Q1 2021 Mercury Systems Inc Earnings Call
Good day, everyone and welcome to the Mercury Systems' first quarter fiscal 2021 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 Gruber. Please go ahead Sir.
Good afternoon, and thank you for joining us with.
With me today is our president and Chief Executive Officer, Mark Aslett.
If youve not received a copy of the earnings press release, we issued earlier. This afternoon, you can find it on our website at MRC wide dot 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 two 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.
Forward looking statements should be considered in conjunction with the cautionary statements on slide two.
In the earnings press release, and the risk factors included in Mercury's SEC filings.
I'd also like imagine 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 todays 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 three.
Thanks, Mike Good afternoon, everyone and thanks for joining us before we start I'd like to extend my appreciation to the entire book, reaching and maintaining their focus on execution and results during a very challenging time.
I'm, sorry employees and the outstanding work that they did mercury continued to perform extremely well during the first quarter I will discuss in my business update.
After that Mike he reviews, the financials and guidance and then we'll open it up your questions.
Let me is off to a solid start in fiscal 21, we continue to invest for the future no people technologies and capabilities at.
At the same time, we delivered double digit organic on total company revenue growth with strong bottom line results.
We came in above the high end about guidance for revenue net income adjusted EBITDA EPS and adjusted Dps.
Mercury's design wins amounted to more than $300 million, an estimated lifetime Bali.
Although the risk associated with Cobian are increasing we're positive about the outlook and raising our full year fiscal 20 warmed guidance.
The business model is performing extremely well.
Strategy and technology are aligned with the major industry drivers and trends and new business conduction conditions remain robust.
M&A activity has picked up on with nearly $1 billion of financial capacity, we are well positioned to pursue our pipeline of opportunities.
Turning to our Q1 financial highlights on slide four our results continue to reflect the three fundamental trends that we've discussed in the past supply chain de layering by the government and the primes, the primes flight to quality supplies and the shift to outsourcing by our customers the subsystem level.
A full stride and the government increased focus on creating a domestic supply chain to secure and trusted advanced electronics designed and built in the U.S.
For the first quarter Mercury's total bookings decreased 7% compared with the strong Q1 last year.
So the last 12 months bookings raw approximately 15% a book to Bill was approximately one dollar for the first quarter and want don't want full for the last 12 months.
We currently expect to deliver a strong second hall, leading to a positive book to bill for the full fiscal year.
As Mike will discuss in detail, we expect fiscal 20 warm to be another year of double digit growth in total company revenue and adjusted EBITDA.
We expect this growth to be driven by high single digit to low double digit organic revenue growth in line with our long term strategy.
Our backlog at the end of Q1 was up 16% year over year, not 12 month forward revenue coverage is strong.
Our largest bookings programs in the quarter with C.P.S.P. two d. Hawkeye another new classified radar program on the F 35.
We continue to believe that Mercury is targeting the right parts of the market driven not by all participation in more than 300 different programs and platforms.
Revenue for Q1 increased 16% in total and 12 to central government to year over year.
Our largest revenue programs in the quarter with a new classified radar program C.D.S. SEAWIP and easy to de Hawkeye.
In addition to having many more programs in the past we have much greater program diversification.
No single program accounts for more than 4% of total revenue this fiscal year. So.
Similarly, as we look out over the next five years, we expect no single program to kind of more than 5% of total revenue.
That's why we continue to deliver strong results on the bottom line in Q1, GAAP net income was down 18% and adjusted EBITDA was up 16% year over year, both exceeding the high end of our guidance.
Free cash flow came in at 28% of adjusted EBITDA, reflecting increased inventory on the employee health and safety expenses related to Cove. It.
Moving to slide five we successfully managed cobot related risks for the past eight months.
We believe that Mercury is well positioned to continue doing so.
Since the earliest days the pandemic, we leaned forward to protect the health safety and livelihoods of our employees, while delivering a lock commitments to our customers and shareholders.
Most everyone in the company, who can work from home has been doing so since March.
We've continued to perform well attracting talented people to help grow the business.
Looking forward, we believe that Mercury's coated risks tied mainly to our manufacturing operations and supply chain. That's.
Both of which we continue to manage effectively.
There's risk associated with the overall defense budget environment as well.
We were very quick to implement cobot safety protocols dot money flashing facilities.
As time has progressed, we proactively adjusted those protocols in line with the evolving science and data, putting our employees health and safety at the center of bought decision making.
We've implemented cobot symptom checking in temperature screening for everyone, who went dissolve facilities along with monitory mosquitoes.
We're doing weekly onsite PCR testing for all employees at seven manufacturing locations.
This is up from the initial three sites, where we began testing in early July.
We expect our other locations over time.
As a backup we're also providing self administered rapid PCR testing kits the time for anyone who may need to travel all these we test results is inconclusive.
We believe that pervasive testing and transparency around the results a critical and it's likely change our employees behaviors in a meaningful way.
It's a significant investment, but the right thing to do from a health safety and business continuity perspective.
At the time of all last call, we were facing substantial could risk due to significantly elevated positivity rates in various parts of the country.
These include Arizona, and California, where we have large money factoring facilities.
Sales, our manufacturing facilities remained open and operational.
As a result, we've continued to deliver a lock commitments to customers learning Mercury defense industry's highest employee glass door ratings in the process.
Referees well down the path compared with most other companies in terms of learning how to operationalize lay its cobot testing upscale as Wallace advanced workplace safety protocols.
With winter fast approaching and new cases, increasing rapidly around the country. We believe this knowledge will help to protect employee health insurance operation continuity and reduce financial risk.
As outlined on slide six were optimistic about mercury's ability to continue delivering organic revenue growth at a rate that exceeds the industry average.
Our new business pursuits are taking longer with people working from home, we have a near record level of backlog on new business pipeline is strong and the activity level remains high.
We are beginning to benefit from several new and pride design wins some of these programs to transitioning into production and all this will over time.
We've talked in the past about L. times, which is one of our top flight bookings in fiscal 20.
L. Toms is expected to generate significant revenue for us in fiscal 21.
I see is the sizable classified radar program, we booked last quarter, which is also in the top flight bookings last year.
I mentioned earlier that our Q1 design wins amounted to more than $300 million, an estimated lifetime value.
One of the most notable was Mercury selection for the next phase of the Army Aviation mission common server program.
Mcs is a great example of de layering by the DMT, who are focused on working with non traditional supply is like mercury.
It also demonstrates how we've aligned our technology roadmaps with the government's commitment to existing platform modernization, a new platform risk reduction.
We expect the wave of monetization occurring in both censoring effect in mission systems onto C. fly to continue driving growth across the business.
As in the past, we expect to see this growth in multiple markets, including radar E.W.
