Q1 2025 Mercury Systems Inc Earnings Call
Speaker Change: Good day everyone and welcome to the Mercury Systems First Quarter, fiscal 2025, conference call. Today's call is being recorded.
Speaker Change: At this time for opening remarks and introductions, I'd like to turn the call over to the companies a executive vice president and chief financial officer, Dave Farnsworth. Please go ahead, Mr. Farnsworth.
Dave Farnsworth: Good afternoon and thank you for joining us. With me today is our Chairman and Chief Executive Officer Bill Ballhaus.
If you have not received the copy of the earnings press release we issued earlier this afternoon, you can find it on our website at MRcy.com. The slide presentation that Bill and I will be referring to is posted on the Investor Relations section of the website under Events and Presentations.
Dave Farnsworth: Turning the slide to in the presentation, I'd 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.
Dave Farnsworth: All forward-looking statements should be considered in conjunction with the cautionary statements on slide 2 in the earnings press release and the risk factors included in Mercury's SEC filings.
Dave Farnsworth: During our call, we will also discuss several non-GAAP financial measures, specifically adjusted income, adjusted earnings per share, adjusted EBITDA, and free cash flow. A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation and in the earnings press release.
Dave Farnsworth: I'll now turn the call over to Mercury's Chairman and CEO Bill Ballhaus. Please turn to slide 3.
Bill Ballhaus: Thanks, Dave. Good afternoon. Thank you for joining our Q1 FY25 earnings call.
Bill Ballhaus: We started FY25 with positive momentum, delivering results in line with or ahead of our expectations, and I look forward to our continued focus on performance improvement as we move through the fiscal year.
Bill Ballhaus: Today I'd like to discuss three topics. First, some introductory comments on our business and results.
Bill Ballhaus: Then I'll turn it over to Dave who will walk through our financial results in more detail.
Bill Ballhaus: Before jumping in, I'd like to thank our customers for their collaborative partnership and the trust they put in Mercury to support their most critical programs, and our Mercury team for their dedication and commitment to delivering mission-critical processing at the edge.
Please turn to slide four.
Bill Ballhaus: Coming out of Q1, I am optimistic about our strategic positioning and our expectations on delivering predictable organic growth with expanding margins and robust free cash flow.
Bill Ballhaus: Our Q1 results were generally as expected. Q1 bookings of $247.7 million, up 29% year-over-year, and a book-to-bill of 1.21.
Q1 revenue of $204.4 million, up 13% year-over-year.
Bill Ballhaus: both up substantially year over year.
Bill Ballhaus: and Q1 free cash flow of negative $20.9 million of $26.2 million year-over-year. We ended the first quarter with $158.1 million of cash on hand.
Bill Ballhaus: These Q1 results reflect solid progress in each of our four priority focus areas with highlights that include improved execution across our portfolio and most notably in our common processing architecture area with progress toward full-rate production.
Bill Ballhaus: Expanding our record backlog to over 1.3 billion, up 16% year-over-year.
Bill Ballhaus: Reduced operating expense enabling increased positive operating leverage.
Bill Ballhaus: and continued progress on free cash flow drivers with net working capital down 97 million year-over-year or 14.6 percent.
Bill Ballhaus: Please turn to slide 5. Turning to each of our four priorities and starting with the first, delivering predictable performance.
Bill Ballhaus: In the first quarter, our focus on delivering predictable performance positively impacted our results primarily in three areas.
Bill Ballhaus: First, we continue to make progress on mitigating what we believe to be predominantly transitory impacts that we have discussed over the last several quarters.
Bill Ballhaus: In Q1 FY25, we recognized approximately 11 million of items down 31% from 16 million in Q4 FY24, including 8 million of net EAC change impact across our portfolio and 3 million of inventory reserves.
Bill Ballhaus: These items impact the Q1 revenue by approximately $8 million and gross margin by approximately $11 million.
Bill Ballhaus: Although still greater than we would like to see, the magnitude of these items is the lowest in five quarters and reflects the progress we are making in driving toward predictable execution by maturing our processes in program management, engineering, and operations.
Bill Ballhaus: Second, we continue to make progress in the quarter ramping toward full-rate production in our common processing architecture product area.
Bill Ballhaus: And third, our focus on improved operational performance and delivering for our customers generated an acceleration of deliveries in the quarter as reflected in the 21% year-over-year increase in point-in-time revenues.
