Earnings call transcript: Mercury Systems Q4 2025 beats expectations

Mercury Systems Inc. (MRCY) reported its fourth-quarter 2025 earnings, showcasing impressive performance with earnings per share (EPS) of $0.47, significantly surpassing the forecast of $0.22. The company reported revenue of $273 million, exceeding expectations of $243.61 million. Following these results, Mercury’s stock rose by 1.7% during regular trading hours, closing at $52.83, though it saw a slight dip of 0.09% in aftermarket trading. According to InvestingPro data, five analysts have recently revised their earnings estimates upward, and the stock is currently trading near its 52-week high of $55.40.

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Key Takeaways

• Mercury Systems’ Q4 EPS of $0.47 exceeded forecasts by 113.64%.
• Revenue for the quarter reached $273 million, a 12.11% surprise over expectations.
• The company achieved a record full-year free cash flow of $119 million.
• Operational efficiencies led to a 25% reduction in operating expenses year-over-year.
• Mercury maintains a strong backlog of $1.4 billion, indicating robust future demand.

Company Performance

Mercury Systems delivered strong financial results in Q4 2025, with revenue growing by 9.9% year-over-year to $273 million. This performance was supported by significant contract awards and operational efficiencies. The company has successfully reduced its operating expenses by 25% compared to the previous year, contributing to improved margins and profitability. Mercury’s strategic focus on mission-critical processing technologies continues to bolster its competitive position in the defense sector. InvestingPro analysis shows the company operates with a moderate debt level and maintains strong liquidity, with a current ratio of 3.44x, indicating robust financial flexibility.

Financial Highlights

• Revenue: $273 million, up 9.9% year-over-year
• Full Year Revenue: $912 million, up 9.2% year-over-year
• Q4 Adjusted EBITDA: $51 million (18.8% margin)
• Full Year Adjusted EBITDA: $119 million (13.1% margin)
• Q4 Free Cash Flow: $34 million
• Ended Q4 with $39 million cash on hand

Earnings vs. Forecast

Mercury Systems reported an EPS of $0.47, significantly beating the forecast of $0.22 by 113.64%. The revenue of $273 million also exceeded expectations of $243.61 million by 12.11%. This substantial earnings surprise reflects the company’s effective cost management and successful execution of its strategic initiatives.

Market Reaction

Mercury’s stock responded positively to the earnings report, rising by 1.7% during regular trading hours to close at $52.83. However, the stock experienced a slight decline of 0.09% in aftermarket trading. The stock’s performance aligns with its strong financial results and exceeds broader market trends, reflecting investor confidence in the company’s future prospects. InvestingPro data reveals impressive year-to-date returns of 27.57% and a one-year total return of 50.51%, though current valuations suggest the stock may be trading above its Fair Value.

Outlook & Guidance

Looking ahead, Mercury Systems anticipates low single-digit revenue growth for FY 2026, with a relatively flat first half and increased volume in the second half. The company expects adjusted EBITDA margins to approach mid-teens, with margin expansion anticipated in the latter part of the year. Mercury remains committed to achieving above-market top-line growth and maintaining strong free cash flow conversion. InvestingPro’s comprehensive analysis indicates an Overall Financial Health score of "FAIR," with particularly strong scores in cash flow management.

For detailed insights into Mercury Systems’ growth potential and comprehensive valuation analysis, access the full Pro Research Report, available exclusively to InvestingPro subscribers.

Executive Commentary

CEO Bill Balhaus highlighted the company’s achievements, stating, "We delivered very strong results in Q4 that were once again in line with or ahead of our expectations." He emphasized Mercury’s strategic progress, noting, "We expect to demonstrate continued progress toward our target profile." Balhaus also expressed optimism about market opportunities, saying, "We feel great about those tailwinds."

Risks and Challenges

• Supply chain disruptions could impact production timelines and costs.
• Market saturation in certain defense segments may limit growth opportunities.
• Macroeconomic pressures, including inflation, could affect profitability.
• Regulatory changes in defense procurement could influence contract awards.
• Technological advancements by competitors may challenge Mercury’s market position.

Q&A

During the earnings call, analysts inquired about Mercury’s strategy for managing unbilled receivables and the drivers behind margin expansion. The company addressed potential opportunities related to the Golden Dome initiative and efforts to reduce working capital. Executives reiterated their focus on operational efficiency and strategic growth initiatives.

Full transcript - Mercury Systems Inc (MRCY) Q4 2025:

Conference Operator: Good day, everyone, and welcome to the Mercury Systems Fourth 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 Balhouse 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 section 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 Bauhaus. Please turn to Slide three.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Thanks, Tyler, and good afternoon. Thank you for joining our Q4 and FY twenty twenty five earnings call. We delivered very strong results in Q4 that were once again in line with or ahead of our expectations, resulting in solid FY twenty twenty five year over year growth in backlog, revenue, adjusted EBITDA and free cash flow. Today, I’d like to cover three topics. First, some introductory comments on our business and results second, an update on our four priorities: performance excellence, building a thriving growth engine, expanding margins and driving improved free cash flow and third, performance expectations for FY 2026 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 Q4 and full year results reflect our expectation to deliver robust organic growth with expanding margins and positive free cash flow.

