Mercury Systems, Inc. (MRCY) Earnings Call Transcript & Summary

All right. Hey, everyone. Welcome back to the aerospace defense track at the 22 JPMorgan Industrials Conference. I'm Seth Seifman, the North America aerospace defense equity analyst here. And we are very happy to have Mercury Systems with us to talk about their business. And we've got CFO, Mike Ruppert, and we've got Nelson Erickson as well. And so welcome, guys. Thank you for being here.

Thanks for having us. Yes.

Cool. And I'm going to turn it over to Mike. He's going to kick off with a couple of slides, and then we'll have some questions.

Sure. So up there. Good. Can you guys hear me? All right. Well, thanks for having us today. We're just talking about it, it's great to be here in person again. It's the first conference we've been doing -- we've done in over 2 years live. So it's great to be here and see you guys. As Seth said, I'm Mike Ruppert. I'm the Chief Financial Officer for Mercury. With me here today is Nelson Erickson. Nelson is our VP of Strategy and Corporate Development. So as you'll hear, M&A is an important part of our strategy. So Nelson can field all those questions for us. How do we forward the slides? All right. So I'm going to go through a couple of pages and then we'll turn it over to Q&A. Before we begin, I would like to remind you that today's presentation may include forward-looking statements and due to risks and uncertainties, actual results could change materially from anything you see or hear today. So please take the opportunity to review the safe harbor statement or for more disclosures on our risks, please see our Form 10-K. So a little bit about Mercury. Mercury was founded in 1981, so we've been around for over 40 years. We went public on the NASDAQ in 1998. We trade under the ticker MRCY. And what makes Mercury unique is we really pioneered a next-generation transformational business model at the intersection of high tech, the high-tech industry and the defense industry. And so at the core, of what we're doing is we're making commercial technology profoundly more accessible to the defense industry. And the way we're doing that is we invest significantly in internal research and development, I'll talk about that in a little bit, to develop technology solutions that are rugged, that are secure, that are trusted, that are size weighting power optimized for use in the defense industry. And our goal is to provide all the processing solutions on board every military platform that requires uncompromised computing, so trusted and secure computing. We're on a great group of programs, over 300 programs. Our customers are the defense prime contractors, and we've really set the company up to meet their increased outsourcing needs. And outsourcing from our customers is really the biggest secular growth driver of Mercury today, and it's what's allowed us to grow faster than the overall industry. And then we really focus on culture, and we're a purpose-driven company. Our logo is innovation that matters by and for people that matter. We focus very much on innovation, and we spend on R&D. We focus on our employees. We focus on our customers and the end user. So some of the numbers, you can see on this slide, we have about 2,300 employees globally. A lot of them hold DoD security clearances based on the type of work that we're doing. We have 32 state-of-the-art facilities. Over the last couple of years. We've invested significantly in capital expenditures to update our facilities. We're mostly domestic. We have a couple of facilities in Europe, but based on the work we're doing, we're mostly domestic. We've been around for over 4 years, as I mentioned, as a tech leader in the aerospace and defense industry. We've got a wide base of programs. We have 25-plus key customers. Our customers, as I mentioned, are the prime contractors. R&D is an important part of our strategy. We've got a commercial tech business model, unlike a lot of defense companies. So we invest significantly in R&D. And our R&D investment is 4 to 5x the size of what you see typically for the defense industry. Financially, we're a June fiscal year-ended company. For fiscal '21, which was our most recently completed fiscal year. We did $924 million in revenue, $202 million of EBITDA. And you can see we're a growth company. So we've grown the business since fiscal '14 to fiscal '21 at a 24% revenue CAGR and a 37% EBITDA CAGR over that period of time. So in addition to organic growth and that margin expansion, because we were able to grow EBITDA quicker than revenue, we're also very acquisitive. And M&A is a core part of our strategy. Since fiscal '14, we've completed 15 acquisitions. We've deployed over $1.4 billion in capital, and we still have a lot of financial flexibility today to continue that part of our strategy. Quickly touching on some of our programs. We've got a good group of programs. You can see on the left of this slide, both in the C4I market as well as the Sensor and Effector Mission Systems. Our programs that we're on are well aligned with the DoD priorities. We're on manned platforms. We're on unmanned platforms, rotary wing, naval surface fleet. We do a lot in mission systems as well as weapon systems. So we think a diversified group of programs but well aligned with the defense industry. So what we've set out to do is create a unique business model that allows us to grow organically and inorganically while maintaining and expanding industry-leading EBITDA margins. And this page shows that we've been able