Bill Ballhaus: The $16 million of year-over-year point-in-time revenue increase was a primary driver of our year-over-year revenue growth, the majority of which was driven by accelerated deliveries from Q2.
Bill Ballhaus: Please turn to slide 6. Turning now to the second focus area, driving organic growth.
Bill Ballhaus: Q1 bookings of $247.7 million resulted in a record backlog of over $1.3 billion, up 16% year-over-year.
Bill Ballhaus: In line with our expectations, over 90% of Q1 bookings were production in nature, which we believe is a good leading indicator that our mixed shift toward production is continuing.
Bill Ballhaus: Some wins in the quarter worth noting.
Bill Ballhaus: A follow-on award in our common processing architecture area, which was facilitated by the continued progress we made in Q1 in ramping up toward full rate production.
Bill Ballhaus: A production order for heads-up displays used in the Navy's T-45, a trainer aircraft, which is instrumental to preparing Navy and Marine Corps aviators to fly off of aircraft carriers.
Bill Ballhaus: A large follow-on order from a prime contractor for FPGA processor boards to be integrated on a key U.S. Air Force program of record, where Mercury has already delivered hundreds of boards for developmental testing.
Bill Ballhaus: Under the new contract, Mercury will deliver approximately 1,500 production boards.
Bill Ballhaus: A large follow-on production order for a multi-chip module that will be employed in a key U.S. Air Force program of record where Mercury is the sole source provider of this device.
Bill Ballhaus: A large production order for RF solutions employed in a critical missile defense system that is being used in multiple regions to provide a defensive umbrella against hostile threats.
Bill Ballhaus: from the U.S. Naval Air Systems Command to continue providing secure data transfer systems for naval aircraft, which enable the transfer of data between planners on the ground and aircraft, significantly improving operational readiness of airborne assets.
Bill Ballhaus: These awards are important not only because of their value and impact on our growth trajectory, but also because they reflect those customers' trust in Mercury to support their most critical franchise programs.
Bill Ballhaus: We know from engagements with our customers that our unique capabilities providing mission critical processing at the edge align well with their priorities and what we view as strong demand in growth markets including sensors and effectors, electronic warfare, avionics, and C4I.
Bill Ballhaus: Please turn to slide 7.
Bill Ballhaus: Now turning to our third priority focus area, expanding margins.
Bill Ballhaus: getting back toward a more historical 2080 mix of development to production programs, driving organic growth to generate positive operating leverage and achieving cost efficiencies.
Bill Ballhaus: Q1 adjusted EBITDA margin of 10.5% was in line with our expectations and indicative of progress on each of these levers we're pursuing in our effort to reach our targeted margins over time.
Bill Ballhaus: Gross margin of 25.3% was in line with our expectations and largely driven by the average margin in our backlog coming into FY25.
Bill Ballhaus: As we discussed last quarter, our backlog margin coming out of FY24 was lower than what we expect to see on a go-forward basis, driven primarily by a small number of low-margin development programs and programs that incurred adverse EAC adjustments in FY24.
Bill Ballhaus: that we believe will be in line with our targeted margin profile and accretive to the current average margin in our backlog.
Bill Ballhaus: Operating expenses, specifically R&D and restructuring and other charges, are down significantly year over year as a result of the actions implemented in FY24 to streamline and focus our operations.
Bill Ballhaus: Additionally, Q1 R&D reflects the completion and streamlining of internally funded efforts and an increased allocation of resources toward customer-funded activities to drive development contracts to completion and to accelerate customer deliveries.
Bill Ballhaus: Going forward, I expect R&D levels to increase incrementally as we progress on customer funded activities and ramp up targeted efforts in our Advanced Concepts Group to fuel innovation across the mercury processing platform. Please turn to slide 8.
Bill Ballhaus: Finally, turning to our fourth priority focus area, improved free cash flow. We continue to make progress on the drivers of free cash flow and in particular in reducing net working capital.
Bill Ballhaus: Networking capital is down year over year, 96.6 million or 14.6 percent.
Bill Ballhaus: Inventory is down 11.8 million year-over-year.
Bill Ballhaus: Notably, WIP is up 23% year-over-year from $101.1 million to $124.3 million.
Bill Ballhaus: and raw materials is down 12.3% from $235.9 million to $207 million, reflecting an increased mix of inventory progressed toward delivery.