Record quarterly bookings of $342,000,000 and a 1.25 book to bill resulting in a record backlog of $1,400,000,000 Q4 revenue of $273,000,000 up 9.9% year over year and full year revenue of $912,000,000 up 9.2% year over year Q4 adjusted EBITDA of $51,000,000 and adjusted EBITDA margin of 18.8% full year EBITDA of $119,000,000 and adjusted EBITDA margin of 13.1%, all up substantially year over year and free cash flow of $34,000,000 resulting in record full year free cash flow of $119,000,000 We ended Q4 with $3.00 $9,000,000 of cash on hand. These results reflect ongoing focus on our four priority areas with highlights that include solid execution across our broad portfolio of production and development programs, backlog growth of 6% year over year, reduced operating expense enabling increased positive operating leverage and continued progress on free cash flow drivers with net working capital down $90,000,000 year over year or 16.7%. Please turn to Slide five. Starting now with our four priorities and priority one, performance excellence. In the fourth quarter, our focus on performance excellence positively impacted our results primarily in two areas.

First, in Q4, we recognized $4,700,000 of net adverse EAC changes across our portfolio, which is in line with recent quarters, reflecting our maturing capabilities in program management, engineering and operations and progress in completing development programs. Second, our focus on accelerating customer deliveries generated approximately $30,000,000 of revenue and approximately $15,000,000 of adjusted EBITDA planned for FY26. This acceleration incrementally impacted our top line growth and adjusted EBITDA margins for Q4 and FY 2025 and will also factor into our outlook for FY 2026, which I’ll speak to shortly. Please turn to Slide six. Moving on to priority two, driving organic growth.

Q4 record bookings of $342,000,000 resulted in a record backlog of $1,400,000,000 and a full year book to bill of 1.13. In the quarter, we received a number of significant contract awards, including two new production awards totaling $36,900,000 for ground based radar programs that leverage our common processing architecture and cybersecurity software from recently acquired Starlab, a $22,000,000 initial production contract from a U. S. Defense prime contractor for sensor processing subsystems that will upgrade existing combat aircraft, an $8,500,000 contract to develop and demonstrate a next generation RF signal conditioning solution to enhance the performance and cost of X band active electronically steered array radars broadly used in air, sea and ground based applications. Two agreements with the European defense prime contractor to expand and accelerate production of processing subsystems and components for radar and electronic warfare missions and a new production agreement that supports a critical U.

S. Military space program. 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. Please forward to Slide seven. Now turning to priority three, expanding margins.

In pursuit of our targeted adjusted EBITDA margins in the low to mid-twenty percent range, we’re focused on the following drivers: backlog margin expansion as we burn down lower margin backlog and replace with new bookings aligned with our target margin profile ongoing initiatives to simplify, automate and optimize our operations and driving organic growth to realize positive operating leverage. Q4 adjusted EBITDA margin of 18.8% was ahead of our expectations and up sequentially over 700 basis points. This stronger margin performance was driven by the conversion of backlog previously contemplated to be delivered in FY 2026 and higher operating leverage. Gross margin of 31%, up approximately 160 basis points year over year, was in line with our expectations and largely driven by the average margin in our backlog. We expect backlog margin to continue to increase as we bring in new bookings that we believe will be 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 as a result of fully realizing the impact of previously implemented actions to simplify, streamline and focus our operations. Please forward to Slide eight. Finally, turning to priority four, improved free cash flow. We continue to make progress on the drivers of free cash flow and in particular reducing net working capital, at approximately $449,000,000 is at the lowest level since 2022 and down $211,000,000 from peak net working capital levels in 2024. Q4 free cash flow of $34,000,000 was ahead of our expectation of breakeven, primarily driven by acceleration of cash receipts.

Free cash flow for FY 2025 was approximately $119,000,000 and net debt is down to $282,000,000 the lowest level since 2022. We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning and supply chain management will lead to continued reduction in working capital and net debt going forward. In addition, as we did in FY 2025, we continue to expect to allocate factory capacity in FY 2026 to programs with unbilled receivable balances, which will help drive free cash flow, although with little impact to revenue. Please turn to Slide nine. FY 2025 represented a year of significant progress and dramatically improved results.

Looking ahead, I am optimistic about our team, our leadership position in delivering mission critical processing at the edge, the market backdrop 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-twenty percent range and free cash flow conversion of 50%. Although we will not be providing specific guidance for FY 2026, I will provide the following color, which excludes any acceleration of customer deliveries within or into FY 2026 and potential funding increases on existing programs driven by administration priorities such as Golden Dome. In FY 2026, we expect to demonstrate continued progress toward our target profile. For full year FY 2026, we expect annual revenue growth of low single digits with the first half relatively flat year over year and volume increasing sequentially as we move through the second half. This revenue outlook reflects the previously discussed approximately $30,000,000 of accelerated deliveries into 2025 as well as our expectation that we will allocate factory capacity to programs with unbilled receivable balances resulting in free cash flow generation with little revenue impact.