Avionics and platform and mission computing as well as secure rugged service.
We believe that overall defense spending will continue to be primarily driven by national security threats, especially considering China's militarization and tightened U.S., China diplomatic technological and economic tensions.
Microelectronics has become a critical defense technology although.
Although the IP around microelectronics is largely developed in the U.S., most manufacturing and packaging a demo show.
In response, the DMT is identifying U.S. produced trusted microelectronics is the number one defense technology priority.
Given the investments we've made in secure processing and trusted microelectronics domestically. This is a strategic opportunity from Macquarie over the long term.
For the past 10 years, we focused on pioneering a next generation defense Electronics company.
Company sitting at the intersection of Tech in defense and positioned as the leader in embedded security IP and trusted microelectronics.
Our goal is to make commercially developed technologies in these areas.
Finally, more accessible to the defense industry.
Today's national security environment makes objective even more timely.
Probably the biggest news on this front in Q1 was the Intel was selected by the due date for the second phase of the Navy state of the art heterogeneous integration prototype program known as ship the.
The ship program will utilize next generation chip live based architectures and Mercury is delighted to be part of the Intel team.
Our involvement in ship is evidence of the growing interest that we're seeing from our semiconductor partners customers on the DSD and our microelectronic strategy.
It demonstrates the value of the trusted microelectronics stop capability, we're creating in Phoenix as well as Mercury's ability to help address significant national security threats.
Moving to the defense budget outlook with the government operating as anticipated undersea all that's the potential for an extended delay in the approval of the defense Appropriations Bill.
As we've seen in past years, we believe that the lens DCR could affect the contracting environment in caused further delays in the timing of specific orders New program starts all program production increases.
There's also the prospect of another round of fiscal stimulus and the potential for those dollars over time to cry that discretionary spending including defense.
Unlike what we saw in the past with sequestration. However, today that seems to be a stronger sense of bipartisan commitment to defense irrespective of the outcome of the election.
This includes current defense spending levels, which may have peaked as well as dealing with offshore supply chain threats.
If new pressures on defense spending do materialize, we're likely to see an even greater focus on existing platform modernization speed and affordability.
This could lead to greater use of nontraditional contractors in contrast, and methodologies, which should benefit mercury.
Turning to slide seven.
We continue to believe that we are targeting participating in large growing and well funded markets at the same time, we had the balance sheet strength to supplement Mercury's high levels of organic growth with accretive M&A.
After a covert driven slowdown we're seeing a significant increase in M&A activity piece.
People are finding ways to conduct diligence and get deals done in a pandemic environment for example by ensuring the counterparties that tested for kind of it before meetings and using different modes of transportation.
Our deal pipeline is very robust right now as a result liquidity.
We believe that Mercury is perceived to be a great buyer give not purpose culture and values, our strategy and positioning as well as the performance of our business.
Against this backdrop Mercury remains disciplined in pursuit of deals this strategically aligned and that can be accretive in both the short and long term.
Our overall strategy remains the same to deliver strong margins, while growing the business organically and supplementing that organic growth with disciplined M&A and full integration.
Turning to slide eight inch.
In summary, we believe this strategy will continue to generate significant value for our shareholders over the long term as we execute our plans in five areas.
First is to grow our revenues organically at high single digit to low double digits, averaging 10% of the time.
And to supplement this high level of organic growth with acquisitions.
The second is to invest in new technologies, all facilities manufacturing assets and business systems as well as in our people.
So it is manufacturing in sourcing as well as driving strong operating performance across all manufacturing locations.
Fourth we are seeking to grow revenue sauces and operating expenses. This should allow us to continue investing in organic growth, while maintaining strong operating leverage in the business.
And finally, we're fully integrating the businesses, we acquired to generate cost and revenue synergies over time. These.
These synergies combined with other areas the plan should produce attractive returns for our shareholders.
This strategy has worked very well over the past six years and we're confident that Mercury will extend this record of success in fiscal 21.
We're in the right markets and we've aligned our business with dominant industry trends, we've created a transformational business model at the intersection of Tech and defense.
We are fueling the model with growth focused investments in our people our trusted domestic manufacturing assets and four to five times the industry average level of R&D.
That's really reducing code related risk as our employees to fully engaged in the mission of delivering value to our customers and shareholders with that I would like to turn the call over to Mike Mike.
Thank you Mark and good afternoon again, everyone.
I'd like to start by noting that Mark was recently honored by glass door as number one among the 25 highest rated Ceos during COVID-19.
Marks earnings such high praise from our employees demonstrates the strength of Mercury's culture and values and the investments we've made to protect their health during the pandemic. So congratulations and thank you Mark.
In Q1, we continued to make investments focused on employee health as well as operational continuity and business risk reduction these.
These included the coated workplace safety and testing protocols that mark discussed as well as the continuation of payments from our employee relief fund.
We also invested in inventory to mitigate potential cub covered related impacts to our production capacity and supply chain or unforeseen changes in customer behavior as the pandemic continues.
We believe these measures position us well to protect our employees and adapt to future disruptions associated with Cove. It.
Given the investments that we've made to de risk the business as well as Mercury's strong performance in Q1, we're increasing the midpoint of our full year fiscal 21 guidance for both revenue and adjusted EBITDA.
Turning now to our Q1 results on slide nine Mercury.
Mercury started fiscal 21 with a solid first quarter total revenue net income adjusted EBITDA EPS and adjusted EPS exceeded our Q1 guidance. We also delivered solid bookings and concluded the quarter with near record backlog.
Q1 bookings were 201 million driven primarily by the radar and C. III markets bookings were down 7% compared to a strong Q1 20, where we had a book to bill of 1.22.
In the last 12 months bookings are up 15%.
Our book to Bill for Q1 was 0.98 following a 1.28 book to Bill in Q4 20.
For the last 12 months, our book to Bill was 1.14. Following two years of 1.2 book to bills, which supports our continued growth.
For the year, we still expect strong bookings with a book to bill above one.
Mercury ended Q1 with backlog of $826 million, an increase of 16% compared to Q1 of fiscal 20.
Backlog expected to ship within the next 12 months was 516 million, providing a solid visibility into the remainder of the year.
Revenue increased 16% from Q1 last year to 205.6 million above the high end of our guidance of $190 million to $205 million.
Q1 organic revenue growth was 12% and our revenue base continues to be diversified with no single program, representing more than 10% of total revenue during the quarter.
Gross margin for Q1 was 42.9% compared to 44.2% in Q1 fiscal 20.
The decrease was primarily driven by covered related expenses and program mix.
Gross margin this quarter was impacted by $1.8 million of direct covered related expenses charged to cost of goods sold which had an approximate 90 basis point impact on margins.
