Mercury Systems, Inc. Q2 FY2026 earnings call

First, Q2 results ahead of expectations with solid growth in backlog, revenue, adjusted EBITDA and free cash flow. Second, update on four priorities: Performance excellence (sound execution on programs, capacity building), Driving organic growth (strong bookings, mix of franchise extensions, new design wins, follow-on production awards), Expanding margins (focus on backlog margin expansion, simplifying operations, driving organic growth for operating leverage), Improve free cash flow (progress on reducing net working capital, net debt down). Third, outlook for FY 2026 with expected low single-digit revenue growth, Q3 revenue down y-o-y absent additional accelerations, Q4 ramp, mid-teens adjusted EBITDA margin, positive free cash flow for the year.

Q2 results: Bookings of $288 million, 1.23 book-to-bill, record backlog near $1.5 billion. Revenue $233 million, first-half revenue up 7.1% y-o-y. Adjusted EBITDA $30 million, margin 12.9% (up 36.3% and 300 basis points y-o-y). Free cash flow $46 million. Backlog growth 8.8% y-o-y. Net working capital down $61 million y-o-y (12.9%).

Maintain full-year view on FY 2026 excluding further accelerations or upside from Golden Dome or global defense budgets. Expect annual revenue growth of low single digits. Q3 revenue down y-o-y absent additional accelerations, Q4 ramp. Q3 adjusted EBITDA margin approaching double digits, Q4 highest of fiscal year. Free cash flow expected to be positive for the year, with Q3 expected to have a free cash outflow due to Q2 pull forward.

Forward-looking statements subject to future risks and uncertainties that could cause actual results to differ materially. Uncertainty around material acceleration for revenue recognition due to supplier delays. Uncertainty regarding the timing and impact of global defense budget allocations and domestic priorities like Golden Dome on bookings and revenue.

Q: Can you give a handicap on remaining lower margin backlog?

A: Lower margin backlog will burn through over time, with higher margin bookings replacing it.

Q: On capacity for CPA, where are we?

A: Ramping up production in CPA area, with additional space in Phoenix to meet increased demand.

Q: Why not push up guidance?

A: Uncertainty around material acceleration as it depends on supplier delivery, can't be assumed.

Q: On net EICs, where are we?

A: Largely older programs being completed, in normal course range.

Q: On common processing architecture sales mix?

A: Successful in ramping, with healthy demand and growth potential.

Q: On cash balance and stock buyback?

A: Focus on delevering, cash balance around $100 - $150 million ideal.

Q: On capacity allocation to unbilled?

A: Haven't quantified, focus on reducing net working capital.

Q: On choke points for acceleration?

A: Working aggressively across programs to accelerate kit completion, but material delays can occur.

Q: On SCAR program revenue impact?

A: Don't quantify individual programs.

Q: On Golden Dome and international orders?

A: Numerous conversations, still in pipeline phases.

Q: On cost savings and facilities consolidation?

A: Made progress, continue to identify efficiencies.

Q: On international revenue percentage and missile/munition revenue?

A: Don't break out separately.

Q: On margins and cost components?

A: Bridge to target EBITDA margins through backlog margin progression, streamlining, and operating leverage.

Q: On restructuring charges?

A: Related to driving scale and efficiency, affecting ~100 folks.