Earnings call transcript: Mercury Systems Q3 2025 misses EPS forecast, stock dips

Published 06/05/2025, 23:04
 Earnings call transcript: Mercury Systems Q3 2025 misses EPS forecast, stock dips

Mercury Systems Inc. reported its third-quarter earnings for 2025, revealing a significant miss in earnings per share (EPS) compared to forecasts. The company posted an EPS of -$0.33, falling short of the anticipated $0.10. Despite an actual revenue of $211 million, which surpassed the forecast of $205.88 million, the company’s stock saw a decline of 1.43% in regular trading, closing at $49.85, and continued to slip by 1.11% in aftermarket trading. According to InvestingPro data, the stock has shown remarkable strength with a 72.76% return over the past year, though current analysis suggests the stock is trading above its Fair Value.

Key Takeaways

  • Mercury Systems’ Q3 2025 EPS of -$0.33 missed the forecast of $0.10.
  • Revenue of $211 million exceeded expectations, showing a 1.5% year-over-year increase.
  • Stock price fell by 1.43% in regular trading and 1.11% in aftermarket trading.
  • The company highlighted significant improvements in financial performance and operational efficiency.
  • Strategic acquisitions and innovations in cybersecurity and processing technologies were noted.

Company Performance

Mercury Systems demonstrated a mixed performance in Q3 2025. While the company exceeded revenue expectations, the EPS miss marked a notable deviation from forecasts. Year-to-date revenue growth was strong at 8.9%, and the company reported a positive book-to-bill ratio of 1.1, indicating healthy demand for its products. The company also highlighted its strategic focus on reducing operating expenses and improving working capital trends. InvestingPro analysis reveals the company maintains a healthy financial position with a current ratio of 3.62, indicating strong liquidity, and operates with a moderate debt-to-equity ratio of 0.45. These are just two of numerous financial insights available through InvestingPro’s comprehensive research reports.

Financial Highlights

  • Revenue: $211 million, up 1.5% year-over-year.
  • EPS: -$0.33, below the forecasted $0.10.
  • Adjusted EBITDA: $24.7 million, a substantial improvement from -$2.4 million the previous year.
  • Gross margin: 27%, increased from 19.5% last year.
  • Free cash flow: $24 million, compared to -$26 million in the prior year.

Earnings vs. Forecast

Mercury Systems reported an EPS of -$0.33, missing the forecast of $0.10 by a significant margin. The surprise percentage was -430%, a notable deviation from expectations. However, the revenue of $211 million exceeded the forecast of $205.88 million, reflecting a positive sales performance.

Market Reaction

Following the earnings release, Mercury Systems’ stock dropped by 1.43% during regular trading and continued to decline by 1.11% in aftermarket trading. The stock’s performance is currently within its 52-week range, with a recent high of $52.25. The market sentiment appears cautious, likely due to the EPS miss overshadowing the revenue beat.

Outlook & Guidance

Looking ahead, Mercury Systems anticipates annual revenue growth approaching mid-single digits and targets low double-digit EBITDA margins for FY2025. The company expects the fourth quarter to deliver the highest EBITDA margins of the year, reaching mid-teens. Long-term goals include above-market top-line growth and EBITDA margins in the low-to-mid 20% range. InvestingPro analysts forecast profitability for the company this year, with an EPS forecast of $0.41 for FY2025. For deeper insights into Mercury Systems’ valuation and growth potential, including exclusive ProTips and detailed financial analysis, explore the full InvestingPro Research Report.

Executive Commentary

CEO Bill Balhaus expressed confidence in the company’s performance, stating, "We delivered solid results in Q3 that were once again in line with or ahead of our expectations." CFO Dave Farnsworth highlighted financial goals, noting, "We expect to get to a point where there’s a recurring 50% of EBITDA cash flow."

Risks and Challenges

  • Potential tariff impacts, though deemed minimal by executives.
  • Supply chain disruptions could affect production timelines.
  • Competitive pressures in the defense and aerospace sectors.
  • Macroeconomic uncertainties, including changes in defense budgets.
  • Execution risks related to strategic acquisitions and integrations.

Q&A

During the earnings call, analysts inquired about the company’s outlook on the LTAMDS program and improvements in backlog margins. Executives emphasized their optimism about the pipeline and activity in Q4, while also addressing ongoing working capital optimization efforts.