As we discussed in previous calls, our backlog margin, while up over the last four quarters, is still below our target margin profile, driven primarily by older low margin programs. We expect to continue to execute those low margin programs in FY 2026. As a result, we are expecting full year adjusted EBITDA margin approaching mid teens with low double digit adjusted EBITDA margins in the first half and first quarter margin flat year over year. We anticipate margins to expand in the second half with Q4 adjusted EBITDA margin expected to be the highest of the fiscal year. Finally, with respect to free cash flow, we expect to be free cash flow positive for the year with second half free cash flow greater than the first.

In summary, with our momentum coming out of FY 2025, I expect that our performance in FY 2026 will represent another positive and meaningful step toward our target profile. I look forward to providing updated commentary as we progress through the year. With that, I’ll turn it over to Dave to walk through the financial results for the quarter and fiscal year, and I look forward to your questions. Dave?

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: Thank you, Bill. Our fourth quarter results reflect solid progress toward our goal of positioning the business to deliver performance excellence characterized by organic growth, expanding margins, and robust free cash flow. We still have work to do, but we are encouraged by the progress we have made and expect to continue this momentum in fiscal twenty six. With that, please turn to slide 10, which details our fourth quarter results. Our bookings for the quarter were $342,000,000 up $57,000,000 or 20% year over year with a book to bill of 1.25.

Our backlog of $1,400,000,000 is up $79,000,000 or 6% year over year. Revenues for the fourth quarter were $273,000,000 up approximately $25,000,000 or 9.9% compared to the prior year. During the fourth quarter, we were able to accelerate customer deliveries worth approximately $30,000,000 of revenue from fiscal twenty six into the fourth quarter. Gross margin for the fourth quarter increased approximately 160 basis points to 31% as compared to the same quarter last year. Gross margin improvement during the fourth quarter was primarily driven by favorable program mix and a reduction in net EAC change impacts of approximately $5,000,000 or 51% year over 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 through our continued focus on building a thriving growth engine coupled with further expected progress toward completion of lower margin activities. Operating expenses decreased approximately 20,000,000 or 25% year over year. The decrease was primarily driven by the actions taken in fiscal twenty four and twenty five to improve our performance by simplifying, automating, and optimizing our operations and aligning our team composition with our increased production mix as we previously discussed. GAAP net income and earnings per share in the fourth quarter were approximately $16,000,000 and $0.27 respectively, as compared to GAAP net loss and loss per share of approximately $11,000,000 and $0.19 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 fourth quarter was $51,000,000 up $20,000,000 or 65% as compared to the same quarter last year. Adjusted earnings per share were $0.47 as compared to $0.23 in the prior year. The year over year increase was primarily related to net income of $16,000,000 in the current period as compared to net loss of $11,000,000 in the prior year. Free cash flow for the fourth quarter was approximately $34,000,000 as compared to approximately $61,000,000 in the prior year. This reflects the third consecutive quarter of positive free cash flow.

Turning to our full year results on slide 11. Our bookings for fiscal twenty

Dave, Executive Vice President and CFO, Mercury Systems: twenty five were approximately $1,000,000,000 marking another solid year of bookings. Our book to bill was 1.13, yielding record backlog of $1,400,000,000 which is up 6% from fiscal twenty twenty four.

Dave Farnsworth, Executive Vice President and CFO, Mercury Systems: Fiscal twenty twenty five revenues were nine twelve million dollars up approximately $77,000,000 or 9.2% compared to the prior fiscal year. Gross margin was 27.9% for fiscal twenty five, an increase of approximately four forty basis points from the 23.5% gross margin realized during fiscal twenty twenty four. During fiscal twenty twenty five, we had net EAC change impacts of $21,000,000 a reduction of $51,000,000 or 71% as compared to the prior year. Our gross margin improvement in fiscal ’twenty five was also impacted by lower manufacturing adjustments, including inventory reserves and warranty expense. Operating expenses decreased approximately $70,000,000 or 20% in fiscal twenty five as compared to the prior year.

The decrease was primarily due to the organizational realignment activities taken in fiscal twenty twenty four and 2025 as previously discussed. GAAP net loss and loss per share in fiscal twenty twenty five were approximately $38,000,000 and $0.65 respectively as compared to net loss and loss per share of approximately $138,000,000 and $2.38 respectively, in the prior year. The improvement in year over year earnings is primarily a result of increased gross margins coupled with reduced operating expenses. Adjusted EBITDA for fiscal twenty twenty five was $119,000,000 up $110,000,000 as compared to the prior year. Adjusted earnings per share were $0.64 as compared to adjusted loss per share of $0.69 in the prior year.

The year over year increase was primarily related to lower net losses of approximately $100,000,000 in fiscal twenty five as compared to the prior year. Free cash flow for fiscal twenty five was a record of $119,000,000 as compared to $26,000,000 in the prior year. Slide 12 presents Mercury’s balance sheet for the last five quarters. We ended the fourth quarter with cash and cash equivalents of $3.00 $9,000,000 sequentially driven primarily by approximately $38,000,000 in cash provided by operations in the fourth quarter, which were partially offset by investments of approximately $4,000,000 in capital expenditures. Over the last five quarters, we generated approximately 180,000,000 of free cash flow.