Q1, R&D was up 25% from a year ago as a percentage of sales R&D was 13.3% compared to 12.3% in Q1 20.
This increase was driven by new opportunities in avionics mission computers secure processing and radar modernization as well as continued investment in our trusted microelectronics business.
Consistent with our business model, we continue to invest significantly more in R&D than the industry average.
Q1, GAAP net income and GAAP, EPS were down, 18% and 17% respectively year over year.
As we discussed last quarter, we expected lower Q1, GAAP numbers as a result of higher discrete tax benefits in Q1 fiscal 20, yes.
GAAP net income and GAAP EPS, both exceeded our Q1 guidance.
Adjusted EBITDA for Q1 was up 16% year over year to 42.8 million above the top end of our guidance of 38 to 41 million.
Adjusted EBITDA margins exceeded our guidance of approximately 20% coming in at 20.8%. This.
This outperformance was primarily driven by operational improvements as well as additional operating leverage on SGN Ed.
Direct corporate related expenses totaling 2.3 million were added back to adjusted EBITDA in Q1, primarily related to preventative koby testing at our largest manufacturing facilities.
We also incurred expenses for payments from our employee relief fund as well as for supplies and services required for workforce safety protocols.
We charged approximately $1.8 million of these expenses to cost of goods sold in approximately 500000 to operating expenses.
We're continuing to invest in protecting the health safety and livelihoods of our employees as well as in de risking the business as the pandemic continues.
Free cash flow was 12 million in Q1 down 19% from Q1 20, reflecting investments in inventory to reduce cobot related risks as well as the cash outflows for covered expenses.
Slide 10 presents Mercury's balance sheet for the last five quarters.
We ended Q1 with cash and cash equivalents of 239 million.
Which combined with our Undrawn $750 million revolver provides us with nearly $1 billion financial capacity at very attractive rates.
As Mark said M&A activity has increased significantly we remain well positioned from a capital structure perspective to complete strategic and accretive acquisitions, while continuing to invest in organic growth.
Turning to cash flow on slide 11 free cash flow for Q1 was $12 million, representing approximately 28% of adjusted EBITDA.
Our cobot related cash outflows amounted to approximately $2 million, which had an approximate 5% impact on our conversion rate free.
Free cash flow for Q1 was otherwise inline with expectations coming into the quarter.
Cash flow from operations. This quarter was approximately $23 million compared to 24 million in Q1 20.
In addition to $14 million of bonus payments and the $2 million of cash outflows for coated.
The 1 million decline in cash flow was primarily driven by a $28 million use of cash for inventory.
This was offset by sources of cash across other working capital accounts.
As I mentioned the inventory investment was primarily made in order to mitigate potential cobot related impacts to our production capacity and supply chain or unforeseen changes in customer behavior. We.
We expect inventory to burn down over the course of fiscal 21 and inventory turns to increase as we move through the year.
Capital expenditures in Q1 were $11 million or 5.3% of revenue.
Compared to $9.6 million or 5.4% last year.
Q1 capital expenditures were slightly lower than expected as we experienced some cobiz related delays and expansion capex for facility upgrades and equipment.
We expect Capex to increase as a percentage of sales in Q2, as we catch up from the delays in Q1 and continue to invest in the business.
Our biggest investments in H., one are primarily related to facility build outs in Andover, Massachusetts, Cyprus, California, and Hudson, New Hampshire, along with continued investment and trusted micro electronics.
I'll now turn to our financial guidance, starting with Q2 on slide 12.
Our guidance for the second quarter and the full fiscal year assumes no major operational impacts associated with Covance, which as we've discussed we've made every effort to mitigate.
Mark also talked about the potential for headwinds related to the defense budget that's.
That said, we believe mercury isn't the right parts of the market and are well supported programs that align with current threads and DMD priorities our guidance reflects this positioning.
Our guidance for Q2 includes covert related expenses of 3.1 million. This is up from Q1, reflecting the rollout of weekly onsite cobot testing two additional facilities.
Our guidance for the full fiscal year does not include covert related expenses or cash outflows for the second half.
For Q2, we currently expect revenue in the range of 200 to 210 million.
This is approximately 6% organic growth at the midpoint compared to the second quarter last year.
The single digit organic growth, we anticipate for Q2 is related to program timing and we still expect high single digit to low double digit organic growth for the year.
Q2, GAAP net income is expected to be 11.9 to 13.4 million or 21 to 24 cents per share.
The year over year declines reflect the incremental $3.1 million of coated related expenses as well as a slightly higher expected tax rate.
Q2, adjusted EPS is expected to be 48 to 51 cents per share adjusted EBITDA for Q2 is expected to be 42 to 44 million representing approximately 21% of revenue.
We expect Capex in Q2.
Fiscal 21 to be approximately 8% of sales at the midpoint of our guidance.
Capex for the quarter is primarily related to trusted microelectronics investments as well as the facility build outs that were delayed from Q1 into Q2.
We expect free cash flow to adjusted EBITDA for Q2 to be approximately 40% driven by expansion capex as well as continued coveted related expenses.
Also in accordance with the Thames purchase agreement, we will distribute $2.3 million to former Thomas shareholders for a tax benefit realized post acquisition, which will impact free cash flow in Q2.
Turning to slide 13, our guidance for fiscal 21 reflects a strong outlook for organic growth and continued investments in R&D and capital.
For the full fiscal year 21, we now expect total company revenue of $865 million to $885 million.
This represents 9% to 11% growth from fiscal 20 and is an increase from our previous guidance it.
It represents organic growth of approximately 8% to 10% year over year consistent with our high single digit low double digit target.
Like we saw in fiscal 19, and 20, we expect a percentage split between each one and h. two revenue to be weighted toward the second half of fiscal 21.
Total GAAP net income on a consolidated basis for fiscal 21 is expected to be $67.9 million to $72.3 million or $1.20 to $1.30 per share. This.
This is down year over year as a result of approximately 21 million or 38 cents per share of non operating investment income and discreet tax benefits that we had in fiscal 20.
Adjusted EPS for fiscal 21 is expected to be in the range of $2 and $22.28 per share.
This is down slightly year over year as a result of a discrete tax benefit of approximately $8 million or 15 cents per share in fiscal 20, which is not expected to recur in fiscal 2001.
Adjusted EBITDA for fiscal 21 is expected to be in the range of $190 million to $196 million, an increase of 8% to 11% from fiscal 20.
Adjusted EBITDA margins are expected to be approximately 22%.
We expect capital expenditures for fiscal 21 to be approximately 6% to 7% of revenue.
Despite the delays in Q1, we still expect an increased level of capex for the year driven by our continued investments in organic growth.