Full transcript - Mercury Systems Inc (MRCY) Q3 2025:

Conference Operator: Good day, everyone, and welcome to the Mercury Systems Third Quarter Fiscal twenty twenty five 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 Vice President of Investor Relations, Tyler Hojo. Please go ahead, Mr. Hojo.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems: Good afternoon and thank you for joining us. With me today is our Chairman and Chief Executive Officer, Bill Balhaus and our Executive Vice President and CFO, Dave Farnsworth. If you have not received a 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 we will be referencing to is posted on the Investor Relations of the website under Events and Presentations. Turning to Slide two 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. All 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 to mention 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 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.

I’ll now turn the call over to Mercury’s Chairman and CEO, Bill Balhaus. Please turn to Slide three.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Thanks, Tyler. Good afternoon. Thank you for joining our Q3 FY twenty twenty five earnings call. We delivered solid results in Q3 that were once again in line with or ahead of our expectations, and I’m optimistic about our ongoing efforts to improve performance as we move through the fiscal year. Today, I’d like to cover three topics.

First, some introductory comments on our business and results Second, an update on four priorities: delivering predictable performance, building a thriving growth engine, expanding margins and driving improved free cash flow. And third, performance expectations for FY twenty twenty five and longer term. Then I’ll turn it over to Dave, who will walk through our financial results in more detail. 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. I’d also like to thank our Mercury team for their dedication and commitment to delivering mission critical processing at the edge.

Please turn to Slide four. Our Q3 results reinforce my confidence in our strategic positioning and our expectations to deliver predictable organic growth with expanding margins and robust free cash flow. Bookings of $200,000,000 and a trailing twelve month book to bill of $1,100,000 revenue of $211,000,000 and year to date revenue growth of 8.9% year over year adjusted EBITDA of $25,000,000 and adjusted EBITDA margin of 11.7%, both up substantially year over year. And free cash flow of $24,000,000 up $50,000,000 year over year, resulting in $146,000,000 of free cash flow over the last four quarters. We ended Q3 with two seventy million dollars of cash on hand.

These results reflect continued progress in each of our four priority areas with highlights that include solid execution across our broad portfolio of production and development programs backlog growth of 4% year over year, reduced operating expense enabling increased positive operating leverage and continued progress on free cash flow drivers with net working capital down $148,000,000 year over year or 24.6%. Please turn to slide five. Starting now with our four priorities and priority one, delivering predictable performance. In the third quarter, our focus on predictable performance positively impacted our results primarily in two areas. First, in Q3, we recognized approximately $3,700,000 of net EAC change impacts across our portfolio, which is again down sequentially to the lowest level in several quarters, reflecting our maturing capabilities in program management, engineering and operations and progress in completing development programs.

And second, our focus on accelerating customer deliveries allowed us to largely offset the $29,000,000 of revenue that we accelerated into Q2 as discussed in our last call. Please turn to Slide six. Moving on to priority two, driving organic growth. Q3 bookings of $200,000,000 resulted in a backlog of $1,340,000,000 up 4% year over year. In the third quarter, we received a number of significant contract awards, including a total of $40,000,000 in production contracts for our common processing architecture, adding to our backlog in this area and a $20,000,000 follow on production order associated with the F-thirty five program.

It’s also worth noting that in the month of April, we had several meaningful bookings, including a $20,000,000 follow on production agreement with an innovative commercial space company that supports a U. S. National security mission, a $7,000,000 development contract with the U. S. Navy for an electronic warfare capability, and a $6,000,000 follow on production order for a classified avionics program that leverages our commercial memory products and advanced packaging expertise.

In line with our expectations, over 80% of trailing twelve month bookings were production in nature, which continues to drive a mix shift toward production. 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. In addition to this bookings progress, in early Q4, we entered into two agreements that we believe will enhance our competitive position going forward. First, we announced the acquisition from Wind River of Starlab, a longtime partner and provider of cybersecurity software that integrates with our common processing architecture products, adding to our overall differentiation in this area. Second, we announced an agreement to divest and outsource our manufacturing operation in Switzerland, which we believe will enhance our ability to scale and increase capacity with improved efficiency as we pursue continued growth of our international operations.

Please forward to slide seven. Now turning to priority three, expanding margins. As we’ve discussed in prior calls, to achieve our targeted adjusted EBITDA margins in the low to mid-twenty percent range, we are focused on the following two drivers: backlog margin expansion as we burn down lower margin existing backlog and replace with new bookings aligned with our target margin profile and driving organic growth to realize positive operating leverage given our streamlined operations. Q3 adjusted EBITDA margin of 11.7% was in line with our expectations, up sequentially 180 basis points and indicative of progress on each of these levers in our effort to reach our targeted margins over time. Gross margin of 27% was in line with our expectations and largely driven by the average margin in our backlog coming into FY 2025.

