Mercury Systems Q3 2026 Earnings Report

Mercury Systems EPS Results

• Actual EPS: $0.27
• Consensus EPS: $0.06
• Beat/Miss: Beat by +$0.21
• One Year Ago EPS: $0.06

Mercury Systems Revenue Results

• Actual Revenue: $235.76 million
• Expected Revenue: $208.56 million
• Beat/Miss: Beat by +$27.20 million
• YoY Revenue Growth: +11.50%

Mercury Systems Announcement Details

• Quarter: Q3 2026
• Date: 5/5/2026
• Time: After Market Closes
• Conference Call Date: Tuesday, May 5, 2026
• Conference Call Time: 5:00PM ET

Mercury Systems (NASDAQ:MRCY), Inc. (NASDAQ: MRCY) is a technology company that designs, manufactures and markets secure processing subsystems for aerospace and defense applications. The company’s products are built to address the stringent security, safety and reliability requirements of mission-critical programs, with a focus on radar, electronic warfare, intelligence and other sensor and processing functions. Mercury’s offerings encompass rugged embedded computing modules, high-performance radio frequency (RF) and microwave components, digital signal processing subsystems and secure networking solutions.

Since its origins in advanced signal processing, Mercury Systems has expanded its capabilities through a combination of internal development and targeted acquisitions. Its product portfolio spans open architecture compute platforms, secure data storage and management systems, high-speed analog-to-digital conversion technology, and application-specific integrated circuits designed for harsh environments. These solutions enable system integrators and original equipment manufacturers (OEMs) to accelerate the development of next-generation radar systems, electronic countermeasures and intelligence, surveillance and reconnaissance (ISR) platforms.

Headquartered in Andover, Massachusetts, Mercury Systems serves defense prime contractors, government agencies and allied militaries around the globe. The company maintains research, development and manufacturing facilities across North America and Europe, ensuring compliance with domestic security standards while supporting international programs. Under the leadership of President and Chief Executive Officer Mark A. Aslett, Mercury Systems continues to invest in secure-by-design architectures and trusted supply chain practices to meet evolving defense requirements and advance its position in mission-critical electronics.

Mercury Systems Q3 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Q3 results beat expectations with $348.3M bookings (1.48 book-to-bill), nearly $1.6B backlog, $235.8M revenue (+11.5% organic) and adjusted EBITDA of $36.1M (15.3% margin, +360 bps YoY).
• Positive Sentiment: Management raised FY‑2026 guidance to revenue growth approaching mid‑single digits (from low single digits), full‑year adjusted EBITDA now expected in the mid‑teens, and expects Q4 Free Cash Flow to be positive while reiterating a long‑term target of low‑to‑mid‑20% EBITDA margins.
• Positive Sentiment: Operational execution accelerated conversion of backlog (~$25M revenue, ~$15M adjusted EBITDA and ~$25M cash timing benefits tied to Q4), added 50k sq ft of automated Phoenix capacity for Common Processing Architecture programs, and closed an acquisition of a manufacturing process technology provider to support ramping programs.
• Neutral Sentiment: Balance‑sheet and working‑capital progress includes $332M cash, $259.7M net debt, Net Working Capital down ~4.1% YoY and a $150M revolver paydown, although Q3 showed a slight Free Cash Flow outflow (~$1.8–2M).
• Negative Sentiment: Upside remains conditional — potential tailwinds from initiatives like Golden Dome, LTAMDS and FMS orders are not yet reflected in bookings or guidance and depend on customer funding allocations and prime‑level awards.

Presentation

[Operator]

Good day, everyone, and welcome to the Mercury Systems third quarter fiscal 2026 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 at Mercury Systems]

Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, Bill Ballhaus, and our Executive Vice President and Chief Financial Officer, 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.

