditional COTS board model broken (“Plug-n-Pray”) – Product procurement cost low – Large hidden integration costs – Lower Prime IR&D spending
Slide 17: From Teraflop modules and RFM subassemblies to pre-integrated subsystems
17 © 2015 Mercury Systems, Inc. From highly leveraged Teraflop modules and RFM subassemblies… …to secure servers and pre-integrated sensor processing subsystems Rugged MOSA Teraflop server blade Rugged MOSA solution - servers for the tactical edge ATCA blade server Integrated Microwave Assemblies MO
Slide 18: Factors leading to a unique market position
18 © 2015 Mercury Systems, Inc. • Pre-integrated end-to-end sensor capability unique • Lower integration costs, time, risk • Facilitates Prime outsourcing • DoD mandate • Unique capabilities • Important relationships • Critical programs • 2-3 years ahead of traditional competitors • Intel server cla
Slide 19: Capabilities aligned to DoD investment priorities
19 © 2015 Mercury Systems, Inc. Mercury’s capabilities and opportunity for growth… …are aligned to DoD investment priorities Pacific Pivot: Platforms need improved sensors, autonomy, electronic protection and attack, on-board exploitation. Greater demand for onboard processing Aging Platform Moderni
Slide 20: Company growth drivers
20 © 2015 Mercury Systems, Inc. Defense industry growth drivers translate into specific… …company growth drivers that we are pursuing Outsourced Secure Processing Subsystems: Grow blade-server processing applications. Expand into other mission- critical secure compute applications beyond the sensor
Slide 21: Blade server processing enables new compute applications
21 © 2015 Mercury Systems, Inc. Blade server processing capabilities enable… …expansion into new mission-critical compute applications 1x 20x-30x Typical airborne radar processing application New ground-based ballistic missile defense radar processing application
Slide 22: Acquisitions broadened capabilities across sensor chain
22 © 2015 Mercury Systems, Inc. Acquisitions have broadened capabilities across sensor chain… …yielding new revenue streams via program content expansion Acquire 17% Digitize 4% Process 61% Exploit 12% Other 6% FY15 Revenue (%) Acquire 2% Digitize 9% Process 63% Exploit 3% Other 23% FY09 Revenue (%)
Slide 23: Acquisitions and investments driving opportunity growth
23 © 2015 Mercury Systems, Inc. Acquisitions and investments driving significant opportunity growth • Low-risk content expansion growth strategy • Key production programs • Total potential value grew 2.5x to $4.0B in 3 years • Converted 1.4x of possible to probable value in 3 years • After 3 years,
Slide 24: Strategy and investments have positioned Mercury well
24 © 2015 Mercury Systems, Inc. © 2015 Mercury Systems, Inc. Strategy and investments have positioned Mercury well • Pioneering a next-generation defense electronics business model • Unique technology and capabilities on key production programs • Low-risk content expansion growth strategy with demon
Slide 25: Agenda
25 © 2015 Mercury Systems, Inc. © 2015 Mercury Systems, Inc. Agenda • Strategy & Business Update • Program Update – Didier Thibaud President, Mercury Commercial Electronics (MCE) • Financial Update • Q&A
Slide 26: Program focus driving substantial growth potential
26 © 2015 Mercury Systems, Inc. FY15 FY16 FY17 Production Years Probable Bid vs. Won Expansion Probable Possible Process RFM Total ($M) Total ($M) Aegis Sensor Processing FRP: FY14-25 Won 296 523 Processing Expansion FRP: FY19-25 Bid 57 96 RFM FRP: FY16-25 Won/Bid 46 198 SEWIP Block 2 FRP: FY1
Slide 27: Aegis
27 © 2015 Mercury Systems, Inc. Processing 619 RFM 198 Aegis Integrated radar & missile defense system • 10+ year Lockheed Martin relationship • Domestic installed base Radar processing tech refresh • Well-positioned with new server-class processing and RFM solutions • FMS development and production
Slide 28: SEWIP
28 © 2015 Mercury Systems, Inc. RFM 586 SEWIP Legacy SLQ-32 electronic warfare system upgrade • 10+ year Lockheed Martin relationship • Largest Naval EW upgrade program • Largest Block 2 RFM supplier • CY15 derivative opportunity for FMS and smaller ships • Pursuing electronic attack opportunities o
Slide 29: F-35 Joint Strike Fighter