Bill Ballhaus: While inventory is upped sequentially, this increase is offset by an increase in deferred revenue, which reflects our focus on improved contract terms.
Bill Ballhaus: Unbilled receivables are down year over year 90.3 million or 23.2% and down sequentially 5.8 million, reflecting our focus on progressing our programs in order to deliver for our customers and in turn invoice and collect cash.
Bill Ballhaus: We believe our continuous improvement related to program execution and hardware delivery, just-in-time material, and appropriately timed payment terms will lead to continued reduction in working capital and improved free cash flow performance going forward.
Bill Ballhaus: Please turn to slide 9.
Bill Ballhaus: Looking ahead, I am optimistic about our team, our leadership position in delivering mission-critical processing at the edge,
Bill Ballhaus: and our expected ability over time to deliver results in line with our target profile of above-market top-line growth, adjusted EBITDA margins in the low-to-mid 20% range, and free cash flow conversion of 50%.
Bill Ballhaus: As we discussed last quarter, although we will not be providing specific guidance this early in the year for FY25, I will reiterate the color we previously discussed.
Bill Ballhaus: Although we are pleased with the acceleration of customer deliveries and revenue into Q1, largely from Q2, we continue to expect that revenue for the first half will be approximately in line with last year.
Bill Ballhaus: For FY25, we continue to expect revenue to be relatively flat year over year, with an increase in run rate as we exit the fiscal year.
Bill Ballhaus: Although we are encouraged that our recent quarter bookings are accretive to our overall backlog margin,
Bill Ballhaus: We continue to expect low double-digit adjusted EBITDA margins overall for FY25.
Bill Ballhaus: with adjusted EBITDA margins in the high single-digit range for the first half of the year and then expanding in the second half as we complete lower margin development efforts and continue to shift our mix toward production.
Bill Ballhaus: Finally, with respect to free cash flow we are expecting to be cash flow positive in FY25 with second half free cash flow higher than the first half.
Bill Ballhaus: In summary, given the operational improvements over the last several quarters and our recent momentum, I expect that our performance in FY25, in particular our exit run rate, will represent a positive step toward our target profile.
Bill Ballhaus: As we progress through the first half of the year, I look forward to providing additional insights relative to our expectations for second half and full year performance.
Bill Ballhaus: With that, I'll turn it over to Dave to walk through the financial results for the first quarter and I look forward to your questions. Dave? Thank you, Bill.
Dave Farnsworth: As Bill previously noted, our first quarter results were in line with or ahead of our expectations and reflect solid progress toward our goal of transitioning the business to deliver predictable performance characterized by organic growth, expanding margins, and robust free cash flow.
Bill Ballhaus: There is still a lot of work to be done, but we are encouraged by the progress we have made so far, and we continue to expect our transition efforts to become more apparent in our financial results during the second half of fiscal year 2025.
Bill Ballhaus: Our continued progress in our priority areas is highlighted by a few key milestones that we achieved during the first quarter.
Bill Ballhaus: This includes delivering improved operating performance, making additional progress in our ramp toward full rate production in our common processing architecture, and continuing to expand our record backlog. With that, please turn to slide 10, which details our first quarter results.
Bill Ballhaus: Our bookings for the quarter were $248 million with a book-to-bill of $1.21 yielding a backlog of $1.3 billion up $188 million or 16% year-over-year.
Bill Ballhaus: Revenues for the first quarter were $204 million, up $23 million or 13% compared to the prior year of $181 million.
Bill Ballhaus: The increase was primarily driven by higher point-in-time revenue of $16 million, largely accelerated from Q2, as we have continued to improve our operational performance.
Speaker Change: As Bill noted, we experienced approximately $8 million of net EAC change impact in the quarter as compared to approximately $16 million in the first quarter of fiscal 2024, which was the lowest net EAC change impact in the last five quarters.
Speaker Change: Gross margin for the first quarter decreased to 25.3% from 27.9% in the prior year. The decline in gross margin during the current quarter was primarily driven by higher manufacturing adjustments and inventory reserves of $11 million.
Speaker Change: Operating expenses decreased approximately 26 million euro per year primarily due to lower R&D expenses, restructuring and other charges.
Speaker Change: These decreases were driven by actions taken in fiscal 2024 to improve our performance by consolidating and simplifying our operations.
Speaker Change: The R&D headcount was impacted by more than 130 employees driving lower cost as compared to the prior year.