to do it. So what this page does is it compares Mercury to all other publicly traded companies with market caps between $1 billion and $5 billion. And you can see, on the top left of this page, there's 1,242 of those companies. And what we did is we applied a couple of filters to all of those companies. The first we said is, which of those companies are highly profitable. And we define that as LTM EBITDA margins greater than 20%. And when you apply that initial filter, you quickly eliminate about 70% of that original universe of companies. We then said of those highly profitable companies which ones are also high growth. And we define that as a revenue CAGR greater than 10% over a 5-year period. And when you apply that filter, you get down to 100 companies. And then finally, we said of those highly profitable, high-growth companies which ones have really been able to vault themselves forward in their last fiscal year growing greater than 20%. When you apply that final filter, you get down to 30 companies. And historically, it's right at the tip of that inverted pyramid where Mercury has positioned ourselves from a financial standpoint. And you can see our numbers over on the right for our fiscal '20 and fiscal '21. Our EBITDA margins are 22% in both the years. Our 5-year revenue CAGR is 28% in both periods. And then in fiscal '20, you can see that our revenue growth was 22%. So we're right at the tip of the pyramid in fiscal '20. And in fact, if you look back at fiscal '19, fiscal '18, fiscal '17, you'd also see that we were right at the tip of the pyramid, so really the strategy of work. In fiscal '21, you can see on the bottom right that our revenue growth was 16%, which is slightly below that 20%. And we'll probably talk a little bit about that. But we did face some headwinds. It's still good growth at 16%, but we did face some headwinds associated with COVID. We had some program delays on some of our key programs as well as supply chain disruption that we've seen in fiscal '21, and we're also seeing it in fiscal '22. But we think we're incredibly well positioned in fiscal '23 and beyond to continue to be in this unique category of companies. The other thing we've done on this page is we've compared our financial performance to a Tier 2 defense index. And what you can see is that our business model, based on our financial performance is significantly different from the rest of our peers. So we've been able to overachieve both in terms of margins but significantly overachieve in terms of revenue growth as well -- over 5 years as well as over a 12-month period. The point of this page is to show our financial performance, but it's not just what we've done historically. It's really about this is what we're trying to do from a financial standpoint going forward. And we think if we cannot just maintain but expand those EBITDA margins, we can continue to grow organically at high single-digit, low double-digit rates, and we can continue to supplement that with M&A, then we'll continue to be at the tip of the pyramid and we'll continue to create significant shareholder value. This page looks at some of the investment highlights that's really driven that financial performance. We are an innovative growth company at the intersection of high tech and defense. We think we've positioned the company extremely well for where the defense industry needs to go and where the defense industry is going. We're a defense pure-play company, defense electronics. So we're very focused on that market. But within the defense electronics market, we are focused on the large, faster-growing well-funded parts of the market, which is, we think, is aligned with the defense industry and will let us grow in any defense budget environment. We've got a transformational business model. We've got a commercial tech business model even though we're serving the defense industry. which is why we're spending 4 to 5x what normal defense companies spend on internal R&D. Our growth is really benefiting from some key trends, outsourcing being the biggest. So this is our customers outsourcing more of what they had done in-house to us. We're uniquely positioned to take advantage of that, and that's really what's driven our organic growth faster than the overall market. We're also benefiting from supply chain delayering as well as reshoring. We've got a low-risk content expansion strategy. So we talked about some of the programs that we're on. We've been able to successfully get more content on each of those programs. We've done that organically as well as through M&A. And then as I mentioned, we've got a scalable M&A capability. It's a core capability of ours. We've got the ability to identify, execute as well as integrate acquisitions. So this slide looks at some of our key financial and operational metrics since fiscal '14. And what you can see is we've really grown the company over the last 7 years. And from a financial perspective, you can see we grew our revenue at 4.4x over the last 7 years. We grew our adjusted EBITDA by 9.2x. So we've been able to grow it faster than revenue as we've expanded our margins and integrated our acquisitions. Operationally, we've also increased the size and complexity of the business. One thing I'd point out there is the subsystem revenue. So you can see that we grew our revenue -- our subsystem revenue at 7.5x compared to total revenue of 4.4x. And that's really the strategy of work. And that's as we've moved from selling modules and subassemblies to integrated subsystem to take advantage