29 © 2015 Mercury Systems, Inc. Processing 1,101 RFM 255 F-35 Joint Strike Fighter Multi-role combat aircraft for ground attack, aerial recon and air defense missions • Mercury’s multiprocessor technology leadership key factor in program selection • IP licensing of multiprocessor architecture and so
Slide 30: Badger / Buzzard
30 © 2015 Mercury Systems, Inc. Badger / Buzzard Electronic attack systems for Navy/AF vulnerability assessment and tactics training • 20+ year US Navy relationship • Leader in digital radio frequency memory (DRFM) technologies • $42M Badger IDIQ in Q2FY16 • Buzzard: Next-generation advanced DRFM •
Slide 31: E-2D Advanced Hawkeye design win
31 © 2015 Mercury Systems, Inc. Mercury’s technology leadership driving design win E-2D Advanced Hawkeye Navy’s new carrier-based tactical battle management aircraft • Upgrades Radar system, missile defense capabilities, multi-sensor integration • 75 aircraft Navy program; in FRP • Developed prototy
Slide 32: Long Range Discrimination Radar (LRDR)
32 © 2015 Mercury Systems, Inc. Strategic partnership and technology leadership fueling growth Long Range Discrimination Radar (LRDR) New ground-based ballistic missile defense Radar • Long-standing relationship with LM based on Aegis • Designed to protect U.S. from ballistic missile threats • Enhan
Slide 33: Stable base of programs driving long-term visibility
33 © 2015 Mercury Systems, Inc. © 2015 Mercury Systems, Inc. Stable base of programs driving long-term visibility • Designed in on well-funded, long-standing programs of record • Aligned with DoD strategy and in growing areas of the budget • Leveraging long-standing relationships with key strategic
Slide 34: Agenda
34 © 2015 Mercury Systems, Inc. © 2015 Mercury Systems, Inc. Agenda • Strategy & Business Update • Program Update • Financial Update – Gerry Haines CFO • Q&A
Slide 35: Pioneering a next-generation business model
35 © 2015 Mercury Systems, Inc. …creating a unique opportunity for growth and strong returns Pioneering a next-generation business model… • Few subsystem competitors • High barriers to entry • Annuity revenue streams • Primes outsource to lower cost & risk • Value-based innovation, modular design fo
Slide 36: Mercury's position is very strong
36 © 2015 Mercury Systems, Inc. Mercury’s position is very strong… … with growth and profitability outpacing industry averages •Budget deal yields first increases in 5 years •Targeted market segments remain strong • Franchise programs moving into full-rate production •Next-gen programs being awarded
Slide 37: Strong revenue growth and operating leverage
37 © 2015 Mercury Systems, Inc. Strong revenue growth and operating leverage… …yielded dramatic growth in adjusted EBITDA 194 209 235 5% $9.9M 11% $23.5M 19% $44.4M 0 50 100 150 200 250 FY13 FY14 FY15 Revenue to Adjusted EBITDA trends Revenue ($M) Adj. EBITDA (%, $M)
Slide 38: FY13-FY15 revenue CAGR of 10%
38 © 2015 Mercury Systems, Inc. FY13-FY15 revenue CAGR of 10%... …with steady gross margin expansion, expense reduction Notes: • All numbers based on continuing operations. 46 46 50 52 51 51 53 54 54 57 60 64 42% 36% 42% 41% 43% 48% 46% 46% 44% 47% 47% 49% 67% 52% 46% 48% 50% 51% 48% 46% 43% 41% 37%
Slide 39: FY13-FY15 Adjusted EBITDA CAGR of 111%
39 © 2015 Mercury Systems, Inc. FY13-FY15 Adjusted EBITDA CAGR of 111% Notes: • FY13-15 figures are reported in the Company’s fiscal 2015 Form 10-K. • Adjusted EBITDA is income from continuing operations, less interest income and expense, income taxes, depreciation, amortization of acquired intangib
Slide 40: FY11-FY15 backlog CAGR of 24%
40 © 2015 Mercury Systems, Inc. FY11-FY15 backlog CAGR of 24%... …yielded record backlog and revenue coverage exiting FY15 Notes: (1) Revenue Coverage Ratio = 12-month ending backlog/Next 12 months Revenue (or initial revenue estimate for current/future year). (2) Estimate based upon YoY revenue gro
Slide 41: FY16 guidance
41 © 2015 Mercury Systems, Inc. FY16 guidance Notes: (1) The guidance included herein is from the Company’s most recent earnings release and is as of the date of that release. The Company is neither reconfirming such guidance as of the date of this presentation nor assuming any obligations to update