We expect backlog margin to continue to increase as we bring in new bookings that we believe will be both in line with our targeted margin profile and accretive to the current average margin in our backlog. Operating expenses are again down year over year and down significantly year to date as a result of prior and ongoing actions to streamline and focus our operations. Please forward to Slide eight. Finally, turning to priority four, improved free cash flow. We continue to make significant progress on the drivers of free cash flow, and in particular reduced net working capital, at $453,000,000 is at the lowest level since Q2 of FY twenty twenty two and down $2.00 $7,000,000 from peak net working capital levels in Q1 of FY twenty twenty four.

Notably, combined free cash flow over the last four quarters is approximately $146,000,000 and net debt is down to $322,000,000 the lowest level since Q1 of FY twenty twenty two. 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 net debt going forward. Please turn to Slide nine. Looking ahead, I am optimistic about our team, our leadership position in delivering mission critical processing at the edge 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%. As we discussed last quarter, although we will not be providing specific guidance for FY 2025, I will update the color we previously discussed.

For full year FY 2025, we continue to expect annual revenue growth approaching mid single digits with timing positively impact by our enhanced execution and accelerated deliveries earlier in the year. As we discussed last quarter, our current backlog margin is 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 net EAC change impacts in FY 2024. Although we are encouraged that our recent quarter bookings are accretive to our overall backlog margin, we continue to expect low double digit adjusted EBITDA margins overall for FY 2025. We continue to expect Q4 adjusted EBITDA margins to be the highest level of the fiscal year approaching mid teens. Finally, with respect to free cash flow, our year to date free cash flow of $85,000,000 is above our previous expectations.

Even with this acceleration of cash year to date, we expect free cash flow to be around breakeven for Q4, resulting in full year free cash flow that is ahead of our prior expectations. In summary, given the operational improvements over the last several quarters and our recent momentum, I expect that our performance in FY twenty twenty five will represent a positive step toward our target profile. And I look forward to providing commentary on expectations for FY twenty twenty six in our call next quarter. With that, I’ll turn it over to Dave to walk through the financial results for the quarter and I look forward to your questions. Dave?

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: Thank you, Bill. Our third quarter results reflect solid progress toward our goal of positioning the business to deliver predictable performance characterized by organic growth, expanding margins and robust free cash flow. There is still work to be done, but we are encouraged by the progress we have made and expect the fourth quarter fiscal twenty twenty five revenue and adjusted EBITDA margins to improve over those in the first three quarters. With that, please turn to Slide 10, which details our third quarter results. Our bookings for the quarter were $200,000,000 with a book to bill of 0.95.

Our bookings on a trailing twelve month basis reflect a book to bill of 1.1. Our backlog of 1,340,000,000 is up $51,000,000 or 4% year over year. Revenues for the third quarter were approximately $211,000,000 up $3,000,000 or 1.5% compared to prior year. Our revenues grew approximately $52,000,000 or 8.9% on a year to date basis. Gross margin for the third quarter increased to 27% from 19.5% in the same quarter last year.

As Bill previously noted, we expect to see an improvement in our gross margin performance over time as the average margin in our backlog improves. This is the result of our expectation that newer awards will be at targeted margins coupled with further expected progress towards completion of lower margin activities. Operating expenses decreased approximately $12,000,000 year over year, primarily due to lower R and D expense and restructuring and other charges. These decreases were driven by the actions taken in fiscal twenty twenty four and 2025 to improve our performance by consolidating and simplifying our operations and aligning our team composition with our increased production mix as we discussed last quarter. GAAP net loss and loss per share in the third quarter were approximately $19,000,000 and $0.33 respectively, as compared to GAAP net loss and loss per share of approximately $45,000,000 and $0.77 respectively, in the same quarter last year.

The improvement in year over year earnings is primarily a result of increased gross margins coupled with reduced operating expenses. Adjusted EBITDA for the third quarter was $24,700,000 compared to negative $2,400,000 in the same quarter last year. Adjusted earnings per share were $06 as compared to adjusted loss per share of $0.26 in the prior year. The year over year increase was primarily related to lower net losses in the current period as compared to the prior year. Free cash flow for the third quarter was approximately 20 outflow of approximately $26,000,000 in the prior year.