Speaker Change: Gap net loss and loss per share in the first quarter were $17.5 million and $0.30 cents respectively as compared to gap net loss and loss per share of $36.7 million and $0.64 cents respectively in the prior year.
Speaker Change: The improvement in year-over-year earnings is primarily a result of reduced operating expenses driven by our reductions in force throughout fiscal 2024.
Speaker Change: The year-over-year increase was primarily related to lower net losses in the current year as compared to the prior year.
Speaker Change: Free cash flow for the first quarter was an outflow of $20.9 million as compared to an outflow of $47.1 million in the prior year.
Speaker Change: The increased free cash flow is primarily driven by the reduction in cash used in operating activities of approximately 24 million in the current year as compared to the prior year.
Speaker Change: Slide 11 presents Mercury's balance sheet for the last five quarters
Speaker Change: We ended the first quarter with cash and cash equivalents of approximately 158 million driven primarily by approximately 15 million in cash used from operations and investments of approximately 6 million in capital expenditures.
Speaker Change: Billed receivables increased approximately $13 million sequentially. Unbilled receivables decreased sequentially by approximately $6 million, due in part to continued successful execution and billings across the program portfolio.
Speaker Change: Inventory increased sequentially by approximately 16 million, primarily as a result of material receipts supporting milestone invoicing, which largely drove the increase in our deferred revenue of approximately 22 million.
Speaker Change: On a year-over-year basis, while inventory decreased by approximately 12 million, WIP is up approximately 23 million from the prior fiscal year period, reflecting an increased mix of inventory progressing toward delivery.
Speaker Change: Accounts payable decreased approximately six million sequentially driven by the timing of payments to our suppliers.
Speaker Change: Deferred revenues increased sequentially and year-over-year by approximately $22 million and $38 million respectively, as a result of additional milestone billing events achieved during the period. These increases were primarily driven by material receipt milestones, as we continue to improve on aligning our contractual billing milestones with our cash outlays.
Speaker Change: working capital increased approximately 25 million or 5% on a sequential basis in the first quarter but decreased by almost a hundred million year-over-year
Speaker Change: Networking capital remains a primary focus area for the year ahead and we believe we can continue to deliver improvement.
Speaker Change: Turning the cash flow on slide 12. Free cash flow for the first quarter was negative 20.9 million as compared to negative 47.1 million in the prior year.
Dave Farnsworth: As Bill noted, while this negative cash flow performance during the quarter was expected, we did experience some timing delays, which resulted in some free cash flow being pushed into the second quarter.
Dave Farnsworth: As Bill outlined in his earlier comments, we will not be providing detailed guidance for fiscal year 2025 at this time, but I would point you to slide 9 for some qualitative comments.
Dave Farnsworth: In closing, we are pleased with the solid starts of the fiscal year and the higher level of predictability of the business.
Dave Farnsworth: We believe continuing to execute on our four priority focus areas will not only drive revenue growth and profitability, but will also result in further margin expansion and cash conversion, demonstrating the long-term value creation potential of our business.
Speaker Change: With that, I'll now turn the call back over to Bill.
Bill Ballhaus: Thanks Dave. With that, Operator, please proceed with the Q&A.
Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.
Speaker Change: and if you would like to withdraw that question, again press star 1. We also ask that you limit yourself to one question and for any additional questions please re-queue. Your first question comes from the line of Pete Skibinski with Alembic Global. Please go ahead.
Pete Skibinski: Hey, good evening, guys.
Pete Skibinski: A.P.
Pete Skibinski: Hey Bill, could you give more color on the Common Processing Architecture programs?
Pete Skibinski: I'm just trying to get a feel for what what challenges remain on those programs if you're just trying to get yields up in the second quarter Before you go into full rate production just just maybe give us some more of a feel there And do you still call them challenge programs or are we past using that that term?
Speaker Change: Yeah, I mean I'll start with the second part of your question first. We've really moved away from using that term and I think that's just reflective of the progress that we made over the last five quarters. We talked about it.
Speaker Change: pretty much quarter over quarter how we made pretty pretty methodical and systematic progress in closing out those programs and when we you know left it last year we had a couple left where we felt like the the risk was
Pete Skibinski: I'd say from the time that we initiated the root cause corrective action, we halted the line, we put a plan in place, and this is going back a few quarters now, we've pretty much executed.