of the outsourcing trend, we've been able to grow revenue faster than the overall market. Now with that growth, both financially and operationally, has led to increased complexity and size of the business, obviously. And that's why we launched what we call our 1MPACT initiative, and I'll talk about that in a second. And I think Seth and I will talk about that as well. But we launched that because of the growth that we've had in the company. This slide just looks at our financials since fiscal '16 for some of our key metrics is by year in the blue bars, then you can see the CAGR as well. The one thing I'd point out, we've got strong compounded annual growth rate in all our key metrics. But we've also grown pretty consistently year-over-year in all these key metrics as well. So from a market perspective, I mentioned we're a pure play defense electronics company. But what this slide looks at is the submarkets within the global Tier 2 defense electronics market. And what we've been able to successfully do is expand into adjacent markets. So we started out in the core -- core Mercury started out in the radar submarket that you see here. But through M&A and as well as organically, we've moved into adjacent markets where we have competitive differentiators. And that's allowed us to continue to grow. It also positions us well to continue to grow going forward, both organically as well as through M&A because this opens up the aperture of M&A opportunities that are near our core. So I mentioned 1MPACT earlier. And what 1MPACT is, it's the value creation plan that we implemented as we've grown with -- in the size of the business. So we proactively launched 1MPACT to lay the foundation for the next phase of our value creation at scale. So we've gotten to $1 billion in revenue. We've been very acquisitive doing 15 acquisitions, and we realized that in order to continue to scale, we needed to do things differently. We also realized that there was an opportunity, even though we've grown significantly from an organic standpoint, and we have industry-leading margins that we saw that there was an opportunity to grow those even further. And that's what 1MPACT is all about. And so from a cost perspective, we've estimated that we can get $30 million to $50 million of incremental adjusted EBITDA by fiscal '25. As a reminder, our revenues are about $1 billion today. So that would be 3% to 5% of where we are today, although revenue growth will be a little less than that but significant opportunity to expand EBITDA margins. And the other thing that we're excited about for 1MPACT is the ability to continue to do additional acquisitions and bigger acquisitions. So we've done 15 acquisitions since fiscal '14. We've grown revenue, as I discussed, grown EBITDA. We've integrated our acquisitions because that's core to our strategy. But with 1MPACT, we see the ability to do even more, and we've already executed on some of that. But what we see going forward is, from an M&A perspective, the ability to use 1MPACT to recognize even more synergies. So we're excited about this 1MPACT opportunity, both from a margin expansion, helping us with organic growth as well as helping us create even further value through M&A. So on the previous slide, where I showed the inverted pyramid, we talked about the financial performance that we've had historically. This page looks at how we plan on maintaining that financial performance. So first of all, we don't want to just maintain our EBITDA margins. We want to increase those EBITDA margins over time. We think we have a clear path to do that as we grow revenue faster than expenses and have operating expense leverage, program mix. We've got a lot of new program starts that are going to move into production. Production historically has had higher margins than the new program starts; and then finally, impact, which I just talked about, where we see significant margin expansion opportunities. In addition to expanding margins, we want to grow organically at high single digits, low double digits. Obviously, there's been a lot in the news because of geopolitical events in terms of increased defense spending, both in the near term and the long term. That having been said, with our business model and where we sit, we think we're well positioned to grow in any defense budget environment because we're aligned with the DoD priorities, and we're seeing increased outsourcing. And again, that additional content on the programs is driving our organic revenue growth. And then finally, we're well positioned to supplement that margin expansion and organic growth with additional strategic M&A, and Nelson can talk about it. We've got a large pipeline of targets. We've got significant financial firepower. We just upsized our revolver to $1.1 billion. We've got very attractive terms. What we think is if we can do these 3 things that we're well positioned to do that we're going to continue to create shareholder value. So that's it. I mean this is just a summary, track record of strong organic growth profitability and strategic M&A. We've invested significantly over the last 5 years, CapEx, R&D, M&A, which is a competitive differentiator for us. We're well positioned to continue to grow organically as well as expand margins driven by the 1MPACT initiative that we've launched, and we're well positioned for future M&A as I just discussed. So a clear strategy to continue to maintain the unique financial profile that we've had over the last 7 years, and we expect to continue to do it going forward.