Finally for the year, we expect free cash flow to be approximately 40% of adjusted EBITDA.
Again. This estimate does not include any potential second half covert related cash outflows. This conversion level is driven by our expansion capex and our cobot investment in each one.
Turning to slide 14 in summary.
Mercury delivered solid results for the first quarter of fiscal 21, extending the momentum from fiscal 20 right.
Revenue net income adjusted EBITDA, EPS and adjusted EPS exceeded our guidance, while we made substantial covered related investments to protect our employees and ensure business continuity.
Looking ahead, we're well positioned to deploy capital for strategic M&A, while continuing to execute on our long term financial model of above industry average organic revenue growth and EBITDA margins.
With that we'll be happy to take your questions. Operator, you can proceed with the culinary now.
[noise].
Anyone there.
Our first question comes from the line of Pete Skibitski with Alembic Global.
Hi, Mark and Mike how are you [noise].
Yeah no.
Good good hey, guys nice quarter, just wanted to learn some more about your thoughts on the a sequential decline in backlog it sounded like you're mainly thinking it was due to to co bid and employees not be able to close deals in this environment any other kind of dynamics surrounding that in terms of you know duties pace of car.
Contracting slowing down or timing on big programs, just wanted to get more color on that.
Sure. So the you know the bookings decrease that we saw in the first quarter I would say is kind of related to two things you know the first is that we did see some code related impact yeah, with the ability or the speed at which our customers could move as it did impact certain bookings.
Towards the end of the quarter.
Probably the biggest impact is that we did have a launch of or customer a large foreign military sales that basically move to next fiscal year. So our fiscal year 22. So those were the I guess the major impacts that we saw that resulted in.
Bookings that went on to implant backlog you know that being said I think as Mike said in his prepared remarks. If you look at over the last 12 months bookings is up 15% backlog is up 16% and we've had a book to bill.
One point to or above in the last couple of years. So.
It's unfortunate that we saw some of the the movements that we did but yeah. We don't believe there anything fundamentally has changed paid.
You know should we think about any risk to your revenue guidance for Twoq you because of the CR kind of how are you guys. Feeling and then also is it fair to say or I think that we have another kind of flattish bookings quarter until we get the budget and then maybe a pretty pretty heavy back half of the year once we get the budget bookings wise.
Yeah, So right now as we see it we don't see any potential risk or major risk associated with Q2, we are yeah.
Encompass that in the guidance that we gave.
We raised the midpoint of our guidance for the full fiscal years. So I think overall, we do feel pretty confident about our ability to deliver for the full fiscal year.
And so we'll see how things evolve, yes, Mike did say I think in his prepared remarks that we do expect the second half to be stronger than the first and that is very consistent with what we've seen in the past several years as well so no real change there as well.
Okay. Thanks very much.
Thank you.
Thank you.
And just a reminder, ladies and gentlemen, if you have a question. Please press Star then one on your telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Our next question comes from the line of sets the men with JP Morgan.
Okay. Thanks, very much and good afternoon good evening.
I guess, maybe just a quick question about EMV.
M&A in the landscape I mean, you mentioned that its fairly robust so I guess first.
Can you find in the in the call that buyer.
Environment that you're able to do kind of the the diligence that that you typically.
Like we do on M&A and alongside that in the event that we do see a change in administration.
If there is there appeared at a time, where you'd want to kind of wait.
Wait and see.
Who populate the administration and.
How they set out their priority is before moving ahead on M&A or is it kind of a similar approach either way.
Yes, let me take the questions in the in the reverse order. So I don't believe that the changes administration is going to change our priorities.
Yeah. The areas that we're focused on we believe are the important ones.
As you know yeah, we focused on C y build.
Building out that business will focus on building off our platform and mission management business, which is basically avionics and mission computing as well as looking it sensor processing those are the three major areas that we're continuing to.
To look at deals.
The market is clearly picked up and I think one of the things that was important for us.
Is that we maintain the discipline in the process that I think has resulted in our M&A deals going as well as they have historically.
And really at the heart of that has been our diligence efforts. So what we've been able to do.
With.
Testing or is it seven different locations for Cobiz, we've been able to actually extend that testing to counter parties in potential M&A scenarios. So both qualities you get tested in advance in the you know that the mutual level of trust there.
The people are coming.
Various meetings yeah.
Having tested negative we've also I think adjusted.
Certain ways in which were traveling to.
The meetings and it was the result of that we have been much more active.
Then what we have as you know in the early early phases of Cove it.
If you'd like to add anything to that at all Mike.
No I mean, I think you hit on it I mean Seth.
Activity is.
It's picked up there's a lot going on and we've adapted to the virtual due diligence environment, where we can but as Mark said, we are integrators as having traded values. So we are continuing to go see the sites and meet the people will continue to do that.
Great. Thanks, and then just as a as a follow up on 'em Microelectronics I know you know you mentioned some opportunities we see a fair amount in the trade press from DSD, including some awards there and so clearly there is some activity going on now but for review and more broadly.
Same time, when you talked about in the past got the impression that this was something that was very much kind of a longer term opportunity. So our microelectronics can you kind of help us understand what a better whats kind of what's there in the near term and then kind of how the how the opportunities evolve over.
Time.
Yes, so I kind of parse it so as you know right. We ended in the micro electronics space when we did the.
The acquisition.
Certain assets for Microsemi line, So we acquired the mine.
Microelectronics business, there was targeting the defense sector, we've been very successful growing up business as well as improving the profitability of it over time.
And so we've already got a lot of activity going on in the space in various different end markets I think what youre touching upon is really yeah. Walt the DMT is now looking for which is to.
Trusted micro electronic capabilities that is taking advantage of all of the innovation that's occurring in the high Tech World in particular in the commercial silicon space.
And Thats, where we have invested heavily in the new found capability that we've been standing up in Phoenix.
And probably the most yeah. Most significant news this past quarter was the fact that Intel.
Was down selected by the U.D. on a program called ship.
Which stands for the state of the art heterogeneous integration prototype and its basically what they are looking to do is exactly what we've been discussing.
If they're looking to be able to use chip based architectures secure them and package them in a very innovative way for use inside of the defense industry. So we were part of the Intel team were obviously delighted that they won a and that's a very important part.
The future focus on trusted microelectronics, which as we said is a longer term opportunity, but it's the number one.
Tech priority for DMD, so very.
Very happy with the progress that we're making.
And the fact that Intel one the ship the next awarded over the next phase of the ship program.
Okay. Thank you very much.
Yes.
Thank you.
And our next question comes from the line of Peter Arment with Baird.
Yeah, Hi, good evening, Mark and Mike Nice results, Hey, Mark if I could just follow on to your comments on chip.
