SYSTEMS

59th Consecutive Quarter of Profitability - Mercury Computer Systems reported results for its first quarter ended September 30, 2005. First quarter revenues were $66.9 million, an increase of 21.7% over the prior year's first quarter, and a record for first quarter revenues. Cash flows from operating activities were $17.8 million in the first quarter. Cash and marketable securities balance for the first quarter was $170.6 million. First quarter GAAP operating income was $4.3 million, representing 6.4% of revenues. First quarter GAAP net income was $3.1 million, or 4.6% of revenues. GAAP diluted earnings per share were $0.14 for the first quarter. GAAP net income includes $4.1 million in charges, consisting of $2.1 million in stock- based compensation costs, $1.5 million in amortization of purchased intangible assets, and $0.5 million for in-process research and development charges. Excluding the impact of these charges, first quarter non-GAAP operating income was $8.4 million, representing 12.6% of revenues. First quarter non-GAAP net income was $6.3 million, or 9.4% of revenues. Non-GAAP diluted earnings per share were $0.27 for the first quarter. Non-GAAP net income and earnings per share also reflect a $1.0 million net tax impact of the foregoing charges. "We had strong first quarter results, particularly in light of softness in the semiconductor industry and program delays in the defense markets," said Jay Bertelli, president and chief executive officer of Mercury Computer Systems, Inc. "This quarter we continued to make progress toward achieving our strategic growth objectives, and completed the acquisitions of SoHard AG and Echotek Corporation." Backlog The Company's total backlog at the end of the quarter was $92.1 million, a $1.9 million increase over the same quarter last year. Of the current total backlog, $83.8 million represents shipments scheduled over the next 12 months. The book-to-bill ratio was 0.74 for the quarter. Defense Revenues for the quarter from the Defense business were $41.1 million, representing 61% of the Company's total revenues. Revenues were particularly strong in the radar and signals intelligence markets. Commercial Imaging and Visualization Revenues for the quarter from Commercial Imaging and Visualization were $13.7 million, representing 21% of the Company's total revenues. Revenues were particularly strong in the MRI and digital X-ray markets. Advanced Solutions Revenues for the quarter from Advanced Solutions were $9.3 million, representing 14% of the Company's total revenues. During the quarter, the Advanced Solutions business was adversely affected by the slowness in the semiconductor market. Modular Products and Services Revenues for the quarter from Modular Products and Services were $2.8 million, representing 4% of the Company's total revenues. Stock Repurchase Program At its meeting on July 25, the board of directors of Mercury authorized a share repurchase program for up to $20 million of the Company's currently outstanding common stock. The plan is intended to offset the potential dilutive impact of the issuance of shares in connection with the Company's employee stock option and purchase plans. Along these lines, in Q1FY06 the Company repurchased 230,800 shares of its outstanding common stock at an average purchase price of $27.07 for $6.3 million. Business Outlook On our July 28 earnings call, the Company estimated an annual revenue range for the 2006 fiscal year of $295 to $305 million, representing approximately 20% growth at the midpoint of the range. Based on continued sluggishness in the semiconductor industry and several large defense programs experiencing timing delays, we are currently anticipating revenues to fall into a range of $275 to $285 million for the 2006 fiscal year. Based on anticipated revenues, the Company currently expects 2006 fiscal year GAAP earnings per share to be in the range of $0.50 to $0.55. Excluding the impact of stock-based compensation costs, amortization of purchased intangible assets, and in-process research and development charges, fiscal year 2006 non-GAAP earnings per share are currently expected to be in the range of $1.00 to $1.05. (Full-year non-GAAP estimates provided on the July 28 call only excluded stock-based compensation.) For the second quarter of fiscal year 2006, revenues are currently expected to be in the range of $61 to $64 million. The Company currently expects second quarter fiscal 2006 GAAP earnings per share to be approximately breakeven. Excluding the impact of stock-based compensation costs, amortization of purchased intangible assets, and in- process research and development charges, second quarter fiscal year 2006 non- GAAP earnings per share are currently expected to be in the range of $0.08 to $0.10. Recent Highlights * Mercury's first product based on the IBM Cell BE (Broadband Engine) processor, the Dual Cell-Based Blade, was announced in October. The Dual Cell-Based Blade will offer unprecedented peak performance of 400 GFLOPS, and will be available in the IBM BladeCenter platform, which integrates server, storage, and networking functionality to provide upward scalability and performance density for computing needs in a variety of applications in the industrial, medical, and military markets. * Mercury completed the acquisition of Echotek Corporation in August for approximately $50 million. Based in Huntsville, Alabama, Echotek is a market leader in the development of data acquisition products. * Mercury also completed the acquisition of SoHard AG in July for approximately $23 million. Headquartered in Fuerth, Germany, SoHard AG is a global market leader in the development of advanced software solutions for medical imaging systems, hardware and firmware for commercial embedded systems, and software intelligence applications via professional services. * Mercury joined the board of directors of VITA, the governing body of the VMEbus International Trade Association, in October. The Company is also continuing its extensive involvement in the standards working groups that are actively renewing the VMEbus architecture and ecosystem and advocating commercial off-the-shelf (COTS) solutions for existing and emerging market applications. Mercury personnel are making vital contributions to eight distinct VITA committees that are focused on standardizing implementations for a specific technology frontier. * Mercury and Terra Soft Solutions, Inc. announced in September an alliance to deliver the Mercury XR9 in a 1U and 4U rack-mount form factor. The customer solution packaging includes dual-PowerPC 970FX-based HPC (high-performance computing) with enhanced I/O capability. Terra Soft is the leading developer of integrated Power Architecture Linux solutions, and a Value Added Reseller (VAR) for Mercury. * Mercury also announced in September its next-generation VME board with high-bandwidth options and 20 GFLOPS of processing power. Designed for vast configuration flexibility, the Momentum Series VPA-200 will combine host, signal processing, and I/O carrier functionality in a single slot, and provide a flexible, multi-function feature set for price-sensitive, entry-level military embedded applications. * Mercury announced in July its alliance with inTrace GmbH to bring a highly advanced, real-time ray-tracing solution to the manufacturing and industrial markets. The worldwide (except Japan) distribution agreement is for joint distribution of inTrace's OpenRT ray-tracing software package and will enable Mercury to enhance its portfolio of visualization products.