Billed receivables decreased slightly year over year, while unbilled receivables decreased approximately 26,000,000 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. As Bill previously noted, we continue to expect to allocate factory capacity in fiscal twenty six to programs with unbilled balances, which will help drive free cash flow. Inventory decreased slightly year over year and sequentially by approximately 2,000,000 and 20,000,000 respectively. Accounts payable increased $6,000,000 sequentially, driven by the timing of payments to our suppliers. Accrued expenses decreased approximately $2,000,000 sequentially, primarily due to lower restructuring and other accrued expenses.

Accruent compensation increased approximately $16,000,000 sequentially, primarily due to bonus and payroll expenses. Deferred revenues increased year over year by approximately 53,000,000 as a result of additional milestone billing events achieved during the period. Sequentially, deferred revenues decreased approximately 16,000,000, primarily due to additional point in time revenue during the ’25. Working capital decreased approximately 90,000,000 year over year or 17%. This demonstrates the progress we’ve made in reversing the multiyear trend of growth in working capital, resulting in the lowest net working capital since ’22.

As a reference point, in the last four quarters, we have driven our networking capital from a high of 72% of trailing twelve months revenue to 49%. Networking capital remains a primary focus area for us, and we believe we can continue to deliver improvement. Turning to cash flow on slide 13. Free cash flow for the fourth quarter was approximately 34,000,000 as compared to $61,000,000 in the prior year. This exceeded our expectation of breakeven for the fourth quarter.

We believe our continuous improvement in 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 for 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: Thank you. We will now begin the question and answer you. Your first question comes from the line of Peter Arment with Baird. Please go ahead.

Peter Arment, Analyst, Baird: Yes. Good afternoon, Bill, Dave, Tyler. Nice results.

Dave, Executive Vice President and CFO, Mercury Systems: Hey, Peter.

Unidentified: Hey, Bill. Can I ask

Peter Arment, Analyst, Baird: a question regarding the factory capacity that’s being allocated programs tied to the unbilled receivable, what

Unidentified: does that really does that

Peter Arment, Analyst, Baird: wash out of the system when we think about fiscal twenty six? Or how do you how do you handicap that?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yeah. I mean, it’s hard for us to be real precise on the timing, but I think we’re working ourselves into a time period where that won’t be something that we talk about with respect to our organic growth. You know, in in ’26, as Dave and I have discussed, we think we still have pretty significant room to improve on networking capital. We made great progress in ’24 and ’25. We expect to make good progress in ’26.

A piece of that will come from burning down the programs with the unbilled balances and of course as we push those through the factory, it’s good for free cash flow but it doesn’t help with revenue. It’s very little impact on revenue. I don’t without So being too precise about it, I think we get significantly through this headwind as we work our way through ’26.

Peter Arment, Analyst, Baird: Great. That’s very clear.

Noah, Analyst, Goldman Sachs: And just

Peter Arment, Analyst, Baird: regarding the net working capital comment, Dave mentioned, I think you guys peaked at 72% of sales and now down to 49%. Is there a way to think about what should be a normalized level for a business like Mercury?

Dave, Executive Vice President and CFO, Mercury Systems: Yeah. I think Peter, this is Dave. I think we pretty consistently said depending on the mix of business, that could be in the 35% range. And as we think longer term, that’s still kind of our target to go and and continue to attack that. And, you know, bringing it down, and we’re down 200 or so million that, you know, obviously, the next dollar gets harder than the previous dollar, you know, but we still feel we have room to run-in that direction.

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

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

Conference Operator: Your next question comes from the line of Ken Herbert with RBC Capital Markets. Please go ahead.

Ken Herbert, Analyst, RBC Capital Markets: Hey, good afternoon, guys. Nice quarter.

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

Ken Herbert, Analyst, RBC Capital Markets: Yes. Bill or Dave, maybe as you think about the pull forward of the revenues from a sounds like first half twenty six into the fourth quarter, Is can you maybe elaborate on what’s behind that? Because this is obviously the second or third quarter of this year you’ve been able to do this. Is it just better execution? Is maybe customers really sort of pushing things to go faster?

I’m just trying to get a sense as to sort of repeatability of this if that makes sense because obviously it’s a really nice surprise and reflects certainly well on the execution.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yeah. I mean, first of all, we’re really happy with the performance in Q4. If you just go top to bottom with record quarterly bookings, our revenue was the second highest revenue quarter that we’ve had in the company’s history. What drove that was a large percentage of point in time revenue, which implies delivery. And so what we’re underneath the hood, what we’re doing in order to accelerate these deliveries is work through our supply chain and our factory capacity to look at what in our expanding and record backlog we can pull forward into current periods and try and accelerate deliveries for our customers.

Because the reality is they want the benefits of our technologies into their programs and into their customers’ hands as fast as we can get it there. So that’s what we’re working on. I think where we are right now with the magnitude of what we pulled into q four, which again, we think is a very good thing because it’s demonstrating performance that’s getting really close to our target profile when you think about organic growth and margins and free cash flow conversion. Now we’re working through okay with the impact to the first half and what were originally planned deliveries that are now we’re now in Q4 working through the same constraints. And so that’s working through our supply chain, looking at kits that are ready to approach the factory floor, where we short, how to work those shortages so that we can complete kits, accelerate deliveries, etcetera.