Great. Thanks very much. I've got some questions, and we'll -- maybe I'll kick it off, and then we'll take some questions from the group as well. I know it's been -- on the organic growth side, it's been a tougher series of quarters recently, both for Mercury and throughout the industry. But can you break down some of the specific headwinds that you faced over that period? And has it been kind of the same headwinds over the past year? Or have they evolved?

Yes. So stepping back, when you look at our strategy, we still feel very good about the long-term organic growth of the company. And as I just went through for all the reasons, the trends in the industry are still there for us. And if you look at what we've done over the last 7 years, we've clearly been able to grow the business with the strategy. So we think, fundamentally, nothing has changed. And for those of you that don't follow us as closely over the last couple quarters, we have seen some headwinds associated with organic growth. We saw it in the second half of our fiscal '21, and we're [indiscernible] into fiscal '22. And that's really been driven by a couple things that we've talked about on our earnings calls. The first is we had some program delays really with naval modernization, including the SEWIP program, we think driven by COVID, which delayed the upgrade cycle associated with the electronic warfare and other systems on board ships, so really COVID-driven. The second is we had some technical delays, not Mercury, but our customer had technical delays on Joint Strike Fighter TR3. And where we provide, where we sit in the pyramid and the supply chain, we're providing our content to them. So as they're delayed, we're delayed. So it was out of our control, but it led to some delays. And then the third thing is we've seen a slowdown. As the Biden administration came in, we're reviewing FMS programs. We did see a slowdown in some FMS sales. And so those are the headwinds that we faced. We had 5% organic growth in fiscal '21. So it's still strong but it was slower than we expected coming into the year. The impact of those things I just mentioned was about 6 points. So if we didn't have those, we still would have been at that low double-digit organic growth. You look at fiscal '22, when we came into the year, it was the same things, more or less. It was the naval modernization. It was FMS sales. LTAMDS is a big program of ours that was delayed till -- the full rate production was delayed. And the combination of those things led to lower organic growth. So our organic growth this year because of those items is we're forecasting slightly negative, actually. It was flat coming into the year. So all the same things. The one thing that's new is supply chain and supply chain and labor and attrition. But for us, it's mostly supply chain. And we have seen an impact from that. We are a computer company. Silicon is an important part of the capabilities that we provide and we're seeing significant delays there, and we're seeing decommits. And so that has led to slightly lower organic growth. But again, we feel good about where we're positioned and going forward. We're looking for -- looking forward to a good second half and especially Q4 when some of these programs, we expect them to come back together.

Okay. Yes. Maybe to dig in a little bit more on some of those, on F-35, I was listening to the head of the program office last week talk about bringing in TR3 kind of in mid-2023. And so when you think about your lead times, and where things stand on the TR3 refresh, what does that imply for Mercury in terms of when F-35 can ramp back up and begin growing again?