Pete Skibinski: to that plan. And we're in the progress of ramping up toward full-rate production.
Pete Skibinski: As I've mentioned before
Pete Skibinski: You know, we have the resources trained and in place. We have our capital in place.
Pete Skibinski: We're just being very methodical and rigorous in how we ramp this up.
Pete Skibinski: I think another positive sign in the quarter and we alluded to the possibility of this in prior quarters
Pete Skibinski: was once we got closer to full rate production and demonstrating that our corrective action was in place and working, we felt like there was the potential.
Pete Skibinski: for follow-on awards to become unlocked and we saw that happen in the quarter which I think is another positive indicator of the progress that we made on that front. Hopefully that's some helpful color on the topic.
Speaker Change: Yeah, yeah, appreciate it. And just one last one for me, just...
Speaker Change: was wondering, on the cadence here in the first half, it sounds like you had some revenue get pulled forward into the first quarter, so the second quarter will probably be down sequentially, probably year over year. Does the gross margin take a step down in the second quarter as well before it ramps in the second half? I was just wondering if you could clarify that for us. That's it. Thanks.
Speaker Change: Yeah, I'll let Dave address the gross margins and then maybe I can come back and provide a little color on the volume.
Dave Farnsworth: Yeah, I think what you see is, and we had talked last quarter about our expectations being in the high single digits
Dave Farnsworth: And we were slightly higher than that in Q1, and I think, you know, what you would find is as a result of the volume that got pulled in, we were able to have a bit of a higher operating leverage.
Pete Skibinski: and which resulted in EBITDA being higher even though gross margin was not.
Pete Skibinski: And so we would expect that if the volume ends up being lower in Q2, we wouldn't have as much of an impact from operating leverage, but it would still be in the same realm from a gross margin standpoint.
Speaker Change: Okay, great. Very helpful. Thank you.
Speaker Change: Yep. Thanks, Pete.
Speaker Change: Your next question comes from the line of Peter Armand with Baird. Please go ahead.
Peter Armand: Yeah, thanks. Good afternoon, Bill and Dave.
Peter Armand: Hi, Peter. Hey, Bill. Hey, Bill. Thanks for all the color on the Common Processing Architecture. It sounds like that's...
Peter Armand: kind of tracking to your plan.
Peter Armand: You know, but you've always talked about, I think, when you retired, the risk on all these other kind of programs that are no longer challenged.
Peter Armand: that eventually you had to wait for them to get into kind of production before you'd be able to start to see that unbuild unwind. And obviously you've made progress on the unbuild, but how do we think about it? It sounds like the CPA will start to ramp in the second half, but how about all those other programs? How do we think about kind of how they layer in?
Peter Armand: an allocation of our engineering and our technical resources to closing out the development programs and ramping up
Speaker Change: production. So you know the status varies program by program but I would say that we're generally in that phase where we're ramping down on the developments and beginning the process of transitioning to production.
Speaker Change: Okay that's super helpful and just a quick follow-up just your R&D obviously as you mentioned ticked down this quarter and then you said it's going to incrementally come back is it is it going back to kind of your historical 12% of revenues or is that you know is that not a good guide?
Speaker Change: Yeah, I don't expect any major swings, but I do expect some incremental
Speaker Change: movement on that front, just as we make progress on ramping
Speaker Change: you know, down on the development programs, and then have the capacity to increase in an incremental way our investment in innovation across our mercury processing platform.
Speaker Change: Got it. I'll jump back into Q. Thanks, guys.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Seth Seifman with JP Morgan. Please go ahead.
Seth Seifman: Thanks very much and good afternoon.
Seth Seifman: I wanted to ask when the CPA programs get ramped up, how do we think about the kind of, you know, portion of the mix that programs related to common processing architecture will comprise at that point when they're at full rate production?
Speaker Change: Yeah, I think we haven't specifically spoken about exactly what percentage of the portfolio any of these things are, nothing.
Speaker Change: you know, is they're not a majority of the portfolio. Everything, you know, we have a breadth of 300 plus programs across the portfolio. So, you know, and no program in and of itself contributes, you know, 10% of revenue.
Speaker Change: So, it is, you know, it is a bunch of programs across various capabilities.
Seth Seifman: So, you know, it is, as you saw last year, a significant contributor to revenue and you know, as Bill talked about
Peter Armand: We did see increased production booking activity around this and we expect that to be impactful as we move throughout the second half of the year.