[Tyler Hojo, Vice President of Investor Relations at Mercury Systems]

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 Systems' 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 Systems' Chairman and Chief Executive Officer, Bill Ballhaus. Please turn to slide three.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Thanks, Tyler. Good afternoon. Thank Thank you for joining our Q3 FY 2026 earnings call. We delivered Q3 results that were ahead of our expectations with significant year-over-year growth in backlog, revenue, and adjusted EBITDA. Strong demand signals and solid execution contributed to better-than-expected organic growth and margin expansion this quarter. Today, I'll 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 Free Cash Flow. Third, performance expectations for the balance of FY 2026 and longer term. 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.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

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 Q3 results reflected robust organic growth and margin expansion. Record bookings of $348.3 million and a 1.48 book-to-bill, resulting in a record backlog approaching $1.6 billion. Revenue of $235.8 million, up 11.5% organically year-over-year. adjusted EBITDA of $36.1 million and adjusted EBITDA margin of 15.3%, up 46% and 360 basis points respectively year-over-year. Free cash outflow of $1.8 million, meaningfully outperforming our expectations. We ended Q3 with $332 million of cash on hand.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

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 18% year-over-year and a sequential increase of 12-month backlog of 10.3%, a streamlined operating structure enabling increased positive operating leverage and significant margin expansion, and continued progress on Free Cash Flow drivers with Net Working Capital down 4.1% year-over-year. Please turn to slide five. Starting with our four priorities and priority one, performance excellence, where we are focused on sound execution on development programs, accelerating deliveries for our customers broadly across our portfolio, and ramping to rate on numerous programs transitioning to higher volume production.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

We accelerated progress across a number of programs and generated approximately $25 million of revenue, $15 million of adjusted EBITDA, and $25 million of cash all primarily planned for the fourth quarter. This acceleration, enabled by our efforts to align our supply base to yield faster backlog conversion, contributed to top-line growth, adjusted EBITDA margin, and Free Cash Flow that exceeded our expectations for Q3 and will also factor into our outlook for Q4, which I'll speak to shortly. Our strong bookings and record backlog, combined with our ability to more rapidly convert backlog, is translating into organic growth exceeding our expectations coming into FY 2026. Notably, our domestic revenue, representing approximately 88% of our Q3 revenue, generated 17% year-over-year growth.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Beyond this solid performance, we progressed on a number of actions in the quarter to increase capacity, add automation, and consolidate subscale sites in our ongoing efforts to drive scalability and efficiency. Notably, we added capacity to our highly automated manufacturing footprint in Phoenix, Arizona and initiated operations within our additional 50,000sq ft of factory space to support ramped production for our Common Processing Architecture programs and to allow for efficient scaling. In the quarter, we also completed the acquisition of a critical manufacturing process technology provider integral to a number of our key ramping programs. These are among a number of actions we have taken, along with prior investments across a number of critical technology developments that are driving our ability to accelerate delivery of vital capabilities to our warfighters and our allies. Please turn to slide six. Moving on to priority two, driving organic growth.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

We believe that our near-term organic growth will be driven by increased volume on existing production programs and the ongoing transition of a number of development programs to production. Additionally, we expect possible upside tied to potential tailwinds from customer-driven acceleration and increased quantities across a broad set of production programs in our portfolio. Lastly, we are excited about new development programs and the potential of the production volume associated with those wins. In Q3, we delivered a record quarter with $348.3 million of bookings, resulting in a book-to-bill of 1.48 and a record backlog approaching $1.6 billion. Our trailing 12-month bookings are a record $1.23 billion. Q3 bookings were driven largely by follow-on production orders reflecting strong customer demand across core franchise programs.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