Yes. So it's a perfect example of where we sit. So TR3 is the tech refresh for the upgraded computer system on board the Joint Strike Fighter. And Mercury provides content to L3 HRIS on that program. But it's a great example of where we sit in the supply chain. So they're talking about cutting in TR3 into lot 15 in terms of when they upgrade those planes. We've already delivered lot 15. So we provide memory modules and other special components to L3 HRIS. We've delivered lot 15 already, and we expect to deliver -- start beginning lot 16 here relatively soon.

And then when we think about SEWIP, is SEWIP a growth program for the company? Or is SEWIP something where the sales will kind of return to a level and then kind of maintain at that level? Or is it something that's going to grow over time after it recovers?

Yes. So there's 2 programs under SEWIP. There's SEWIP Block 2 and SEWIP Block 3. And when we've been talking about SEWIP, we're designed in to SEWIP Block 2, and that's normally what we talk about. And so when we talked about the headwinds to organic growth and the upgrades to the naval surface suite for the electronic warfare programs, we're talking about SEWIP Block 2. And for us, that was running at a steady state. The navy does a certain number of upgrades on ships every year. Because of COVID and other delays, those ship sets came down. We expect them to ramp back up slowly in fiscal '23. And then by our fiscal '24, we expect that to be a run rate and then flatten out from there in terms of that program. Now upgrading the naval surface fleet with everything that's going on with additional electronic warfare programs and capabilities is critically important. So we think there's growth within that market.

Yes. And then on LTAMDS, I mean, it was definitely striking to me how much that program contributed shortly after Raytheon won the award. And now I think because Raytheon and UTC merged, we kind of within Raytheon lost a little bit of track of how things are going with that program. But now it seems like there's this long pause period. Was that kind of an unanticipated delay? Or was it -- is it the life cycle of the program?

Yes and no. So it is the life cycle of the program. So when LTAMDS started, and it's now called GhostEye, and this is the replacement for the Patriot missile defense system. And when that started, Raytheon got an order for 6 prototypes and the initial order. So our initial order, we had a big booking in fiscal '20 associated with the initial engineering work and the 6 prototypes around that. That led to revenue in fiscal '20 and fiscal '21. We thought that we'd get orders for full rate production in fiscal '21, additional orders. Those orders have pushed to the right. So it's a combination, Seth, of the normal life cycle, but then also a pushout to the right of the production of that program. And again, another example of as you look at our revenue growth and movements period to period, it's not a program that we've lost or designed into. There's great support around it. There always has been additional support in terms of what's going on in the world today. So we'll get that revenue, but it's just pushed a little bit to the right, but that revenue is not going to 0. We still have a lot of engineering work we're doing, lab, test equipment, things like that.

Okay. I guess you talked about Q4 and kind of a pretty big recovery in that quarter. If we just look at the guidance and what's implied, I think it's something in the neighborhood of $300 million plus. How do we think about what that implies for fiscal '23? And obviously, if you run rate that, you get to a very big number, but that's not necessarily the right way to approach it. So how do you guys think about it?

Yes. Don't run rate that because what's happening because the other thing you'll see is based on the midpoint of our guidance, our EBITDA margins that quarter, 29%, 30% EBITDA margins. And so what you're seeing in Q4 is the backup of these programs that we've seen delays on in the last couple of quarters. And so it will be the biggest quarter that we've had by far. As you said, it's over $300 million. But I would look, as you think about fiscal '23, what we've talked about, we haven't given any official guidance for fiscal '23, but we talked about a strong bookings year in fiscal '22 with a book-to-bill above 1 and then in fiscal '23, returning to more normalized Mercury levels of growth. So I'd look at it on fiscal '22 annual basis and look at growth from there.

Okay. Okay. Great. Let me stop for 1 second to see if there are any questions out in the audience. And okay. Well, I will continue. And you spoke about 1MPACT -- there's a question. Sorry, I missed that. Yes.