Speaker Change: right okay okay so I guess you said it was that you said 15 million of follow-on orders
Speaker Change: Correct. In Q1, right? So that's about...
Speaker Change: It's $2.50, so that's about 20% of the bookings.
Speaker Change: But it sounds like when we think about where future revenues are going forward, it's not 20% of future revenues going forward. It's something much lower than that in terms of CPA-based programs.
Speaker Change: Yeah, I said, I think we're not we're not specifically calling out how much that it is of the total and I I would not I would not conclude that it's
Speaker Change: I don't think there's enough that we've commented on for you to make that conclusion.
Speaker Change: Okay, okay, that sounds good. And then just as a follow-on...
Speaker Change: the SG&A in the quarter.
Speaker Change: you know definitely down meaningfully from the levels we saw in the second half of last year q1 of 24 was also kind of low and then it kind of popped up for the remainder of the year do we think about a similar profile there or is that kind of you know low 30s kind of number sustainable quarterly on a go-forward basis
Speaker Change: Yes, there is some cyclicality in the SG&A as you've seen historically from us. It's just timing of some of the expenses that happen, but we do expect our operating leverage to improve throughout the second half.
Speaker Change: Excellent. Thanks very much.
Speaker Change: Your next question comes from the line of Michael Ciaramoli with Trois Securities. Please go ahead.
Michael Ciaramoli: Hey good evening guys, thanks for taking the question. Hey Michael, hi Michael. Hey good progress, good results here. Just a point of clarification back to Pete's first question, the first half flat and I always appreciate
Speaker Change: David Farnsworth, The College of Agricultural and Environmental Sciences
Speaker Change: Well, I think what we've said is for the full year, we expect our
David Farnsworth: revenue to be roughly in line, roughly in line in the in the first half. The thing that we're really focused on is the exit run rate coming out of the year. You know with with the things that we're focused on are four priorities, the progress that we make in the first half of the year and coming out of the first half.
David Farnsworth: You know, first half, roughly in line with last year, and we did have a little bit of pull forward from Q2 into Q1, but, you know, appreciate that our focus is really on driving the exit run rate coming out of the year.
Speaker Change: Got it. Got it. And then I guess just on.
Speaker Change: On that exit run rate, is there any way to quantify, I mean, if you get to full capacity on the common processing architecture, I mean, can you maybe help us out with kind of the overhead absorption, you know, what the drag on gross margins are now just in getting full volume through on the end of the year?
Speaker Change: Yeah, I mean, I'll comment on the things that we're thinking about as the drivers on that exit run rate and it aligns with our priority focus. So first it's
Speaker Change: You know, continuing to drive down the volatility in the business, getting the common processing architecture
Speaker Change: line up to full rate production. Second, it's on our bookings and our organic growth focus. It's on the mix of bookings.
Speaker Change: And in this case, it's also on the margin in our bookings, based on the dynamic that we talked about of our backlog margin being a little bit lower than what we'd expect to see on a go-forward basis, driven by...
Speaker Change: some low-margin development programs and EAC impacts from last year, and we are feeling good about the new bookings coming in and being accretive to our backlog margin and in line with our target margins aligned with our target profile.
David Farnsworth: also the progress that we make
David Farnsworth: on the working capital front and how we're able to
Speaker Change: you know, allocate increased capacity away from deliveries on the large unbilled balances that have very little revenue with them and over to programs that do have a higher revenue content. So, I mean, there's nothing new in what I just said. That's what we've been focused on for the last
Speaker Change: year plus, and those are the areas that really are going to drive our velocity and our run rate coming out of the year, both top line and on the bottom line.
Speaker Change: Got it. Got it. Just the last one. I'll jump off just on those production bookings that you're getting, you know Especially if it's you know, kind of a core legacy program. I'm not talking about the the new CPA bookings I mean, do you see that line of sight to gross margins, you know, maybe at or above the 40% level?
Speaker Change: Great.
Speaker Change: Michael, it's Dave. We do see that, you know, and have spoken about, we expect those margins to be in line with what our target model is for production.
Speaker Change: And we have been seeing that, as Bill indicated.
Speaker Change: Q4 and Q1 bookings on those production activities.
Speaker Change: Yeah, I think the other ad here that I'd emphasize is just the mix, too. We're, you know, seeing it in this quarter an even heavier mix toward production, which I think is helpful to the, you know, the margin story going forward as well.