The significantly increased cash flow was primarily driven by the improvement in cash provided by operating activities, which was approximately $48,000,000 higher as compared to the same quarter in the prior year. Slide 11 presents Mercury’s balance sheet for the last five quarters. We ended the third quarter with cash and cash equivalents of nearly $270,000,000 driven primarily by approximately $30,000,000 in cash provided by operations, which were partially offset by investments of approximately $6,000,000 in capital expenditures. Billed receivables remained relatively flat sequentially, while unbilled receivables decreased approximately 7,000,000 Unbilled receivables decreased year over year by approximately $54,000,000 or 17%. The decrease in unbilled receivables reflects the incremental progress we’ve made by delivering on programs to our customers, which significantly drove our cash flow performance during fiscal twenty twenty five.

Inventory increased slightly year over year and sequentially by approximately $10,000,000 and $8,000,000 respectively. We continue to see increases in deferred revenue, which in many cases provides an offset to a portion of our unbilled and inventory balances. Accounts payable increased approximately $9,000,000 sequentially, driven by the timing of payments to our suppliers. Accrued expenses increased approximately $5,000,000 sequentially, primarily due to increased litigation and settlement related expenses. Deferred revenues increased year over year sequentially by approximately $72,000,000 and $7,000,000 respectively, as a result of additional milestone billing events achieved during the period.

Working capital decreased in the third quarter approximately $148,000,000 year over year or 25% and decreased by $22,000,000 or 5% sequentially. This demonstrates the progress we’ve made in reversing the multiyear trend of growth in working capital, highlighted by six quarters of sequential reductions in unbilled receivables, resulting in the lowest net working capital since Q2 of fiscal twenty twenty two. As a reference point, in the last four quarters, we have driven our net working capital from a high of 72% of trailing twelve month revenue to 51%. Net working capital remains a primary focus area, and we believe we can continue to deliver improvement. Turning to cash flow on Slide 12.

Free cash flow for the third quarter was approximately $24,000,000 as compared to an outflow of $26,000,000 in the prior year. We believe our continuous improvement related to program execution, hardware delivery, just in time material and appropriately timed payment terms will lead to continued reduction in working capital. In closing, we are pleased with the performance through the third quarter of the fiscal year and the higher level of predictability in the business. 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. With that, I’ll now turn the call back over to Bill.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Thanks, Dave. With that, operator, please proceed with the Q and A.

Conference Operator: Absolutely. We will now begin the question and answer session. And your first question comes from the line of Peter Arment with Baird. Peter, please go ahead.

Peter Arment, Analyst, Baird: Yes, thanks. Good afternoon, Bill, Dave, Tyler. Nice results. Bill, could you maybe give us a little bit of, you know, an update on LTAMDS given just recent developments of that kind of program moving into kind of initial production? And and I know that was always going to be considered one of your larger programs as we get into kind of that production stage.

What’s the latest on that?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yeah. Thanks for asking the question. And we’ve talked about this before as one of the major programs that has that we worked our way through the development has tremendous potential for us in terms of long term production. We’re really pleased to see our customer achieve their significant milestone which was critical to the program moving forward and we continue to work with them to ramp up consistent with their schedule and their needs and are excited about the growth prospects for LTAMDS.

Peter Arment, Analyst, Baird: Okay. And then just maybe

Garrett Berkham, Analyst, William Blair: as my follow-up Dave, could you just just give

Peter Arment, Analyst, Baird: us a little more color on the increase in deferred? I know you guys are making a lot of progress on unbilled receivables and that’s been great to see. But just how do we think about the deferred revenues kind of jumping the way it’s been over the last few quarters?

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: Yeah. I I think Peter goes back to and we’ve talked about, you know, really focused on the terms that we have with our with our customers and and being in a position where we can set milestones, we go. And as long as we’re achieving those milestones, you know, we have a we have solid payment terms associated with that. So we’ve been, you know, getting through those milestones on schedule and and the payments result. And again, one of the things we’ve talked about in the past and you see this in our inventory is where customers will come and say, hey, we’d like you to go buy a bunch of end of life components for us so we can have production for several several years and not have to worry about it.

And we say, we’re absolutely willing to do that, and they’re willing to pay us to do that, you know, upfront so that we can go out and get those things and have them in stock for them. So you see a little bit of inventories pick up because of that, but at the same time, the deferred payments that offset that.

Peter Arment, Analyst, Baird: Got it. I’ll jump back in queue. Thanks, guys.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Okay. Thanks, Peter.

Conference Operator: And your next question comes from the line of Michael Ciarmoli with Truvy Securities. Michael, please go ahead.