I mean, that’s literally the process that we’ve been going through. I think the good news is we’ve demonstrated in FY twenty five the ability to build and execute that muscle and you saw in multiple quarters that we’re able to continue to pull forward and, as a result took an outlook that was low single digits for the year and converted it into high single digits almost double digits for the year. So we’re executing those same muscles again in FY 2026. Obviously, in the color commentary around 2026, we haven’t accounted for any accelerations within the year or into the year from FY 2027, But we are working on that every day and as we make progress as we put those plans in place and as we execute those plans we’ll continue to update our commentary as we move through the year.

Ken Herbert, Analyst, RBC Capital Markets: Great. Thank you. And if I could just a quick follow-up on the bookings in the quarter. You obviously continue to call out that they are supportive of sort of the longer term margin targets. Can you give any more granularity in terms of where you’re seeing the bookings in terms of maybe, you know, capabilities?

How many are with, you know, the the the CPA? And what you’re seeing, in terms of real demand on a from a booking standpoint?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Well, I think in just the small number of select bookings that we referred to in the call, you can see a pretty good distribution across end markets, a mix of production with some development awards that we think have the potential to lead to really significant future scale on those new developments. So I think a good mix of bookings and a good representation of the health of our end markets. On the margin point that you mentioned, I feel really good about the progress that we made. So we talked about the status of our backlog margin, where it sat at the end of FY24, the fact that we expected it to come up over time as we burned down the lower margin and replace it with bookings that are in line with our targeted margin. We’ve done that for four quarters and so we feel very good about that.

And when we look at sort of the rest of the runway, we haven’t been specific about the timing as to when that transition would complete itself. But we’ve if you do the math on our backlog duration, it clearly wasn’t going to happen in a year and it’s not going to take three years. It’s somewhere in between. And as I think as we get toward the end of FY twenty six, we should have a very crisp picture of where we are in completing that transition and be able to give, you know, I think a more precise update.

Dave, Executive Vice President and CFO, Mercury Systems: Yeah. And Ken, this is Dave. I would I would add it with specific reference to your question on the bookings around the common processing architecture, we did note in our remarks that two of the bookings that that came in in the quarter for $36,900,000 were related to common processing architecture, adding more to our backlog in that area.

Ken Herbert, Analyst, RBC Capital Markets: Thanks, Bill. Thanks, Dave.

Conference Operator: Your next question comes from the line of Pete Skibinski with Alembic Global. Please go ahead.

Pete Skibinski, Analyst, Alembic Global: Yes, really nice quarter guys.

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

Pete Skibinski, Analyst, Alembic Global: Maybe just to beat the drum more on the unbilled receivables, just because Bill, you mentioned that they declined really nicely and you talked about it accelerating the $30,000,000 in the quarter, so you can do quick turnaround stuff. So I just wanted to understand better why the balance of these unbilled programs are sort of giving you schedule risk and why they’re taking up so much capacity? Are they basically all integrated subsystems as opposed to components? Is that why they’re kind of taking longer and taking up more capacity?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Well, I think it’s a couple of things. One is some of those programs are what we talked about over the last couple of years, development programs that transitioned into production, etcetera. But I but I think the main point is that with the programs that have some of the larger unbilled balances, when they consume factory capacity to move out the door, we’re able to deliver invoice and collect cash, but most of the revenue on those programs have been recognized. So there’s very little incremental revenue that comes with it. That’s the main point that we’re trying to get across.

As we have to allocate capacity to these programs, we get the benefit of the free cash flow, but we don’t get significant revenue impact because a lot of the revenue has been previously recognized in those programs and what and and it’s what drives those unbilled balances.

Dave, Executive Vice President and CFO, Mercury Systems: And I would I would add that, you know, when you look at those programs, they’re largely older programs that were bid and and contracted before we were really focused on the terms we have around these contracts. So that’s why the unbilled balances build it build up as well because we weren’t billing and collecting along the way as we are now. You can see examples of how that’s changed in our deferred revenue buildup, for instance. But those older contracts, as Bill said, didn’t have that. So, hey, if a larger unbilled balances, we have to complete the contracts in order to get there.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yes. So Pete, hopefully that addresses the question, but if not, follow-up.

Pete Skibinski, Analyst, Alembic Global: Sure. Sure. And just one follow-up on that point. Just your 26 free cash guide, you’re just speaking to kind of positive free cash flow. It seems like if you’re dedicating capacity to these unbilled programs that aren’t going to generate revenue, it seems like your free cash conversion should be really strong.

Maybe I mean you did one times this year, right? So it seems like with more to go

Noah, Analyst, Goldman Sachs: on the unbilled that you

Pete Skibinski, Analyst, Alembic Global: would be in that neighborhood. Is that the right way to think about it?

Dave, Executive Vice President and CFO, Mercury Systems: Yeah. I think the way we’re putting it is we expect to be positive. This is a business that should be generating positive cash. And, you know, we have a couple of things that are working for us, of course. Like you just said, we did accelerate a significant amount of cash into q four.