So that award was roughly I think a $173 million I think for the phase two that team or Intel team. How does that translate for you is it over multi years or is it you know weighted.
You know in a shorter time line.
Yes.
Sorry, Peter.
Going to play out over.
A multi year period, yeah, I'm not going to get into the specifics of the minds because we're still in the I guess the early phases of that.
Trusted microelectronics capability that we're standing up.
But it is an important capability. It is an important program and yeah, I think it's tied directly to to the needs of the deity we.
We did have a yeah actually our largest design win this past quarter.
Within the.
The E.W. space utilizing next generation trusted microelectronics capability, yes.
So that was a.
An estimated lifetime value.
Of over 250 million, so yeah, I'm really happy with kind of what we see happening with respect to.
Our partners in the silicon space as well as the.
The receptivity that we're seeing from customers in the end markets in which we're playing so overall continue to make good progress I think validating the investments we've made and the strategy that we're pursuing.
Yeah, just you've been talking about it for a number of years and obviously the d. putting money behind it are you seeing anything on from a competitive perspective.
You know in terms of trying to replicate what you guys have been building out.
We haven't specifically and yes, we will own more than one team on the ships program.
And obviously working with different silicon providers, because ultimately what the DMT wants to be able to do is to get access to the best commercially available and valuable silicon from multiple different policies and to combine them together into a heterogeneous.
Piece of Silicon for first defense use.
And I think both multiple parties that were working with on ship I think did their own few diligence and yes, I think ended up choosing mercury because of the investments that we've made in the channel that we have in our reputation so.
We haven't seen anyone trying to replicate what we're doing.
The way in which we're doing it but that doesn't mean over time if were successful that it wanted to truck competition, because obviously, it's a very important set of capabilities and for.
For me, it's going to enable a whole suite of new applications that can be done today with the existing technology.
And then just squeeze in one quick war on on the C are there was a discussion on a on a one of the prime calls earlier.
Last week regarding a CR, maybe going out to the spring timeframe.
How it that if at all impact your thinking about here 21 so.
We think that we've taken it into into account right now Peter from what we can see.
Typically yeah, Andreas see all you kind of see three things going on.
His fewer new program starts.
Yeah, you've got they can't really be increases in terms of you know the production.
Volumes under a program.
And you know you may see some some.
Timing slowdown with respect to contracting events and it's really that lot of one that I think if anything is kind of impacted mercury in the past.
Yeah. So we'll have to see but for now we feel pretty good about the guidance that we've given.
And the fact that.
Yes, we did increase.
The guidance for the full fiscal year.
Appreciate the color thanks Mark.
Yes, Thank you Peter.
Thank you.
Your next question comes from the line of Michael Eisen with RBC capital markets.
Hi, Good evening, Mark and Mike Thanks for taking the questions.
Following up on the conversation around the micro electronics and the clear push to domesticate. Some of this production and packaging can you help us understand what amount is being imported currently and who are some of the major competitors that you're you're competing against.
Internationally.
So most from what we can no Michael most of the actual design.
Activity is done by the silicon providers themselves.
Yeah, but obviously manufactured offshore and that depends upon whether you are a fabulous or a company that owns the fabrication facility right. So intel's in warm comp and then you have the likes of Xilinx.
And in video in the other.
Most of the packaging.
Is either done in those facilities.
Or if it's customized by smaller players in the international markets.
As we have seen.
That yeah, there's really two things going on one the DMD wants to be able to get access to the underlying silicon you for.
We use inside of the in the industry.
And where a lot of the risk lies today is the fact that it's packaged offshore so you bring getting access to the silicon on one hand.
He is very important and then being able to combine it together with different types of silicon, but then securing it and packaging. It domestically interested facilities is really what we're focused on as well so there's multiple different elements.
Elements of that trusted microelectronics strategy.
I think the DRD is focused on Michael.
Okay.
Got it that's helpful and then thinking of that contacts and you know you had some comments.
Just a few moments ago that there really isn't any one that you're competing with some of these technologies at this point. So when I think of the balance of R&D spending and your comments around how robust. The M&A pipeline is are there still an ample amount of targeting a market for you to continue that pace at call. It doubled.
Digit contribution through M&A or should we expect a higher level of R&D having fun.
Organic side of that equation.
So the answer is yes, there is absolutely.
It's sufficient opportunities for us to continue to do what we have been doing over a multiyear period, which is generating high levels of organic growth that has been driven by the significant investments that we're making in the underlying technology and our people.
And then adding again on top of that M&A in the three markets three market areas that I described previously.
And so those are continuing.
Continuing to build up our capabilities and sensor processing, which is really the heritage of the company.
And then most recently.
As you know we've made a significant effort to to.
To penetrate all of those are the types of computers that go on board military platforms, which can be grouped into two major areas. One is C ice are commanding control.
Type processing applications, which is a major thrust for the DRD under initiatives such as Jutzi too and then also in platform and mission management, where we see the new supply chain de layering trends really picking up pace around mission computing avionics. So.
The answer is yes.
Yeah, we're going to continue to invest organically in R&D is a critical part of our model that.
Thats driving growth in design wins, and allowing us to growth business as high single digit low double digits, which were then supplementing with M&A and full integration.
Understood. Thanks for taking the questions Mark.
Thank you Michael.
Thank you.
Our next question comes from the line of Sheila Kahyaoglu with Jefferies.
Hey, good evening, Mark and Mike I Hope you're well.
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Mark I guess just to start off.
You mentioned ship I didn't think it would be such a popular contracts to get the questions, but in relation to that how do you think mercury is differently position. This budget cycle than it was you know about a decade ago with the outsourcing trend.
Yeah. So I think we're a very different company than what we were yeah.
When you talk about sequestration, if thats what youre.
Specifically, referring to Sheila.
Yeah, we've got wall, a much bigger backlog than what we had back then we've got far more programs.
Then what we had back in fiscal 13, and as I talked about in my prepared remarks, yes, no one specific program.
Accounts for more than 4%.
Of our revenues in the short term of 5% over the next five years. So I think we've got much greater program diversification as well.
So, yes, and I think we are obviously participating in more.
Parts of the market is the M&A strategy.
He is evolving as we've moved from.
Just providing processing associated with sensors into these other.
Adjacent markets for the high performance compute capability that we provide.
We like the only thing to that Mike.
No I think you hit on most of it I mean, the only other thing I'd add is that when you look at our near term, but also our non 12 12 month backlog so longer term as we've moved into integrated subsystems.
Record levels and so not only do we have good visibility to believe in the near term, but our non 12 month backlog was 320 310 million, which is up significantly year over year and positions us well to to have that visibility beyond 12 months as well as the near term.