Slide 42: Q1 FY16 vs. Q1 FY15
42 © 2015 Mercury Systems, Inc. Q1 FY16 vs. Q1 FY15 GAAP ($M) Q1FY15 Q1FY16 Change Backlog $205 $218 6% Revenue $54 $58 8% Gross Margin (%) 44% 47% 3 pts Operating Expenses $23.3 $24.4⁽¹⁾ 4.7% Adjusted EPS $0.13 $0.19 $0.06 Adj. EBITDA $8.0 $11.8 48% Notes: (1) Includes $2.1 million of acquisition-r
Slide 43: Q2 FY16 vs. Q2 FY15
43 © 2015 Mercury Systems, Inc. Q2 FY16 vs. Q2 FY15 GAAP ($M) Q2FY15 Q2FY16⁽¹⁾ Change Revenue $57 $58-$61 2%-7% Gross Margin (%) 47% 47%-48% - Operating Expenses $23.5 $23-$24 - Adjusted EPS $0.20 $0.15-$0.18 ($0.05-$0.02) Adj. EBITDA $10.7 $10.0-$11.5 (7%)-7% Notes: (1) The guidance included herein
Slide 44: Achievement of target business model for FY16
44 © 2015 Mercury Systems, Inc. Achievement of target business model for FY16 GAAP FY15 FY16E⁽¹⁾ Revenue 100% 100% 100% Gross Margin 47% ~46%-47% 45%-50% SG&A 21% ~21% Low 20’s R&D 14% ~14% 11%-13% Amortization 3% ~3% 2%-3% Adjusted EBITDA 19% ~19%-20% 18%-22% Current Target Business Model Notes: (1
Slide 45: Guidance: Strong performance track record
45 © 2015 Mercury Systems, Inc. Guidance: Strong performance track record Q1 Q2 Q3 Q4 Reported Guidance Reported Guidance Reported Guidance Reported Guidance 2011 Revenue ($M) 52.1 48.0-50.0 55.5 54.0-55.0 59.9 58.0-60.0 61.2 57.0-59.0 EPS ($) 0.16 0.03-0.06 0.22 0.10-0.12 0.20 0.16-0.18 0.14 0.11-0
Slide 46: Solid balance sheet with zero debt
46 © 2015 Mercury Systems, Inc. Solid balance sheet with zero debt Ample liquidity, unused $200M credit facility, $500M Universal Shelf Notes: (1) Discontinued operations numbers are Mercury Intelligence Systems, which was divested in January 2015. FYE14 FYE15 Q1 FY16 (In millions) Actual Actual Act
Slide 47: Poised for continued, profitable growth
47 © 2015 Mercury Systems, Inc. © 2015 Mercury Systems, Inc. Poised for continued, profitable growth • Strategy, operational discipline, integration, yielded significant operating leverage • Growth and profitability above industry averages • Record backlog enhances forward visibility, facilitates op
Slide 48: Q & A
© 2015 Mercury Systems, Inc. Q & A
Slide 49: Appendix
© 2015 Mercury Systems, Inc. Appendix
Slide 50: Management team
50 © 2015 Mercury Systems, Inc. Management team Since 2007, Mercury management has successfully grown the Company’s defense business, returned the Company to profitability, acquired and integrated three companies, and positioned Mercury as a leading pure-play defense electronics company. • Mark join
Slide 51: Q2 FY16 guidance (as of October 27th)
51 © 2015 Mercury Systems, Inc. Q2 FY16 guidance (as of October 27th) Q2 FY15 Quarter Ending YoY Change December 31, 2015(1) Actual Range Revenue $57 $58-$61 2% - 7% Adjusted EPS $0.20 $0.15-$0.18 ($0.05) to ($0.02) Adjusted EBITDA $10.7 $10.0-$11.5 (7%) - 7% Adj EBITDA Adjustments: Income (loss) fr
Slide 52: Adjusted EPS reconciliation
52 © 2015 Mercury Systems, Inc. Adjusted EPS reconciliation (000’s) FY13 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 FY15 Q1 FY16 Diluted net earnings (loss) per share ⁽¹⁾ $ (0.46) $ (0.13) $ 0.02 $ 0.09 $ 0.14 $ 0.18 $ 0.44 $ 0.06 Income (loss) from continuing operations $ (13,782) $ (4,072) $ 717 $ 2,886
Slide 53: Adjusted EBITDA reconciliation
53 © 2015 Mercury Systems, Inc. Adjusted EBITDA reconciliation (000'S) FY13 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 FY15 Q1 FY16 Income (loss) from continuing operations $(13,782) $ (4,072) $ 717 $ 2,886 $ 4,694 $ 6,132 $ 14,429 $ 1,960 Interest expense (income), net 31 40 5 4 1 3 13 (22) Tax provision
Slide 54: Sales-related definitions
54 © 2015 Mercury Systems, Inc. Sales-related definitions Design Win A design win means that the customer has selected us to provide services, products, or intellectual property for a program of record or equivalent. In addition, the customer has won the program and we have an initial purchase order
Slide 55: Glossary
55 © 2015 Mercury Systems, Inc. Glossary AEGIS Aegis Ballistic Missile Defense System EDM Engineering Development Model MOSA Modular Open Systems Architecture AESA Active Electronically Scanned Array EMD Engineering and Manufacturing Development O&M Operations & Maintenance AGS Alliance Ground Surve