Michael Ciarmoli, Analyst, Truvy Securities: Hey, good evening guys. Thanks for taking the question. Nice results. Maybe just really good free cash flow performance. Dave, what’s sort of

Garrett Berkham, Analyst, William Blair: the

Michael Ciarmoli, Analyst, Truvy Securities: optimal net working capital level as a percent of revenues? And as you’re kind of continuously driving or taking out cost and improving efficiencies, is anything changing with your expectation of free cash conversion?

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: Yes. No. Mike, thanks for the comments starting out. No, we’ve looked at it and we’ve talked about ultimately looking at a 50% free cash flow conversion from EBITDA. And that still makes sense to us.

I mean we’re running significantly ahead of that, as you said, because we’re bringing down our working capital to a more level that would be commensurate with our business. And as we’ve talked about, we were as high as the 70 plus percent of revenue. That’s just not the right model for this business. We’re down in the low 50% now and still have room to go. We’ve talked about a model in the future kind of in an ideal world.

We’d love to get to 30% or 35%, But more 35% to 40% is probably the right range for us. We have room to go, as Bill and I have both said before, and we’re going to continue to work on that.

Michael Ciarmoli, Analyst, Truvy Securities: Got it. That’s helpful. And just a follow-up. Does this low the low margin backlog that you’re burning off, does that drag continue or have an impact as we start fiscal twenty twenty six? Or should we think of the EBITDA margins you’re going to generate in the fourth quarter as sort of a launching point for 2026?

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: Yes. I think the way I would think about it is every quarter, we’ve been as we’ve talked about, we’ve been adding new bookings that are at our targeted margins or better, so higher than what the existing margin in backlog is, and we’re burning off those lower margin things. It’s not a binary activity that all of a sudden it’s going to jump in one quarter to the final number. It’s going to go gradually up there over time. So I would not think of it as, hey, we’re going to wake up one morning and it’s going to be completely different.

It’s going to gradually move up, and Bill’s talked about approaching that line over time.

Michael Ciarmoli, Analyst, Truvy Securities: Got it. Helpful. I’ll jump back in the queue. Thanks, guys.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Okay. Thanks, Puneet.

Conference Operator: And your next question comes from the line of Seth Seifman with JPMorgan. Seth, please go ahead.

Pete Skibitski, Analyst, Alembic Global: Hi, good afternoon. This is Rocco on for Seth.

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: The

Pete Skibitski, Analyst, Alembic Global: revenue step down sequentially due to the pull forward into Q2?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yeah. We talked about it last quarter that our focus on accelerated deliveries for our customers trying to get the benefits of our technology into their hands sooner. We’ve been really focused on the operations of the business and we had a significant pull forward from Q3 into Q2. I think we characterized it as around $30,000,000 And so in thinking about the Q3 revenue, I think there’s an opportunity to think about it as normalized for that pull forward. And then for our full year commentary, we indicated, our expectations for the full year remain the same.

The timing profile within the year shifting to the left because of the acceleration of deliveries.

Pete Skibitski, Analyst, Alembic Global: Right. So that acceleration of deliveries is what’s driving the flat revenue year over year in Q4 that’s implied, which would be a deceleration versus the first half?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Correct. Consistent with our prior expectations.

Michael Ciarmoli, Analyst, Truvy Securities: And

Conference Operator: your next question comes from the line of Pete Skibitski with Alembic Global. Pete, please go ahead.

Pete Skibitski, Analyst, Alembic Global: Yes. Good evening, Nice quarter.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Hey, Pete.

Pete Skibitski, Analyst, Alembic Global: Yes. Bill, maybe to follow-up on Mike’s question. Just you guys mentioned the twelve month trailing bookings were, I greater than 80% production. I’m just wondering if we switch to revenue, what’s the revenue split development versus production this year? And how do you expect that changes in fiscal twenty twenty six?

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: Yeah. We haven’t talked about the split out of the revenue that way. Suffice it to say that over time, it follows our bookings for sure. So we expect it to continue moving in that direction, but we haven’t broken out for in our financials exactly how much of the revenue is production versus development. But definitely, you should look at the bookings as an indicator.

Pete Skibitski, Analyst, Alembic Global: Okay. Okay. And then just one follow-up. If I look at the 10 Q and some of your revenue by program area, the radar area has really grown nicely year to date the first three quarters. Some of the other areas like electronic warfare, C4I, they still seem to be kind of sort of flattish, I guess.

Is there anything going on that is driving that improved radar performance revenue wise and it’s causing the other couple of areas to kind of lag?