You know, we expected to be about breakeven, and we were $30 plus ahead of that. And so that’s a little bit of a challenge early on in the year. And at the same time, as as I said, we have a significant deferred revenue balance, which is cash we’ve collected, you know, in advance already. So we’ll be working that off over time. We expect to continue building it up, but it it’s dependent on the terms we can negotiate with our customers.

So more to come as we go through the year on that. But for now, I think that’s the way we’re looking at it as we expect to be positive.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yeah. I mean, there’s no mystery to those moving pieces. It starts with the 50% free cash flow conversion and there’s what we free up off the balance sheet. If there’s anything we accelerated into a prior period then that would be impacted. So I think you’re thinking about it consistent with how we’re thinking about it.

Pete Skibinski, Analyst, Alembic Global: Okay. Fair enough. Thanks guys.

Unidentified: Thanks Pete.

Conference Operator: Your next question comes from the line of Seth Seifman with JPMorgan. Please go ahead.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems0: Hey, thanks very much. Good afternoon and good results.

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

Tyler Hojo, Vice President of Investor Relations, Mercury Systems0: Hi. So on I guess two questions about margin. Given that you talked about the average margin and the backlog kind of driving this 31% gross margin that we saw in the quarter, Is there any reason that the margin should step back down into the 20s going forward? And then on the OpEx, very low levels of SG and A and R and D as a percentage of sales. How do we think about these Q4 run rates in dollars and what they imply for next year?

Dave, Executive Vice President and CFO, Mercury Systems: Yeah. This is Dave. I I’ll I’ll start with that. You know, as we go through and over over time, yes, we expect our our gross margins to increase as our margin in backlog increases. Does that mean that there couldn’t be a single event in a quarter that might change it slightly?

I would never say it’s impossible for it to go down. But over the year, over the longer term, we expect it to continue to increase. So from that standpoint, Seth, the other thing on when you look at operating expense, you see a significant decline in operating expense year over year in the fourth quarter and year over year in the aggregate. I would note that a couple of things in the year over year and in the fourth quarter when you look, you see a decline in restructuring. So that’s not impacting EBITDA obviously, but you can see that that went from 20,000,000 a change last year versus this year $20,000,000 difference.

And then if you look at some of the notes, can see there was a significant difference in the SG and A in the fourth quarter. But when you I consider that consistent with last year, the difference is all in stock based comp, which, again, doesn’t impact EBITDA. I think I would say from an SG and A standpoint, we feel like we’re in the right range, as we’ve said a few times. I think that if you look at our R and D in the fourth quarter, I think that was a little bit lower than we expect to be on a run rate basis. I think Bill’s talked about the level we saw kind of as we were going through the balance of the year is about the level we expect to see give or take depending on what contract activities we’re working on in a given period.

Bill, if you have

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: any I just wrap it up by saying I think we’re in the right ZIP code for the near term in our OpEx. And it’s a result of the things that we’ve talked about over the last couple of years and really streamlining our organization and focusing in areas like IRAD, for instance. So I feel like we’re in the right zip code for the near term, and that’s really a good place for us to be to start generating more operating leverage as we start to scale.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems0: Thanks very much.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems: Yes. Thanks, Seth.

Conference Operator: Your next question comes from the line of Jonathan Ho with William Blair. Please go ahead.

Unidentified: Hi. Good afternoon and congrats on the strong results. Just given your strong next twelve months backlog, I just wanted to understand sort of the rationale behind not providing, sort of annual guidance. And where do you maybe see the most potential for uncertainty? Or what’s giving you pause, just given the framework that you’ve laid out?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yeah. I think with respect to our commentary on the outlook for the year, obviously, we said we didn’t account for any of acceleration of deliveries within the year or into the year. And in FY ’25, we demonstrated that we’re focused on doing that and we were successful in doing it. But given that we just recently accelerated 30,000,000, which is a pretty significant amount of deliveries into q four, we’re still working our way through the constraints on accelerating deliveries within the year. And we’re working that.

We’re working it every day and going through risks and opportunities and trying to identify the choke point. So I wouldn’t say there are any concerns there. It’s just a matter of working through those plans. We’re trying to address the constraints and figure out what we will be able to accelerate in the year. And at the same time, with respect to the market and conversations that we’re having with our customers, I would say that those are all very positive.

I mean, when you consider the overall outlook and size of the defense budget and allocation, increased allocation toward acquisition of technology and capabilities, You look at some of the executive orders that are focused on the use of commercial technology, is right in our wheelhouse, the executive orders around Golden Dome. And then what’s happening with your European defense budgets, and you can see in our k how our international operations has really grown over the last twelve months. We we feel great about those tailwinds. The conversations that we’re having with our customers across our business where there’s interest in, you know, additional quantities, looking for ways to accelerate, identify production and capacity constraints. So those all feel like very positive tailwinds.

But until they get quantified and until we see those conversations translate into bookings, it’s really hard for us to pull that into our outlook and be definitive about it. But like we did last year, we’ll go through the year, we’ll work on the accelerations, we’ll convert the bookings, and as we work through the year, we’ll continue to provide an update.

Unidentified: Got it. Got it. And just as a quick follow-up and building on the question, I just wanted to understand your thoughts around design win cadence and the pipeline progression, particularly around areas like Golden Dome and the new budget. How do we sort of see that playing out over the course of the year? And do you need these design wins ahead of sort of bookings programs to sort of accelerate the business?

