Mercury Systems, Inc. Q1 FY2026 earnings call

Introductory Comments: Q1 results were ahead of expectations with growth in backlog, revenue, adjusted EBITDA, and free cash flow.### 4 Priorities: - Performance Excellence: $4M net adverse EAC changes in line with recent quarters, down 51% Y/Y; accelerated high-margin program deliveries generating ~$20M revenue and $10M adjusted EBITDA; progress on capacity, automation, and site consolidation, with plans to bring online over 50,000 sq ft of factory space in Q3 FY '26. - Driving Organic Growth: Record bookings of $250M, backlog of $1.4B, book-to-bill of 1.11; notable awards included competitive wins, follow-on production, and new design programs. - Expanding Margins: Focus on backlog margin expansion, simplifying/automating operations, and driving organic growth for operating leverage. Q1 adjusted EBITDA margin 15.8%, gross margin 28% (up 260 basis points Y/Y). - Improved Free Cash Flow: Progress on reducing net working capital, Q1 free cash flow improved by $16.5M, expect continued reduction in working capital and net debt.

In Q1 FY '26, Mercury Systems had bookings of $250 million with a book-to-bill of 1.11, resulting in a record backlog of $1.4 billion. Revenue was $225 million, up 10.2% year-over-year. Adjusted EBITDA was $35.6 million, up 65.8% year-over-year, with an adjusted EBITDA margin of 15.8%, a 530 basis point increase year-over-year. Free cash flow was an outflow of $4.4 million, a $16.5 million improvement from the prior year. Net working capital decreased by $105.7 million year-over-year, or 18.8%.

• Maintain full-year view for FY '26, excluding further customer delivery accelerations or Golden Dome/UPSIDE bookings. - Annual revenue growth low single digits, first half flat Y/Y, volume up sequentially in second half. - Q2 revenue expected down Y/Y absent additional delivery acceleration. - Full-year adjusted EBITDA margin mid-teens, Q2 approaching double digits, margins expand in second half, Q4 highest. - Free cash flow positive for year, second half greater than first half. - New $200M buyback authorization.

• Forward-looking statements subject to risks and uncertainties in SEC filings. - Potential impact of extended U.S. government shutdown on new bookings (minimal so far).

Q: Ken Herbert with RBC asked about ongoing ability to pull revenues forward and incremental upside.

A: Bill Ballhaus said they continue working through constraints to accelerate deliveries but haven't factored future accelerations into outlook; working on material and factory constraints daily.

Q: Pete Arment with Baird asked about CPA production ramp.

A: David Farnsworth discussed multi-quarter progression of CPA production, ramp to rate, and potential TAM expansion via different form factors.

Q: Rocco with JPMorgan asked about margin progression and free cash flow conversion.

A: William Ballhaus mentioned margin components (backlog margin, automation, operating leverage) and David Farnsworth talked about focus on working capital and long-term free cash flow conversion towards 50%.

Q: Austin Moeller with Canaccord Genuity asked about LTAMDS delivery timeline and U.S. vs international revenue growth.

A: David Farnsworth said no comment on current LTAMDS delivery timeline; both U.S. and international markets have growth potential with tailwinds.

Q: Jonathan Ho with William Blair asked about Golden Dome and U.S. government shutdown impact.

A: David Farnsworth said Golden Dome positioning is strong across layers, and shutdown impact so far is minimal; extended shutdown could affect new bookings but not currently.

Q: Sam with Truist Securities asked about lower-margin backlog progress and free cash flow.

A: David Farnsworth discussed progress on burning down lower-margin backlog and noted cash flow variability due to timing of billings/shipments.

Q: Sheila with Jefferies asked about margin timing and buyback.

A: David Farnsworth talked about low-margin backlog conversion timeline (~FY '27) and Bill Ballhaus said buyback reflects confidence in business and long-term shareholder value.