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: Yes. We and we’ve talked about before the when we talked about some of the significant adjustments that we saw in the QEM catch up on EACs that a large piece of that was in that radar area. And, you know, that that had to do with, some of our common processing architecture activities. And that now you’re seeing that’s not as big an impact. That was a a negative.

So that was naturally gonna rise. That’s you know, if you think about the programs we have and, you know, we don’t we don’t talk about the individual programs and how much revenue they are, but you guys have a good sense of the programs you know we’re working on and which ones are in that radar area. So it’ll give you an idea of what’s driving that.

Pete Skibitski, Analyst, Alembic Global: Okay. Okay. Yes. To complement that, I’m just wondering you know, why the others seem to be kind of lagging a bit.

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: Yeah. I I think there’s not so much lagging. There’s a little bit of timing involved in some of those things. So you know? And, again, volved remember, we’re in a situation where we’ve been very cognizant of

ensuring that materials just in time. And we’ve talked about you’ll see some as we go up that curve a little bit slower than we have in the past, some timing impact in some of those areas. But overarching, the revenue will be identical for the programs, just a little bit of a different timing situation.

Pete Skibitski, Analyst, Alembic Global: Okay. Okay. Sounds great. Thank you.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yes. Thanks, Pete.

Conference Operator: And your next question comes from the line of Ken Herbert with RBC Capital Markets. Ken, please go ahead.

Ken Herbert, Analyst, RBC Capital Markets: Yes. Hi. Good afternoon, everybody.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Hi, Ken.

Ken Herbert, Analyst, RBC Capital Markets: Maybe Bill or Dave, you called out $40,000,000 I think, of production contracts for the common processing architecture in the quarter. Just to help put that in context, can you talk about maybe what sort of how did that trend across through the first two third quarters? Was that a relatively high number that you called it out? And then maybe if you can, what percent of the backlog does the CPA represent? Or can you give any sort of scale as to how that is represented in the backlog?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yes. No, thanks for the question, Ken. I don’t think we’ve given specifics on the magnitude of the backlog associated with CPA. I will point out though that we referenced early in the year some strategic wins, good sized wins along with the wins that we discussed on this call which has added pretty substantially to our backlog in that area. And of course, we feel very good about that.

It’s an area where we see demand. We have differentiation. We added to the differentiation this quarter with the acquisition of Starlab. So we’re feeling really good about the progression associated with CPA.

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: I would add that although we don’t break out the allocation of our bookings into the individual kind of categories and we have pointed out in the past when there’s been a significant booking that was impactful to the backlog in that area. So the fact that we pointed out that $40,000,000 is an indication that it’s impactful, that that’s significant. Yes.

Ken Herbert, Analyst, RBC Capital Markets: That’s helpful. Thanks. And I know it’s been over the last few quarters you’ve been able to call out some nice share gains on some specific recompetes or new wins. Can you give any commentary on the competitive landscape maybe and how you see the opportunity to maybe outgrow the industry here in these areas, especially with what looks like to be a host of new program starts coming out of the DoD as part of the maybe the ’25 supplemental or into ’26?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yes. Mean, those dynamics are still shaping up. But I think in general, we feel pretty good about the tailwinds, at least as they’ve been discussed to date and more specific to us. I think we feel well positioned. I think it’s backed up by our LTM book to bill of 1.1.

Already in this quarter, we had some nice wins in a volume of awards that in the first month of the quarter is the highest that we’ve seen in any quarter in our history. I don’t want to make too much of that because the first month of a quarter is usually a low volume month, but we did have a good month of April and feel good about where we sit in some of those tailwinds.

Ken Herbert, Analyst, RBC Capital Markets: Great. Thank you very much. I’ll pass it back there.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Okay. Thank you.

Conference Operator: And your next question comes from the line of Connor Walters with Jefferies. Connor, please go ahead.

Connor Walters, Analyst, Jefferies: Hi, guys. Thanks so much for taking the question and

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: congrats

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Connor. Thank you.

Connor Walters, Analyst, Jefferies: Yes. So maybe on the EBITDA margins approaching mid teens for Q4, the nice sequential step up. I was hoping to dive into that a little bit. You previously pointed to some OpEx, mainly SG and A, steadily rising, which we’re seeing. But maybe on the gross margin level, things have been a little bit flattish quarter over quarter despite the EAC improvement.