Speaker Change: Got it. Very helpful. Thanks, guys.
Speaker Change: Yep, thank you.
Speaker Change: Your next question comes from the line of Connor Walters with Jeffries. Please go ahead.
Connor Walters: Hi guys, thanks for taking my question and congrats on a great quarter.
Connor Walters: Maybe sticking with the bookings, you're clearly making great progress here, given the 90% production mix in the first quarter. This seems to be much improved from the 80% on fixed price programs you mentioned throughout fiscal 24, so I'm curious if this provides any clarity or better line of sight on that timing for mix normalization of that 80-20 mix you talked about previously.
Speaker Change: I think I think this this quarter our bookings
Speaker Change: you know overall were greater than 90% production and I think we had a pretty heavy mix of firm fixed price
Speaker Change: this quarter. So you can, you know, last quarter we did say that of our firm fixed price bookings, a certain amount were production, but in this case it was 90% of our overall bookings, which I just think is further an indication of the shift in the mix.
Speaker Change: Yeah, and I think, you know, from the standpoint of, you know, of when is there a magic point where the 80-20 is crossed, I think, you know, we've seen a significant shift as Bill said in those.
Speaker Change: production activities that should really be manifesting itself in the second half of the year. So, you know, we absolutely see ourselves moving in the direction we've been discussing.
Speaker Change: Okay, great. That's very clear. And then just one more from me. As we look at the R&D spend, much improved this quarter. And as we think about, you know, the progress we've made since standing up the advanced concept groups recently, just trying to make sense of this is whether, you know, truly more efficient spending with customer funds or how we should be thinking about that over the duration of the year and into next.
Speaker Change: Yeah, I think it's a combination of factors. We have completed some internal projects, we have definitely streamlined our focus, and
Speaker Change: I do think we'll see an incremental lift in R&D as we move through the year and we're able to free up some resources and target it back on internally funded innovation. But as I said earlier, I don't expect major swings. These are more incremental adjustments.
Speaker Change: Perfect, thanks so much.
Speaker Change: Thank you.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: Your next question comes from the line of Ronald Epstein with Bank of America. Please go ahead.
Ronald Epstein: Hey, Keith. Good evening.
Ronald Epstein: A couple of quick ones. What are you seeing in your supply chain and your suppliers? You didn't talk about that too much.
Speaker Change: I mean, are there still challenges or not? How's that going? And maybe as a follow-on to that, what's going on with your own workforce in terms of, you know, having enough folks and retaining them and so on and so forth, because it seems like kind of across the industry, workforce and supply chain have been an issue.
Speaker Change: Yeah, I mean, I'll start with the workforce first. I mean, they're central to everything that we do, and we're very focused on our talent in the organization.
Speaker Change: I would say that at the
Speaker Change: current point, I don't see significant constraints on our performance tied to either workforce or supply chain right now, but we are always focused on those two areas, but not seeing any significant constraints.
Dave Farnsworth: Yeah, I think I would, Ron, this is Dave again.
Dave Farnsworth: I would add, from a supply chain perspective, we haven't seen an elongation of lead times beyond where we've been.
Dave Farnsworth: We haven't felt that I mean are there occasional things that you know that pop up and we got to go figure out Hey, can we accelerate that? How do we get that? Yes, but but I would not say there's a systemic Thing that we've seen at this point
Speaker Change: Got it, got it, got it. And then maybe one more if I can. How should we think about pre-cash flow generation as we go out over time and you know when when would we expect that kind of more in line with you know your EBITDA or your net income, that kind of thing?
Speaker Change: You know, the first quarter, as Bill discussed, we were negative, but much improved from a year ago. There were a couple of things that timing-wise just fell into the very start of the second quarter, and we would have been breakeven or positive in Q1.
Speaker Change: Got it. Okay. Thank you very much.
Speaker Change: Thank you. Mr. Ballhaus, it appears there are no further questions. Therefore, I would like to turn the call back over to you for any closing remarks.
Bill Ballhaus: Okay, thanks. Thanks, Krista. Well, thanks, everyone. Appreciate you taking the time to join us for our Q1 FY25 earnings call, and we look forward to another update a quarter from now. Take care.
Speaker Change: This concludes today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change: Please wait, the conference will begin shortly. Please wait, the conference will begin shortly.