And then just given election night outside of that you know the presidency.
Are there things you guys are looking for just given your manufacturing footprint or alliances with suppliers.
And the smaller Senate or house races.
So that again, sorry, I Didnt hear the second part of the question Sheila just in terms of be elections, you know outside of.
Takes the predator presidency or are there things you guys are looking for this evening in terms of you know house and Senate races that are supportive to your business.
No not really.
You know again, yeah, we don't typically.
You deal with the.
The house and the Senate Armed Services Committee or is that on the political side of things that's really more the realm of our customers.
Who I think do a pretty good job kind of distributing the work. We're ahead of the U.S. as.
As appropriate so yes, we think that were actually in important areas that are well funded that a large part of the market and growing so I can't think of anything specifically off the top of my head.
No worries, thank you and congratulations on your glass door right.
Grading.
Thank you. Thank you.
Thank you.
Our next question comes from the line, Jon Raviv with Citi.
Now.
Your next question comes from the line of Jon Raviv with Citi.
Hey, Thank you very much I'm, sorry about the delay there sort of a question about gross sustainability at almost the opposite of a question you might have gotten a few years ago, which was all your customers are accelerating growth you are not seeing a big bump and you guys are still looking at that high single or double.
There's a question here of course, there's a lot of your big customers are putting through decelerating growth over the next year or two.
To me 500, 500 600 basis points for some.
So where does that leave you guys. When you talk about maintaining above average growth, but they often not 10%. So just generally speaking even with your book to Bill maybe following up a little bit but points above one times, we still feel good about 10% growth organically almost time through a budget cycle.
We do right now Joe Yeah, I mean, the goal is to continue to grow the business organically at high single digit low double digit averaging 10% over time, and then obviously layering on top of that acquisitions, yeah. When you when you boil it down.
We think that the fundamental trends at an industry level that have driven growth in the business will continue so.
The largest of which is outsourcing and so you know we're seeing continue to see significant growth in outsourcing at the subsystem level, Yeah, I talked about on the call that we have a set.
Several design wins literally this year as well.
Well, we won the design wins in prior years, it turn into bookings and 20 and now we're seeing the benefit of that.
In fiscal year, 2001, and obviously our design win activity over the past several years has been very very high so outsourcing is clearly happening.
Yeah, we're continuing to see is a flight to quality supply is I think that initially was in the manufacturing domain, where co sequestrations below the smaller companies didn't have the ability to basically invest in the modernization of their manufacturing plants, we have done.
Not quite successfully and we have taken share.
That coupled with.
The significant investments that we're making in internally funded R&D.
Is very important in this environment, where the government through the use of OTN days is really looking for the industry to step up into to invest or co invest alongside the government and the fact that we're spending 13% of our revenue on R&D not very attractive.
Working with the major primes.
The supply chain de layering, we're also seeing that.
In in Europe.
Were you one of our largest customers.
It's really embrace that model seeking to kind of bypass some of the tier one.
Provided as a platform mission management capabilities and working with the.
The lower tiers and were seeing that in the services here in the U.S. in particular the army.
Yes. He has been very very active around not de layering trend and.
I mentioned on the in my prepared remarks the advanced.
The AMC S program.
Which is basically a cloud in the sky.
Born server, which we're pretty excited about so yes. It is.
I think that the fundamental industry trends are alive, and well and then when you look at things from a capabilities perspective, Yeah. I think we're continuing to see growth in the major markets. So since modernization platform mission management.
C Y and then trusted microelectronics so.
We feel pretty good about how position John and our ability to continue to do what we've been doing.
Over the past five or six years.
No I appreciate that and just a brief follow up on the international piece can you give us a sense I mean, it feels like a lot of this outsourcing all these mega trends are still in relatively early innings domestically have even throw in the first pichot internationally to try to extend the metaphor.
Yeah. So.
Soon so the answer is yes, Sue and boss defense has become a significant customer of us internationally and Jay They I think really embraced yeah. The de layering in the outsourcing and as you may remember we acquired.
Business over in Geneva called C. S. Not business has more than doubled since we acquired it and you have won a lot of new opportunities and so we're seeing a similar trend.
Careering here in the U.S. as well so more to come there I believe.
Thank you.
Thanks, Joe.
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Thank you.
Our next question comes from the line of Ken Herbert with Canaccord.
Hi, good evening.
Hey, Hey, Michael I wondered if I am Mike I Wonder first if I could on working capital I mean, you've been investing in inventory now for several quarters and I can appreciate.
The Cove, it sort of rig.
Risk management aspect to it here, but is there anything else you'd specifically highlight on the inventory front and then I think you said you expected to short of reverse much of this for fiscal 21 I just wondered if you can provide any more sort of granularity on on when maybe inventories starts to become a source of cash or how we should think about that.
For this year.
Hey, Mike if I could can I, just kind of pop in for just the first part of that and then I'll hand, it over to you.
So Ken it's important to realize what really happened in the first quarter.
And so a little bit of history right. So we are you know instituted testing.
Back in July in three different facilities and manufacturing facilities, our largest of which are in is in Phoenix.
The time, yeah, we saw positivity rates in around the Phoenix area greater than 40%.
And 20% over Inox not and it was not massive increase that we saw in the surge of the virus that led us to actually Institute.
The testing, which is now across seven of our different sites is we did that we saw some impacts on production and so during the first quarter. We made a very conscious decision given that we knew that we were going to rollout testing elsewhere.
Basically you know to to invest in inventory to try and de risk the business, both operationally and financially, which I think we did very successfully for me.
Having rolled out testing at scale it became a really foundational in the centerpiece of our the way in which we're dealing with the cobot challenges. It's taken a tremendous amount of effort by the team to operationalize not but if you look at.
What is actually happening right now with the significant increases that we're seeing again and heading into winter I'm. So pleased that we made the decision. It's an investment it's been a very challenging thing to do.
But I can tell you that employ thrilled that we're doing it and I think it is foundational to our ability.
To maintain the operational.
Continuity and the financial performance that we're delivering so just a little bit of a backdrop because I think what you saw with the inventory is us managing the initial rollout of cobiz testing across seven locations, so which is not insignificant so Mike.
Yes.
Sure. So and then just on the timing as I think Mark did a good job laying out the rationale for why we built it up and you can see on the web.
Where shows up on the cash flow statement, we invested a little in Q4 of last year and then more this quarter for all the reasons that I mentioned in my prepared remarks, and then Mark just as discussed in terms of the timing, we do expect it to be temporary we expect inventory to burn down during the year.
Turns have been inventory turns were 2.7 in Q4, they came down to 2.3 this quarter and as we're thinking about it we expect turns to return.