This bookings mix reflects the transitioning of our business toward higher rate production and we believe does not meaningfully capture the potential incremental tailwinds we see in the market. The largest bookings in the quarter were across several missile, C4I, and space programs. In addition, the quarter featured the strongest bookings of the fiscal year for solutions that leverage our Common Processing Architecture. Finally, we secured a follow-on development award on a strategic program that has the potential to proliferate across multiple platforms. Beyond our backlog growth, we continue to see the potential for higher demand on multiple programs across our portfolio, driven by increased defense budgets globally and domestic priorities like Golden Dome. I remain optimistic that these potential market tailwinds may have a positive impact on our demand environment if funding is allocated across certain program priorities to our customers over the next several quarters and beyond.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Please turn to slide seven. Now turning to priority three, expanding margins. In our efforts to progress toward our targeted adjusted EBITDA margins in the low to mid 20% range, we're focused on the following drivers. Backlog margin expansion as we convert lower margin backlog and add new bookings aligned with our target margin profile, ongoing initiatives to further simplify, automate, and optimize our operations, and driving organic growth to increase positive operating leverage. Q3 adjusted EBITDA margin of 15.3% was ahead of our expectations and up 360 basis points year-over-year. Gross margin of 29.3% was up 230 basis points year-over-year, consistent with our expectation that average backlog margin will continue to increase as we convert legacy lower margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Operating expenses are down year-over-year, both on an absolute basis and as a percentage of sales, reflecting our focus on continuously driving cost structure efficiencies to enable significant positive operating leverage as we accelerate organic growth. Please forward to slide eight. Finally, turning to priority 4, improved Free Cash Flow. We continue to make progress on the drivers of Free Cash Flow, and in particular, reducing Net Working Capital, which at approximately $434.4 million is down $18.7 million year-over-year. Net debt was $259.7 million at the end of Q3. We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning, and supply chain management will continue to yield a strong balance sheet that provides sufficient flexibility for us to pursue and capture potential market tailwinds. Please turn to slide nine.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Looking ahead, I am very optimistic about our team's performance, strategic positioning, the market backdrop, and our expectation to deliver results in line with our target profile of above-market top-line growth, adjusted EBITDA margins in the low to mid-20% range, and Free Cash Flow conversion of 50%. We believe our strong year-to-date results reflect meaningful progress toward this target profile, with an aggregate 1.3 book-to-bill, 9% top-line growth, 15% adjusted EBITDA margins, 400 basis points of EBITDA margin expansion year-over-year, and Free Cash Flow of $39.5 million. Coming out of Q3, we are raising our expectations for FY 2026. We believe our efforts to stage material earlier have improved revenue linearity and increased forecast visibility. That progress is now reflected in our updated expectations for FY 2026. As a result, our outlook incorporates backlog conversion that historically may have materialized in accelerations and results above forecast.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Our Q4 bookings have the potential to be the strongest of the year, based on a pipeline of opportunities that is more robust than our Q3 pipeline, which we believe could be an indicator of increased top-line growth and further margin expansion beyond FY 2026. We now expect annual revenue growth for FY 2026 approaching mid-single digits up from low single digits. We expect full-year adjusted EBITDA margin of mid-teens up from approaching mid-teens. Finally, with respect to Free Cash Flow, we expect Free Cash Flow to be positive for Q4.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

In summary, with our positive momentum year to date and coming out of a very solid Q3, I expect FY 2026 performance to deliver a significant step toward our target profile. Additionally, I'm gaining optimism regarding the potential for tailwinds associated with increased global defense budgets and domestic priorities like Golden Dome to materialize in upside bookings to our plan over time.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

With that, I'll turn it over to Dave to walk through the financial results for the quarter, and I look forward to your questions. Dave?

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Thank you, Bill. Our Third Quarter results reflect continued solid progress toward our goal of delivering organic growth and expanding margins. We still have work to do to reach our targeted profile, but we are encouraged by the progress we have made and expect to continue this momentum going forward. With that, please turn to slide 10, which details our Third Quarter results. Our bookings for the quarter were approximately $348 million, with a book-to-bill of 1.48. Our record backlog of nearly $1.6 billion is up $240 million or 17.9% year-over-year. Revenues for the third Quarter were nearly $236 million, up approximately $24 million or 11.5% organically compared to the prior year.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

During the third quarter, we were again able to accelerate progress on a number of customers' high-priority programs worth approximately $25 million of revenue, primarily planned for the fourth quarter of FY 2026. Gross margin for the third quarter increased approximately 230 basis points to 29.3% as compared to the same quarter last year. The gross margin increase during the third quarter was primarily driven by lower net EAC change impacts of nearly $2 million and lower net manufacturing adjustments of approximately $4 million. These increases were partially offset by higher inventory reserves of approximately $3 million. 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 and through our continued focus to simplify, automate, and optimize our operations.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