Great. Good morning. Can you hear me?

I can hear you but I don't think your mic's on.

I don't think your mic's on.

[indiscernible].

Yes. And just for the webcast, the question was about how the budget outlook may be changing as a result of what's happening in Eastern Europe.

Yes. So at the highest level, I think what we're obviously seeing is, both domestically and internationally, a renewed focus on defense spending. And so in the U.S., we saw the appropriations of the omnibus package pass the House and the Senate with bipartisan support and an increase over the president budget request. So I think just fundamentally strong support in the near term and also in the long term. The other thing that we're seeing is the increase -- you saw Germany announced the increase in defense spending. A lot of the NATO companies coming out and pledging 2% of GDP in terms of defense spending as well as non-NATO countries in Europe pledging increased defense spending. Now that's important for us because when you have FMS, foreign military sales, that we sell through our prime customers, anytime you send systems over, even if it is allied countries, the computers on board those platforms have to be secure. And so we spend and have spent, invested a lot of money in security. So that unit is unique for us. In terms of overall budget priorities, I think there's the near-term supplemental that folks are looking at in terms of Ukraine. And that funding is going to be less relevant for us. That's going to be more tactical in my mind. I think it's the second order, and I don't say it's a shift in priorities. I think it highlights the priorities that were already there. The DoD had already shifted to -- in their national defense strategy, a shift in near-peer threats, which was Russia and China. I think that those are things like radar upgrades, missile defense, electronic warfare optimization, electronics optimization or modernization, and those are going to continue to be priorities. So as we look at it, it helps us in terms of overall defense spending, but I think we were already aligned with those priorities. And I think those priorities are going to remain consistent.

Great. Now that we've moved past the Omicron variant for now here in the U.S., has that caused any letup in the supply chain challenges that you've been seeing?

Not yet. Not yet. I think everything that we're looking at as a company, we've talked about some of the program delays that have impacted our organic growth over the last couple of quarters. We haven't lost any of those programs. Those are just delays. The supply chain is tough right now. And I think what we're -- what we've seen and what we continue to see is extended delivery times from our suppliers as they push out deliveries and then decommits. Suddenly, they'll -- we'll be expecting a part and they'll say, hey, it's not going to be there, and I won't even give you a date. And so for us, that's had an impact on inventory because you can have a system that's 98% of the way done, and you're waiting for a couple parts. And it also has an impact on revenue because the way we recognize revenue is when we point in time, when we deliver to a customer. It's not over time revenue recognition like a lot of our customers. So that can have a material impact on us. So we're not seeing it letup yet. The team is working extremely, extremely hard on it, but it's something that we hope mitigates relatively soon. And we've done a lot of stuff. We preordered inventory, we've built inventory. We're working closely with our suppliers, but it is a challenge. It is a challenge right now.

Maybe on M&A, we've seen the company spend, I think, about $600 million or so over the course of fiscal '21 and '22 so far. So what are the key capabilities, number one, that you acquired, maybe we'll start with that -- that you acquired over that time? And then follow-up on future M&A.

Sure. So in terms of the key capabilities, if you look back even before the last year, which was a pretty big year for us from an M&A perspective, we've been building our business thematically in key areas. So we did the Microsemi Carve-Out acquisition and built upon our microelectronics capability through a number of other acquisitions, one of which we did this last December, Atlanta Micro. We have done the acquisition of Themis and subsequently the acquisition of Germane, which was the centerpiece of our C4I expansion and built a nice sized platform there through M&A. Most recently through, what is probably 6-or-so acquisitions, we've built out a global avionics platform focused on open mission systems. Again, through 6 successive acquisitions, trying to bring capabilities and flight safety again, open mission systems and be able to play this, what we call, delayering trend where at least in aircraft modernization, the government rather than going to buying more platforms is focusing their investment on modernizing the competence, modernizing the systems inside these platforms. So that's been a big focus of ours. And we'll continue to grow these acquisition -- or grow these businesses through acquisition, get them to a point of scale, extract synergies while also looking at new domains such as space, in areas like that, trusted microelectronics, et cetera.