So I was hoping on you guys could provide some color on how to think about that progression into Q4 and to what degree we can think of that as a fair launching point in 2026.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: I I can take a cut at it and then Dave can jump in. At least for us, in terms of our path to our targeted margins, which we discussed in the low to mid-20s, it’s now really clear what the drivers of that progression are. It’s the two things that we’ve mentioned. It’s this dynamic associated with our backlog margin and how that’s improving over time as we burn down the low margin and replace with bookings that are at or above our targeted margins. And again in Q3, the margin associated with the bookings that we brought in, in the quarter were at or above our targeted margins.

And Dave, I think we would say very strong relative to the last several quarters. So we feel very good about how that dynamic is playing out. And in Q4, what I think you’re seeing is those two things, that plus the operating leverage associated with our OpEx being sort of in the ZIP code of where we think it needs to be, starting to play out. And hopefully, that gives a sense of the timing and the progression of how the backlog margin dynamic is starting to play out in conjunction with the operating leverage. And that’s really what’s driving the Q4 expectations.

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: Yeah. And I would just echo what Bill said. When you look at EBITDA and the expectations that Bill outlined for EBITDA, it is a function largely of exactly those two things. And we’ve made the progress on the OpEx and you can see that in our financials, and you’ve seen that as we’ve gone through the year. And at the same time, again, every quarter that we’re making more progress as we both finish off or get to the lower levels on some of the lower margin activities, and we’re adding to our backlog at higher margins.

So that backlog margin is increasing, and we expect to see that start playing out. As I said earlier, it will play out over time. But we do expect to see benefit from both of those things in the fourth quarter to benefit the EBITDA.

Connor Walters, Analyst, Jefferies: Okay. That’s great. Thanks so much. I’ll leave it there.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Okay. Thanks, Connor.

Conference Operator: And your next question comes from the line of Noah Poponak with Goldman Sachs. Noah, please go ahead.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems0: Hey, good evening, everyone.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Hey, good evening, Noah.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems0: Could you grow free cash flow full year 2026 versus 2025?

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: Yes. It’s a good question. The way we’re thinking about cash in 2026 is continuing to, you know, as we think about in general, as we go forward, we’re not providing any color or guidance around 2026. But I think I would talk to the longer term model that Bill had talked about in his remarks is we expect to get to a point where there’s a kind of a recurring 50% of EBITDA cash flow, and we expect to continue as we go through time until we get to the right working capital level to reduce working capital. I think as Bill talked about, when we get to at the end of next quarter, we’ll have a little more color around FY twenty twenty six.

But right now, we’re just focused on getting through this year and completing strong and then working towards the model that we’ve talked about.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yeah. And I think there’s two pieces to coming up with the answer to that question. One is our of our steady state free cash flow conversion that we think we can deliver and Dave spoke to that earlier around 50%. And we feel good about how we’re honing in to that part of the model. And then I think the other contributor is the cash that’s still available to be freed up of our balance sheet driving towards the working capital targets that Dave mentioned.

And we still see a really good opportunity on that front. It’ll be a matter of how those two things play together in ’26. And as I said earlier, I look forward to coming back in our next call and giving some commentary on how we think ’26 is going to shape up.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems0: Okay. Great. So the framework is is sort of directionally 50% of EBITDA and then Yep. You know, it sounds like multiple years still of improving working capital. So, you know, that can be lumpy.

So we’ll sort of just see how that layers on top.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yes, sir. And I think you could look at the progression that we’ve made and the timing associated with that, and that can inform a view of, what’s left to go and the time associated with it.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems0: Okay. Excellent. In terms of the burning out of the backlog, the older legacy lower margin contracts? Yep. What’s the time frame in the future at which that is close to entirely gone from your revenue?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yeah. I mean, if I were to just think about the answer to that question from a math standpoint, I would think about our commentary on the backlog at the end of FY ’twenty four being lower than what we expect to see on a go forward basis and the timing for that aggregate backlog to burn off and the number of quarters it would take for it to be replaced by the bookings that since we made that comment have been in line with what we expect to be our targeted margin profile associated with the EBITDA margin profile we’ve discussed of low to mid-20s. So I think you can create an estimate for what that timeframe looks like based on our duration and the commentary at the end of FY24.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems0: Okay. That makes a lot of sense.

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: I guess And

Tyler Hojo, Vice President of Investor Relations, Mercury Systems0: as Dave said,

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: it’s a matter of several quarters where that will play out. And and the good news is we’re seeing that progression happen.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems0: Okay. Great. And just last thing related. How do you define bringing new work into the backlog at a higher margin? Obviously, the the simple definition is it has a higher margin.

