White Paper

5 open systems architectures and shared technologies, is not supported with a complementary way of operating to encourage such behavior. In fact, often the promotion of shared solutions and incenting open systems has created a "race to the bottom" where all members of the supply chain are driving to "should cost" budgets but forgoing the long- term objectives needed to drive both efficiency and profitability. The challenge is, how can we ensure that the defense industrial base and the DoD can make it work across organizations, both government and commercial? How Commercial Companies Approach R&D Thesis: Commercial enterprises supporting the DoD can successfully undertake internal R&D efforts in a targeted way if the features and solutions are re-usable and portable across different platforms supporting a variety of missions. Let's think about how commercial technology-centric companies ap- proach the problem. Like all companies, they have limited funds to spend on any effort they may undertake. No one hands them a set of specifications for what will be successful. The market, and particularly the market's interest in potential products, is uncertain and can change rapidly. There is often a high degree of price sensitivity for whatever they seek to sell. Finally, the competition is relentless. As a result, companies focus on doing their homework, determining where the unmet technology needs may be and how they might be solved, invest- ing carefully and pricing competitively. It also requires driving hard to innovate and stay ahead of the curve to avoid being overtaken by the next competitor. Against all this uncertainty, one might think that such companies would invest less, not more, for fear of never recouping their investment. Instead, as is evidenced by several of the technology companies mentioned earlier, they typically invest more heavily – and entirely at risk – in self-funded R&D. At the same time, they seek to leverage these investments across multiple opportunities in the hope of finding more ways to earn reasonable returns on their often large and risky investments, essentially spreading the investment risk across a portfolio of opportunities with the goal of earning upside if they enjoy success in multiple areas. We leverage this self-funded R&D approach at Mercury Systems. Using our substantial, at-risk, investment in R&D, we build solutions that work successfully in support of key defense platforms. The approach is not without its failures, but it is by no means a shot in the dark. We minimize our overall investment risk, and by extension that of our customers, by making sure we build solutions that offer modular- ity, standardization, and where possible adhere to critical existing or emerging open systems architecture requirements. Unlike the technol- ogy companies mentioned earlier, our customers are largely defense focused. Yet the same logic applies for us as it does for them. Build innovative technologies that can be used and re-used effectively and be prepared to compete on value. Finally, we make sure we offer critical technology differentiation. Features that are built-in, not bolted on. Thesis: There needs to be a way of taking technology investment theory and turning it into a reality. For us that connective tissue is a pragmatic framework that organizes our innovation into critical areas that in turn support our customer needs. Without such a framework, the bets being placed could be much riskier. Within a suitable frame- work, R&D investments become more manageable and more successful. Pre-Integrated Subsystems and the "5s" model One of the ways we have made our Next Generation Business Model work, satisfy- ing our customers as well as investors, is that we can provide cutting edge technol- ogy solutions both rapidly and cost effec- tively, all while meeting critical schedule and technical requirements. A key to doing that is in providing what we refer to as pre- integrated subsystems. Mercury is neither a platform provider nor an end integrator. We generally leave that to our customers, either large prime contractors or the government. We refer to these subsystems as being "pre-inte- grated", which means they have all the needed technology elements, such as RF content, digital and/or secure processing, along with open middleware and other application ready software already built-in. The customer can then utilize this pre-inte- grated solution as an integral part of a new platform or to modernize an older platform. The requisite classified applications, government IP, electronic warfare and countermeasure techniques, or other elements can all easily be integrated on top of the pre-integrated technology solutions. On top of this, we leverage the best and most recent commercially available technology and open systems architectures. The government has been asking, through multiple directives, for the use of modular open systems architectures for over 20 years. However, the defense industry has been slow to respond. Today with the multiple challenges we face, an increasingly uncertain world, and numerous strategic and tactical threats, the industry is now paying attention. Mercury has been driving open standards based solutions with the development and ratification of OpenVPX in 2010. Open VPX makes it easier and more cost effective to deliver innovations in support of key programs. More recently we have driven innovations in support of more standardization in support of the growing requirements around building innovative and affordable EW solutions. That is why, in 2014, we launched the Open- RFM initiative. Since the announcement of Open RFM we have worked Open TM RFM

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