We expect average backlog margin to continue to increase as we convert lower margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. Operating expenses decreased approximately $11 million or 14.3% year-over-year. The decrease in operating expenses was driven primarily by lower restructuring and other charges, selling, general and administrative expenses, and research and development costs of approximately $5 million, $4 million, and $1 million, respectively. These decreases reflect the efficiency improvements and headcount reductions we've previously discussed to align our team composition with our increased production mix, driving improved operating leverage. GAAP net loss and loss per share in the third quarter were approximately $3 million and $0.04, respectively, as compared to GAAP net loss and loss per share of approximately $19 million and $0.33, respectively, in the same quarter last year.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Adjusted EBITDA for the third quarter was approximately $36 million, up $11 million or 46.2% as compared to the same quarter last year. The increase was partially driven by enhanced execution and improved operating leverage. Adjusted Earnings Per Share was $0.27 as compared to $0.06 in the prior year. The year-over-year increase was primarily related to our improved execution and increased operating leverage in the current period as compared to the prior year. Free Cash Flow for the third quarter was an outflow of approximately $2 million as compared to an inflow of $24 million in the prior year. As we noted last quarter, we did expect to see a Free Cash Flow outflow in the third quarter. We were able to successfully mitigate a large portion of that outflow through improved collections on billed receivables.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Slide 11 presents Mercury's balance sheet for the last five quarters. We ended the third quarter with cash and cash equivalents of $332 million, which represents an increase of approximately $62 million or 23% from the same period in the prior year. This increase was primarily driven by the last 12 months' Free Cash Flow of approximately $73 million, which was partially offset by $15 million of shares repurchased and retired from our share repurchase program earlier this fiscal year. Billed and unbilled receivables decreased sequentially by approximately $10 million and $4 million, respectively. We continue to expect to allocate factory capacity in the fourth quarter to programs with unbilled receivable balances, which will help drive Free Cash Flow with minimal impact to revenue. Inventory increased sequentially by approximately $12 million.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

The increase was driven primarily by work in process as we bring product to its final state in support of our increased proportion of point-in-time revenue on many of the company's production programs. Prepaid expenses and other current assets decreased sequentially by approximately $10 million, primarily due to insurance proceeds and normal operating expenses. Accounts payable decreased sequentially by approximately $2 million, primarily driven by the timing of payments to our suppliers. Accrued expenses decreased approximately $3 million sequentially, primarily due to the payments of a legal settlement and restructuring activities we announced earlier this fiscal year. Accrued compensation increased approximately $2 million sequentially, primarily due to our incentive compensation plans. The amount due to our factoring facility decreased sequentially by approximately $18 million, primarily due to the timing of payments from our customers due back to our counterparty.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Deferred revenues decreased sequentially by approximately $11 million, primarily driven by execution across a number of programs during the period. Working capital decreased approximately $19 million year-over-year or 4.1%. Our continued working capital improvement year-over-year, which is evidenced by our strong balance sheet position, has enabled us to make a $150 million payment against our revolver during the fourth quarter. This continues to demonstrate the progress we've made in reversing the multi-year trend of growth in working capital, resulting in a reduction of approximately $225 million or 34% from the peak Net Working Capital in Q1 Fiscal 2024. Our balance sheet provides sufficient flexibility for us to pursue and capture potential market tailwinds. Turning to cash flow on slide 12.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Free Cash Flow for the third quarter was a slight outflow of approximately $2 million, as compared to an inflow of $24 million in the prior year. We continue to expect Free Cash Flow to be positive for the year, with positive cash flow expected in the fourth quarter, as Bill previously noted. We believe our continuous improvement in program execution, hardware deliveries, just-in-time material, and appropriate lead time payment terms will lead to continued reduction in Net Working Capital. In closing, we are pleased with the performance in the third quarter and the higher level of predictability in the business. We believe continuing to execute on our four priority 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 Ballhaus, Chairman and CEO at Mercury Systems]

Thanks, Dave. With that, operator, please proceed with the Q&A.

[Operator]

We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, please press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the lines of Ken Herbert from RBCCM. Your line is now open.

[Ken Herbert, Analyst at RBCCM]

Yay. Good afternoon, Bill and Dave? Really nice results.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Thanks.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Hey, Ken. Thank you.

[Ken Herbert, Analyst at RBCCM]

Bill, maybe just to start on the implied margins in the fourth quarter. Seasonally, you typically have a nice step up into the fourth quarter. The revised outlook for the full year implies more modest margin expansion into the fourth quarter. Maybe you can just talk about some of the puts and takes into the fourth quarter, and then I guess more importantly, not to get too far ahead, how much of the move towards the longer term target up into the low 20s could we expect to see in the fiscal 2027?