But, you know, over time, everything you bring into the backlog has a assumed margin, and then that can change over time based on cost and execution. And so I I was just curious to hear you talk about how how you’re defining that, if it’s just purely the initial price cost assumptions or if it’s also, you know, some version of conservatism or something else in the assumptions you make on the front end versus, you know, what what’s happened in the past?

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: Yeah. So when when you think about, you know, how how companies in in our business, in the aerospace and defense kind of business, think about these things. So, you know, you you propose, you bid, you negotiate, you know, you you get awarded, and then you go through a start up process. And in that start up process, you review the risk opportunity set around programs, and you establish this is what I’m going to start at in terms of a margin rate. And and so, you know, we put a great deal of additional rigor around that process in the last, you know, twelve or eighteen months since, you know, since we started.

So it’s reflective of that startup process, which is taking into account the risk and opportunities and and how we’re gonna work through them. So, you know, it it’s not, oh, we won this and we bid x rate. It’s what we believe when we when we line up the program and go through that analysis and pressure test that as to what we use as the backlog margin.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems0: I understand. Okay. Thank you so much.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Okay. Thank you.

Conference Operator: And your next question comes from the line of Jonathan Ho with William Blair. Jonathan, please go ahead.

Garrett Berkham, Analyst, William Blair: Hi. This is Garrett Berkham on for Jonathan Ho. Thanks for taking my question.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Hi, Garrett.

Garrett Berkham, Analyst, William Blair: The book to bill ratio dipping below one this quarter. Can you just help us understand why that is? And it looks like it’s been trending lower for two quarters in a row now. So maybe just some color on why that’s happening?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yeah. I think the timing of bookings can move around a little bit. So I I don’t get too hung up on it on a quarter by quarter basis. And that’s why we’re really pointing at, you know, the LTM book to bill of 1.1, which we think is, in a good zip code. Also look at the quality of the bookings and we’ve talked about production versus development mix.

And also this quarter the margin at which we brought those bookings in that we feel very good about. And as I said in Q4 we’re off to a really good start with a lot of activity, already had some new awards, some of which that slipped out of Q3 into early Q4 which can also help inform a view of like an adjusted book to bill for the quarter. So we feel great about our position, feel really good about our pipeline, the activity in Q4 and all in all good about the bookings performance in Q3.

Garrett Berkham, Analyst, William Blair: Okay, got it. Makes sense. And then maybe just on the macro environment, is there anything notable to call out there? And particularly, are you seeing any disruption from the federal space from Doge at all?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Not so much a disruption associated with Doge. I’m sure that our customers’ customers are dealing with some dynamics associated with that. But I think we’re focused on the macros that early on sound like a growing overall defense budget. What we think is a constructive mix adjustment, specifically away from services and into acquiring technologies and capabilities. There are some systems and priorities that have been discussed and in executive orders like Golden Dome where our technology is right at the center of some of the existing systems.

And so we feel really good about the opportunity to participate there. So all in all, as we step back and look at those dynamics, I’d say for me personally, I have a positive overall bias on those dynamics and the tailwinds that they present.

Garrett Berkham, Analyst, William Blair: Got it. Got it. Thank you.

Conference Operator: And your next question comes from the line of Pete Skibitski again from Alembic Global. Pete, please go ahead.

Pete Skibitski, Analyst, Alembic Global: Yes. Thanks, guys. The question, guys, we’ve been asking everyone, but didn’t ask you yet. Tariffs, any just because of your commercial chip supply chain, have you seen do you expect to see any impact from the tariffs?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yes, certainly no material impact in FY 2025. And when we look at country exposure, we don’t see any direct impact from tariffs on China or Mexico or Canada. There are a number of exclusions to your point that apply to a significant piece of our bill of materials. So like everybody else, we’re monitoring the situation and paying attention to it. But at this point, we feel like we feel good about where we sit relative to tariff exposure.

Pete Skibitski, Analyst, Alembic Global: Okay. And that’s both from a cost perspective, but also just from a sourcing perspective, think sourcing will be okay?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: I think from a sourcing standpoint, yes. And also from a cost perspective, we have a number of different ways that we can address any potential cost impacts that may emerge associated with tariffs.

Pete Skibitski, Analyst, Alembic Global: Okay. Thank you.

Conference Operator: Mr. Bauhaus, it appears there are no further questions. Therefore, I would like to turn the call back over to you for any closing remarks.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Okay. Well, thank you very much, and I appreciate everybody joining the call this evening, and I look forward to our next update next quarter. Thank you very much.

Conference Operator: That concludes today’s call. You may now disconnect.

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