Thank you.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Well, I think some of the bigger opportunities that we’re talking about in terms of near term volume is actually on existing programs that could fit within a Golden Dome type architecture. It wouldn’t look like a design one, but it would look like an increase in quantity or an acceleration of delivery. So I’d say that that’s one point to the response. But I’d say secondly, since we’ve stood up our advanced concepts group over the last year, we’ve really tightened up our focus on the next set of developments and next generation technologies and design wins that can expand our footprint and really drive and accelerate our growth beyond our current portfolio. So I think those are the two things that we’re really focused on.

But I think the near term opportunities that could really drive volume are more tied to existing customer relationships and existing systems where we have a footprint. Thank you.

Conference Operator: Your next question comes from the line of Connor Walters with Jefferies. Please go ahead.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems1: Hi guys. Congrats on the great quarter and thanks for taking my question.

Dave, Executive Vice President and CFO, Mercury Systems: Good. Thanks, I

Tyler Hojo, Vice President of Investor Relations, Mercury Systems1: wanted to circle back on margins. Curious what played out better than anticipated in Q4 given the earlier commentary was pointing to something nearing the mid teens and then hoping you could offer some puts and takes as we think about that deceleration to the low double digit range in the 2026. Now that OpEx is in the right ballpark, you’re executing well on the EACs, is this just the read on program mix expected to come down the pipeline?

Dave, Executive Vice President and CFO, Mercury Systems: Yes. So two things. Certainly, the the increased volume because of the pull in helped us with our operating leverage because, as you saw, our OpEx didn’t wasn’t gonna grow because of that. And there definitely was a mixed phenomena going on there. As, you know, Bill talked about, you know, we we were able to accelerate, you know, $30,000,000 worth of activity that was a higher mix of higher margin activity.

So those things impacted us in Q4 and drove us to that higher than expectation EBITDA margin rate.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems1: Great. And maybe just one more. CapEx took a step back this year. How should we be thinking about that in ’twenty six and beyond as you continue to invest in additional automation across the facility footprint?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: I think there might be an opportunity for it to tick up a little bit in ’26 just tied to any investments we make to further automate or down the road that we make to really accelerate our capacity and ability to accelerate deliveries. But I say tick up. I see anything at this point that would be significant.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems1: Great. Thanks so much.

Conference Operator: Your next question comes from the line of Sam Struzicker with Truist Securities. Please go ahead.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems2: Hi. Good evening, guys. Nice quarter on for Mike Ciarmoli this evening. I guess, just kind of circling back, I am curious what operational improvement levers do you guys have left to pull up any I don’t know if you guys are thinking about maybe any more facility consolidation just anything on that front and kind of building off of that how should we think about potential operational improvement versus the lower margin backlog working out of the system in terms of the margin expansion profile going forward?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yeah. I think, you know, as we think about the drivers of our margin going forward, there’s three pieces to it. One is the backlog margin that we talked about. The second is continuing to drive, efficiencies and to automate and to streamline our operations. And the third is the positive operating leverage that we get with increased volume.

I’d say we’re focused on all three. The backlog margin is progressing and playing out the way we thought. And I think the fourth quarter is a great illustration that when we deliver a higher mix of higher margin backlog, it’s math, it translates into better EBITDA margin. So as we move through ’26 and we’re seeing a little bit in ’26 of a higher mix of lower margin programs working their way through in ’26. I think Q4 showed what happens when we have less low margin mix, more high margin mix that all flows through to higher EBITDA margin.

So we’re focused on continuing that progression. And then we said it before in in prior calls, we’ll work for, you know, continuously for the rest of our lives on driving efficiency into the organization and then it becomes a decision around what we do with those efficiencies either to, you know, create additional capacity for innovation, investment, etcetera. But that’s something that we’ll work on continuously and will never be done.

Tyler Hojo, Vice President of Investor Relations, Mercury Systems2: Got it. That’s that’s great. And I guess if I could just sneak in one more. You guys spoke to a couple noteworthy contracts in the quarter in the backlog, but could you maybe just give us a little more detail sort of on where you’re seeing the most demand either by sort of general product category or even end market kind of land air where you’re seeing that? And then, I guess, obviously, international has been doing well.

But if you have any additional color there, that would be great too. Thanks.

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yeah. I guess you can see in the k where, you know, where we’re growing by customer and by, you know, by segment, and that does move around quarter to quarter. And sometimes it’s just driven by mix and program activity in in a current period. But I will say that across our business right now, we are engaged in conversations that look like increased production quantities and acceleration and questions from our customers and primes around, you know, providing rough order of magnitude bids if we were to accelerate or increase production. And it’s tied to our domestic primes and it’s across their land, sea, space.

And we’re also seeing it with the European primes as well. Now again, until those conversations manifest into bookings, it’s really hard to put any certainty into our outlook. But those conversations are happening and again, we feel very good about the market and the tailwinds in the market going forward.

Conference Operator: Your next question comes from the line of Noah Poponak with Goldman Sachs. Please go ahead.