Two by the end of fiscal 21 to the levels that we saw at the end of a fiscal 21 were at the 2.7. So we don't know whats going to happen with Covidien, but weve positioned ourselves across the business to try to protect our employees to be to de risk the business and this is just one piece of.
That.
The other thing I would just add Ken is that the inventory. This isn't speculative inventory. This is inventory that's predominantly raw materials or finished goods specifically for for program. So really its just advanced buying and building to protect against the unknown over the next 12 months.
So it's really tied to two yeah the manufacturing risk.
Associated with the facilities are rolling out.
The testing as well as potential supply chain disruption of our supply chain.
As well so those were the I guess the two areas that we focus in on.
That's great and Mark Thanks for the detail just a follow up is it fair to assume that well use in sort of building. Some inventory you haven't seen any material disruptions from your own supply chain or other areas that you're maybe incrementally more concerned about as we potentially have a bit of a surge in the virus here into the winter.
Yeah. So we did see some solid pocs early on I would say is being very.
Yes, narrow in terms of his focus I think most people have figured out how to deal with you know with Cove it.
You know in various different ways, we don't know many companies that have actually instituted testing.
I believe it's very important from a business continuity perspective.
But again some of the inventories that that we've built yeah. We're still trying to anticipate any potential disruption, where maybe we weren't able to get a second source supply or yeah. The parts we're already in.
Hi demand so we try to to anticipate where we may have risk.
With respect to our future revenue plan on to hedge that as best we possibly can.
Great. Thank you very much.
Yeah. Thank you.
Thank you next.
This question comes from the line, Jonathan Ho with William Blair.
Hi, Good afternoon, just wanted to maybe start out with the Capex delays and in particularly around covered it in the later start impact any of your production plans at all is there.
A situation, where you can catch back up just wanted to get some some high level color there.
Yeah. So good question Jonathan no it doesn't the effect.
Yeah production capacity really the major delay that.
The delays that we saw was in building a building out the new pump facility for trusted microelectronics and the revenue for that is really yeah. There's not much in this fiscal year ramps in future years.
We have seen that begin to pick up I think we had issues with getting equipment delivered and then you have to do the turn up and test because our suppliers were unable to travel.
Yeah, we found ways around it you know it has improved so no I don't see there being an impact the.
The capex delays.
On our ability to meet our financial goals and objectives, Mike would you agree.
Great. Thanks.
Hi, Greg.
Great and then just as a follow up how much of it impacted you see from that bookings slip.
From the Fms deal and it's this program that's at risk or is there something that.
I was just you know just the normal timing shift thank you.
Yeah. So.
It was significant it was a you know over $30 million booking.
And some of which we.
Have turned into revenue this fiscal year we.
We don't believe that the program is at risk.
It was a follow on award.
And from everything that we can gather from our customer.
They just needed to reengineer the solution some more based upon certain concerns of the customer and not is really wants is.
Caused the delay.
So it was unfortunate, but obviously foreign military sales are notoriously difficult to predict.
Predicts intends or from a timing perspective, and I think this is really a one off case, it's not something that we see as being a trend.
Thank you.
Thank you.
Your next question comes from the line of Michael Ciarmoli Troll Securities.
Hey, good evening guys. Thanks for taking my questions.
Maybe Mike.
And Mark I think you just said you know the industry trends were alive and well even as we go into another maybe defense cycle here, but looking at the gross margins, even adding back the cobot costs.
Tying that in with R&D, which look to be a multiyear high as a percent of sales is this business less profitable going forward than it than it was in prior periods. I mean are you seeing more pricing pressure out there I mean, we're certainly seeing it in your margin, but just just wanted to get more color there just as the gross.
Margins, you're at a multiyear low and you are spending more so how should we think about that.
Yes, no Mike I think that the.
The underlying profitability of the business has not changed and I think if you.
Look at what we.
What we talked about last quarter in terms of the annual guidance is that we expect fiscal 21 to look a lot like fiscal 2000, and you can see that on EBITDA margin line, where our guidance is right around 22%, which is right where we were last year. So at that level we.
I think the profitability is the same and as we've talked about in the past, we see opportunities to grow EBITDA over time.
When you look at gross margin, we don't guide gross margin because we are focused on EBITDA, but I did say last quarter that we expect it to look a lot like fiscal 20, you mentioned the cobot expenses that we had in Q1 those are 90 basis points dilutive to that Q1 gross margin. We also have some.
A more expenses for a covert that we're forecasting in Q2 those will also be.
Dilutive, but when you take.
Take those into account I think that the business in fiscal 21 is going to have the same level of profitability that we saw in fiscal 20 of which was also up from from fiscal 19, when we're at 44%. So we think the businesses and the profitability is still strong we are seeing a lot of new pro.
Graham starts that we've talked about that have lower margins out of the gate and then those become higher margin as they transition into production. So we think the profitability the businesses.
Strong.
Got it and.
On the corporate expenses I mean, there are pretty significant and I know.
Looking at the guidance here I guess, you've got 3.1 million I mean is it realistic to think that they they just roll off in the second half and in terms of any sort of recoverability. There are those that type of expenses you can put into billing rates or do you think if there is some.
Sort of corporate relief at the video D. level do you get any of that money back just trying to 10 minutes, we would seem unlikely that these roll off you know as we go into winter here seem like they would remain elevated.
Yes, I mean, I think that what we've done is as you can tell as we just forecasts in one quarter out because no one knows the yeah, what's going to happen over over the rest of the year in terms of these expenses, but as Mark discussed you know a lot of lot of that cost in Q2.
And a good portion in Q1 was related to testing at our facilities and that's going to continue and it's actually expanding as mark talked about in the second quarter to more sites in more facilities and we're going to continue to do that.
Because we think it's the right thing to do to protect the business. So when we get to next quarter, we'll give a view on what we think it's going to be is.
Is it likely that it could continue yes, but at this point, we just don't have the visibility in terms of what those expenses are going to be from a recoverability standpoint, most of our businesses, though commercial sales. So we can put some these costs in rates, but we're viewing this as an investment.
We're making as a company in our people on in the business.
Got it perfect. Thanks, guys.
Thank you and our next question comes from the line of Ron Epstein with Bank of America.
Hey, guys good evening.
If you were to guess what the book to Bill will be at the end the year.
What would you guess it to be.
And the reason I'm asking this question I think the fear is mark.
With.
People nervous about the election and fear around defense slowing coming to this quarter. Your your book to bills the Smiths below one.
How can you have laid out here.
Sure. So is as we said in the prepared remarks, we do expect a positive book to bill for the year.
Yeah. It is unfortunate that we had that Fms contract kind of move out because obviously that was a substantial award.
If you look at it you know kind of what gives us the confidence right now.
