Mercury Systems, Inc. Q4 FY2025 earnings call

• Performance Excellence: In Q4, net adverse EAC changes across the portfolio were in line with recent quarters, and customer delivery acceleration generated ~$30M revenue and ~$15M adjusted EBITDA planned for FY '26.
• Driving Organic Growth: Q4 had record bookings of $342 million, resulting in a record backlog of $1.4 billion, with significant contract awards including production awards, sensor processing subsystems contracts, and agreements with European defense primes.
• Expanding Margins: Focus on backlog margin expansion, ongoing operations simplification/automation/optimization, and driving organic growth for operating leverage. Q4 adjusted EBITDA margin was ahead of expectations.
• Improved Free Cash Flow: Progress on reducing net working capital, with net working capital down $90 million year-over-year. Q4 free cash flow was ahead of breakeven, and full year free cash flow was a record $119 million.

In Q4, revenue was $273 million, up 9.9% year-over-year. Full year revenue was $912 million, up 9.2% year-over-year. Q4 adjusted EBITDA was $51 million with a margin of 18.8%. Full year adjusted EBITDA was $119 million with a margin of 13.1%. Free cash flow for Q4 was $34 million, and full year free cash flow was $119 million. Backlog was $1.4 billion, up 6% year-over-year. Record quarterly bookings of $342 million with a 1.25 book-to-bill.

• FY '26 revenue expected to have low-single digit annual growth, first half relatively flat, second half volume increasing.
• Full year adjusted EBITDA margin expected approaching mid-teens, first half low-double digits, second half expansion, with Q4 margin expected highest of fiscal year.
• Expect to be free cash flow positive for FY '26, with second half free cash flow greater than first half.

• Uncertainties in program execution and supply chain constraints that could impact delivery timelines and margins.
• Market dynamics affecting the conversion of bookings into revenue and the achievement of margin targets.

Q: Can you elaborate on the pull-forward of revenues from first half '26 into Q4?

A: It was driven by working through supply chain and factory capacity to accelerate deliveries for customers as they want technologies in their programs quickly. Working through supply chain to address shortages to complete kits and accelerate deliveries.

Q: What's a normalized level for Mercury's net working capital?

A: Depending on business mix, could be in the 35% range, and they aim to continue reducing net working capital towards that target.

Q: How should we think about CapEx in '26 and beyond?

A: There might be a tick-up in '26 tied to investments in automation or accelerating capacity, but nothing significant at this point.

Q: What's the outlook for Golden Dome's impact on Mercury?

A: Largely derived from existing systems, and in FY '26 outlook, no impact from Golden Dome-driven acceleration of deliveries is incorporated yet; will keep informed as it plays out.