Noah, Analyst, Goldman Sachs: Hey, good evening, everyone. Hey, Noah. Hey, Noah. Hey. Thanks for taking the question.

Just thinking about the pacing, the quarterly pacing on the top line from here. I hear you on the relatively flat in the first half and identifying the 30,000,000 of pull forward into April from one q. I guess, you know, $3,030,000,000 on a flat year just as a starting point. So if I was using 01/2025 revenue, it would be 15% of revenue. And so to grow or I guess to get back to flat, you know, you’d have to be growing 15% excluding any other you know, all else equal, if there was no other movement in revenue.

So is one q down and then two q’s up to get you to flat for the first half? Or am I missing something in in that thinking?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: I think without, you know, getting too specific or caught up in in quarter to quarter, we’re thinking relatively flat for the first half. I think that’s the simplest way to articulate our commentary.

Noah, Analyst, Goldman Sachs: Okay. Fair enough. On the on the margin commentary, and and maybe this is also splitting hairs too much, but I guess, you know, you calling it approaching mid teens, I would interpret as, you know, you’re still working your way up towards mid teens. And we you just finished a year thirteen one, And you’ve talked about not needing that much more time to be at the longer term framework. So, I guess, help me think through how 26 progresses versus 25, and then to what extent does 27 achieve the low to mid twenties versus it needs more time than that?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Yeah. I think if I think if I step back and don’t get too caught up in the quarter to quarter movements, And I think about the 30,000,000 approximately 30,000,015 that we, you know, really just time shifted to the left. If if I looked at the math, if that didn’t happen, I think it shows a progression of growth rates on the top line and a progression of margins that looks a little bit different than after we pulled it forward and then with the commentary that we gave. And I mean, could all stand up at a whiteboard and do that math, but I think the math is pretty self evident that, you know, at least on the top line, a mid single digit growth rate in ’25 leading to a high single digit growth rate in ’26 would be impacted by the shift of $30,000,000 from ’26 into ’25. And I think that’s part of the phenomenon you know, in our outlook, and it also applies to margins.

So I don’t I don’t think I need to do the math for anybody, but at least that’s how I think about it.

Noah, Analyst, Goldman Sachs: I understand. On Golden Dome, any any ability to frame what that could mean to Mercury on a run rate basis? And I guess, you know, given the time frame they’ve talked about for fully operational, when do you think they’ll start to make awards?

Bill Balhaus, Chairman and Chief Executive Officer, Mercury Systems: Great questions. I think if we take just a step back, in order to deliver capabilities on the time frame that has been discussed, I would think that largely those capabilities would be derived from existing systems that, you know, make up different layers of what a Golden Dome architecture can look like. And as we look at those layers and the existing systems today, we really like our footprint. And so, you know, there is an opportunity, we think, for us to see an acceleration of deliveries on existing programs and increases in quantities. When that happens, for me right now, it’s TBD.

And that’s why, you know, we’ve been pretty clear that in our f y twenty six outlook, which ends next, you know, end of next June, we’re not incorporating any impact from Golden Dome driven acceleration of deliveries. So we’ll see how it plays out and we’ll make sure to keep everybody, you know, everybody informed.

Noah, Analyst, Goldman Sachs: Okay. Last thing, Dave, is is there a way to frame where normal unbilled receivables should be in in dollars or as a percentage of revenue? And then why are you building deferred revenue? What what is the contracting mechanism that’s driving that?

Dave, Executive Vice President and CFO, Mercury Systems: Yeah. So the way the way to think about it, I’ll give you an example for deferred revenue that that maybe it’ll it’ll help when we’ve talked about this before. Customer comes in and says, hey. I want you to go buy the all the end of life components for these programs so that we can order for the next five years. And I want you to hold those in inventory or, you know, as a you know, on on your balance sheet.

And they say you know, and we say to them, okay. We’re willing to do that. Good deal for us. Right? Because we wanna guarantee that production for the next five years.

And we say, but, oh, by the way, we’d like you to pay us now for that. And so they’ll pay us upfront in advance of us placing you know, so we can go place the orders in advance of those things coming in. So you would see that creates itself as a deferred revenue asset, meaning, you know, we’ve got the cash. We have something we need to do in the future. And so that impacts us, you know, significantly, can be long lead, can be end of life, either one of those things.

And and that’s what we’ve seen really go up where we’ve asked customers rather than putting it on our balance sheet. We’ve we’ve said, hey. Can can you pay us for that? And, and they’ve been receptive to that. At this that impacts both the inventory and the unbilled.

And so some of that $127,000,000 you see as deferred revenue is actually you know, think of it as a counter to the unbilled balance and the inventory balance. And and so, you know, we’ve done some math around what the ideal rates are for each one of the categories. And as Bill said, you know, we’ve got, you know, a 100 ish million dollars to get to the 35% kind of range. And as we look at it, it’s across all of those categories. It’s some in unbilled.

It’s some in inventory. You know, we don’t think we’re at the the ideal level for either of those things at this point.

Conference Operator: Mr. Balhaus, 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. Thanks for your time this afternoon, and we look forward to updating everybody in our next quarterly call.

Conference Operator: This concludes today’s conference call. Thank you for your participation, and you may now disconnect.

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