Okay. And I guess when you think about -- you mentioned one of the goals of 1MPACT is to drive more integration in the company. And so -- and you also talked about having an appetite for more M&A soon. I guess is there a need to kind of go through 1MPACT and kind of digest this recent period of activity that you've had? Or do you feel kind of -- it sounds like you feel ready to move on now. And is that a reflection of the fact that the 1MPACT changes are kind of in place and there to drive future integration?

So I'll take a first stab on it. So I think we can do both. If you think about, we just did 2 acquisitions in the last couple months of December right in the throes of us executing on our 1MPACT initiative, and that's worked very well. I mean we've got a pretty good muscle of integrating individual acquisitions, and what 1MPACT is allowing us to do is to kind of take that to the next level across the enterprise and find and harvest additional benefits as we go forward. So I think we have been executing both at the same time and 1MPACT would just allow us to hopefully extract more value out of the acquisitions that we did.

Yes. Completely agree.

Great. Okay. I've got one question I'll ask you. I don't know how much there is u can say about it, but the company has been in the news a little bit because several activists who were involved in the stock. And so I guess maybe if you could tell us a little bit about how you've dealt with that and sort of what types of changes you think they might be looking for and how the company might respond.

Yes. So I'm not going to comment directly on the activist shareholders that are the stock. Obviously, that's been in the news. I would say we're a company that always engages with our shareholders, all of our shareholders and have regular conversations with all of our shareholders. And so we're doing that as well. That having been said, as a team, we're very focused on the strategy. We think we've got a good strategy. We've got a good growth profile. And then with 1MPACT, we're focused on a lot of the opportunities to optimize both the income statement and the balance sheet. And those are things that we're focused on. And those are the things that shareholders, certain shareholders and all shareholders are focused on. So we're just continuing to execute on our strategy. We think we're going to create a lot of value doing that.

Okay. One of the areas you talked about and thinking about long-term value creation is microelectronics. I know it's a big topic and we're under 2 minutes here. So I'll try and ask a fast question so that give you a chance to answer. But it's obviously a priority for the Defense Department, and just thinking about the idea of a secure supply chain in microelectronics is obviously very important for the defense department. You guys, I think maybe it was 2019, announced an initiative here. It's early. It's not something we really see in the financials and understand that, that takes time. But what is -- like from an investor point of view, what is the vision for what you're trying to do here and the time line?

Yes. All right. So this could be a 30-minute discussion because we think this is such a great opportunity. But if you step back and you think about what Mercury is as a company and what we talk about is a business model that is at the -- marries the high-tech industry together with the defense industry. And the reason we can do that is because we have capabilities, knowledge of the defense ecosystem. We talked about security, things like that, that the commercial industry just doesn't have. And so when you look at custom microelectronics, we think it's a very big opportunity. It's critical for the country, too, that we have these capabilities onshore, secure computing capabilities and secure microelectronics. And you're right, we started investing this in fiscal '19, but it really started when we bought the Microsemi Carve-Out acquisitions and that packaging capability that we bought in fiscal -- in 2016. So we see a lot of opportunity here. Now how is it going to work? In defense, it takes time for things to get designed into programs. This is the future of the next generation programs. We've invested over $20 million in this area in CapEx and OpEx as well as in R&D. We're excited about the opportunity. Again, we think it's where the country needs to go and where the DoD is going. In the meantime, I think we'll see it slowly ramp up. You'll see some nice design wins. And then as the defense budget goes up and priorities, there could be some direct government funding as we think through that. But it's a great opportunity, and we think we're positioned the right way. And as a merchant supplier as we've positioned the company, we're well positioned to -- in this area as well.

Excellent. Very good. Okay. Well, with that, we're out of time. So Mike and Nelson, thanks very much for being here. I appreciate it.

Thanks for having us.

Thank you.