So to basically say that we've got a positive book to Bill Yeah, We got some substantial growth in bookings and certain programs and yes. There was.
One as I mentioned was a new classified radar program.
Where we won that design win in prior years. The program is kind of moving into initial production, which we've talked about.
We're seeing a substantial increase in Etwo D Hawkeye well providing.
Various capabilities you know, we're seeing significant growth.
In C I.
In various rugged server capabilities that came to us through one of the acquisitions. So yeah, we've actually got a pretty good line of sight right now from what we can see on being able to deliver positive book to bill them.
You say positive you mean north of one that's originally.
Yes, yes, okay. Okay.
And there has been some stuff written in the <unk> and the trades about.
Pushing forward with more acquisition of reform around acceleration and reform.
Things like OTI is and other kinds of rapid acquisition awards have you seen that impact your business, yet and do you expect to see that you have in the coming months.
We have absolutely seen it roll sales.
So l. times is a great example is.
So it started out as a traditional procurement process and then along the way it transition to an OTI a yeah driven.
Driven by new I think the urgent need.
And yeah the DRD.
One thing too.
Ill to to get buy in from a.
From the primes right in terms of just the investment and so were obviously on L. Townsend here that potentially the largest single program, we want in our history and it's going to be in our top five programs in fiscal year 21 from a revenue perspective and not moved extremely quick.
Play.
Yes, this quarter the AMC S program, which I mentioned, which is not cloud in the Sky type concept.
Was also an OTN and what we're seeing is that.
When we talk about de layering.
Typically the de layering is where is the.
The government.
For the primes is seeking to deal with more non traditional contractors of which we are one.
Because of their ability to invest and to move quickly. So yes, we're absolutely seeing you in.
Increase in OTN days.
I think it could continue because I think if you look at the future budget environment.
I think it's going to be a continued need.
For affordability.
Well as you know.
More rapid technology cycles, and both of those things play into the use of non traditional contracting.
Got it all right.
I think that's it thanks a lot.
Okay. Thanks, Ron.
Okay.
Thank you and as a reminder, ladies and gentlemen, if you have a question. Please press star one on your telephone once again to ask a question. Please press star one.
And our next question comes from the line of Noah Poponak with Goldman Sachs.
Hi, good evening.
Oh no.
You guys hear me, Okay, I'm on a cell with a less than ideal connection.
Yeah, No we'll be fine okay awesome.
Mark just a quick follow up to Ron's question there.
Are you, saying expect book to Bill over one and are you also saying you expect.
Absolute bookings dollars to grow year over year in 2021.
Or is it just before me the book to Bill over one.
Project, So there's probably a little over one.
Okay can you still grow the bookings year over year for the year.
Potentially yes, yeah. So we obviously got some ground to make up with the Slippages that you know.
Fms contract in the in the first quarter.
Got it.
And then.
You know you in your prepared remarks, you pointed to the potential for the defense budget to flatten out.
And then you know you've been asked about your.
Medium to long term target to grow revenues high to low single digits organically on a multiyear basis.
Yes, you know that defense budget discussion has been a moving target.
So maybe just to ask the question sort of refresh the question clearly.
Are you telling us that with the defense budget, you know exactly flat you can still grow your revenues.
Hi high single to low double digits organically.
So based upon what we see right now we believe that that is the case.
We obviously refresher our.
Our strategic plan, which kind of goes out five years every six months.
As we see it right now the answer to that is yes, and yes. The the the biggest driver of that.
As we talked about in the past is really two things here. One is we had a significant increase in new design win activity.
Yeah. So over the course of the last five years on an LTM basis. The estimated lifetime value of design wins is $2 billion. So you know a pretty significant increase that we've seen over time you know the second as we talked about is that we've been actually pretty.
Successful.
Capturing more content and seeing increased outsourcing by our customers.
Is the sub system level and so you know subsystems revenue for Ross you know is much larger dollar content or volume.
Then programs that yeah, we have wanted to pass more the module level.
And on an LTM basis, Subsys revenue were up 46% and it was up 57%.
In the first quarter, so yes more programs more content on those programs is probably the largest driver of.
Our ability to continue to develop high single digit low double digit.
No.
Okay.
That's helpful. And then just if I'm looking at just the second quarter guidance specifically.
You know to be in the middle of the revenue range organic growth would have to not only grow mid single digits to be at the low end it would have to grow low double digits. So.
Some of that bookings headwind.
Interfering with the second quarter or is there just some conservatism there and then Mike some early on the margins the margins to be down not insignificantly year over year to get into the EBITDA guidance range, even though the the four year has it flat.
I guess is that all the cobot expense or is there something else. If you guys could help me with squaring up those numbers.
Sure. So look our organic revenue can kind of move around period to period.
Yeah for the year.
As we mentioned right, we're expecting that high single digit low double digit.
And organic.
Organic growth. So yes again the guidance is the guidance that we gave like.
Yes averages sales timing our ads Q2, if you're comparing to Q2 last year in high gross margins is this program mix I think if you look at the revenue for this year and we talked about the annual guidance. If you look on it in H. one H two you look at the midpoint.
One of our Q2 guidance, you'll see it's very similar to what has been in previous years about 53% of our revenue will be in age to 47% nature on which is exactly what it was in.
In fiscal 20, so what you're seeing is just the timing of.
Timing of programs.
But at the annual level, we still expect another strong year.
Mike where do you have R&D coming in as a percentage of sales for the year compared to last year.
So we don't specifically guide that what I heard that it has become a headwind machine.
It's so what I said last quarter was that when you look at fiscal 21, we expect it to look a lot like fiscal 20 in fiscal 20, R&D as a percentage of sales was 12.4% and we say that with some of the initiatives that and opportunities that mark talked about we.
Could see R&D as a percentage of sales up slightly softer than it did in Q1 was 13.3% compared to 12.3 last year. So we do see opportunities we're going to continue to invest we'll see how the second half plays out.
But again, probably a little higher than last year.
Great last one Mike does your long term, 22% to 26% EBITDA margin range target range. So.
I think what Weve mode.
Mostly started to say no kind of moved away from the 20% to 26% Weve moved away in general from the target business model Bob.
But what we are we continue to believe is that the opportunity for margin expansion over the five year period is still there and that's going to be driven by the programs transitioning from new program starts into full rate production into.
In terms of operating.
Leverage.
As as well as I think over time as we do acquisitions, we'll see some R&D leverage as well.
Okay.
So much.
Thank you I'm showing no further questions at this time I will now turn the call back over to President and CEO Mark Aslett for any further remarks.
Okay, well. Thank you very much for joining us here Tonight, we look forward to speaking to you again next quarter take care Bye bye.
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Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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