MERCURY SYSTEMS INC Q2 FY2025 earnings call

• Introductory remarks: Delivered solid Q2 results in line with or ahead of expectations, optimistic about ongoing efforts to enhance performance.
• Four priorities:
  • Delivering predictable performance: Mitigated transitory impacts, ramped production in common processing architecture, and saw a 31% year-over-year increase in point-in-time revenue due to pull-forward deliveries.
  • Driving organic growth: Record backlog of $1.4 billion with over 80% of trailing 12-month bookings being production-related. Notable wins included a $24.5 million contract for a US Defense Department satellite program, awards with Naval Air Systems Command, and being the sole source provider for US Air Force memory modules.
  • Expanding margins: Focused on executing development programs, shifting towards a production-heavy mix, with R&D and SG&A expenses down. Expected backlog margin to improve with new bookings.
  • Improving free cash flow: Significant progress in reducing net working capital to the lowest level since Q3 FY 2022, with free cash flow expected to be positive in FY '25, though second half projected to be breakeven.

Bookings for the quarter were $242 million with a trailing book-to-bill of 1.12. Revenue was $223 million, up 13% year-over-year. Adjusted EBITDA was $22 million with a margin of 9.9%, both up substantially year-over-year. Free cash flow reached a record $82 million, up $44 million year-over-year. The backlog stood at $1.4 billion, a record high. Net working capital decreased by $115 million year-over-year or 19.5%.

• For FY 2025, revenue growth is expected to approach mid-single digits year-over-year, up from prior flat expectations.
• Adjusted EBITDA margins are anticipated to be in the low double digits for FY 2025, with Q4 expected to be the highest margin of the fiscal year.
• Free cash flow is projected to be cash flow positive in FY 2025, with the second half expected to be breakeven due to cash acceleration in the first half.

Forward-looking statements are subject to future risks and uncertainties that could cause actual results to differ materially, as outlined in Mercury's SEC filings.

Q: Pete Skibitski inquired about progress in common processing architecture (CPA) processes and order flow.

A: Bill Ballhaus responded that CPA progress is on track, ramping to full rate production, and the trailing 12-month book-to-bill of 1.12 is solid, positioning the company well for the second half.

Q: Peter Arment asked about back half free cash flow breakeven.

A: Dave Farnsworth explained that deferred revenue growth is tied to milestones, and deferred revenue is expected to draw down in the second half.

Q: Ken Herbert asked about adjusted EBITDA margins.

A: Bill Ballhaus discussed how backlog margin conversion and operating expense impact will contribute to achieving targeted margins.

Q: Seth Seifman asked about market growth and the role of CPA.

A: Bill Ballhaus stated the market is defense electronics with 5-6% growth, and CPA ramping up opens new awards and drives business performance.

Q: Jonathan Ho asked about pull-forward contract activity.

A: Bill Ballhaus and Dave Farnsworth noted it was driven by a focus on delivering for customers, involving multiple products and customers.

Q: Michael Ciarmoli asked about margin uplift in Q4.

A: Bill Ballhaus and Dave Farnsworth discussed how backlog margin improves with new bookings and contract execution.

Q: Brian Gesuale asked about production vs development margins and competitive wins.

A: Dave Farnsworth talked about margin differences between production and development, and Bill Ballhaus detailed competitive wins like a satellite program contract and CPA takeaway.

Q: Sheila Kahyaoglu asked about free cash flow and profitability.

A: Dave Farnsworth explained free cash flow bridge and margin differences, and Bill Ballhaus discussed the profitability of competitive wins.