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Yeah. Hey, Ken, it's Dave. If it's okay, I'll start and then Bill can jump in. As far as kind of the sequential growth in margin, we've seen that in the past, and it's accompanied a real significant change in the linearity of our business. As you recall, in the fourth quarter, you know, we've typically seen a higher level of revenue, and the mix has been a bit different. One of the things we've been able to do this year is start to flatten out that linearity a little bit. Stronger Q3, with stronger margins accompanying Q3 as well. Where in the past we've seen a step up of a potentially a couple hundred basis points, it was from a much lower starting point normally.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

You know, we don't expect to see that great a jump up in the fourth quarter, more of a gradual kinda of trend, but we feel good about the total year. As Bill said, you know, mid-teens around the margin for the year. You know, we do feel we're headed in absolutely the right direction and in keeping with our expectation of getting towards our target margins.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Yeah, no, I guess what I'll add is what Dave highlighted, just kind of reflects this smooth transition of the business from this high mix of concentration, high mix of development programs and concentration of development programs a couple years ago, to completion of those programs, transition into low-rate production, and then increased levels of production. What we've expected to see as we've evolved was to see a combination of increasing top-line growth and then further acceleration of the bottom line. I think if, you know, you adjust for some of what we pulled forward from this year into last year into Q4, what that's translated into is a relatively smooth progression to mid-single-digit top-line growth now to high single-digit top-line growth, nice margin expansion on the bottom line. Then, you know, some recent indicators of that continuing as we move forward.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

I think a couple things that I would point to would be the growth in our domestic business in Q4, which was up 17% year-over-year. In the quarter, a really nice step-up in our next 12 months of backlog, up 10% Q2 to Q3. More than anything, Ken, I think Dave's point around linearity, we're just seeing a nice, smooth progression of the business.

[Ken Herbert, Analyst at RBCCM]

That's great. Appreciate that, Bill. As we think maybe either Dave or Bill, as we think about the strong bookings in the quarter, you called out, I mean, you highlighted, missiles, C4I, and some space programs. Are there any particular programs within those broader buckets you're comfortable calling out or you'd specifically highlight as significant sources of bookings?

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

You know, it's one of the things we've talked about in the past. One of the real strengths of our business is the diversification across our portfolio. No real concentration. No one program makes up more than 10%. The strong bookings really just reflect strong demand across our portfolio in areas like space, like C4I, like missile defense. We think that's a real strong attribute of our business. You know, no single program, no real lumpiness in the bookings. Just, I think, a strong indication of demand across our broad portfolio.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Yeah, it, and it really is, as we've been talking about, you know, as we look, is there's not one area that we'd say, Oh, this area's going much, you know, this area is like an area you wouldn't focus too much energy on because it's either declining or flat. I mean, all the areas from a booking standpoint are seeing solid activity, you know, and it's in keeping with what the market's, you know, what the market's doing. These are all, you know, to a large degree, these are the production efforts we've been talking about, and this is gearing up more production on those same programs that we've been working on.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Yeah, really reflects, again, just that transition from heavy concentration of development to the follow-on production orders. Nice progression in the quarter.

[Operator]

Thank you for your question. Your next question comes from the line of Pete Skibitski from Alembic Global, your line is now open.

[Pete Skibitski, Analyst at Alembic Global]

Hey, good evening, guys. Very impressive quarter.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Thank you.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Thank you.

[Pete Skibitski, Analyst at Alembic Global]

Yeah. Yep. Ken was asking about the margins. I guess I'll ask about the revenue, which was really strong this quarter. It seemed like, you know, just the tone of your commentary was more positive in terms of the sales outlook, and you've raised the, you know, the guide here to the mid-single digit range. You know, even looking at that guide, the fourth quarter revenue looks like it would imply to be down year-over-year. I just wanted to know if there's continued conservatism there in the guide or if there's just, you know, a large percentage of unbilled receivable type work in the fourth quarter relative to the third quarter, or maybe something else.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

I guess, you know, one way at least that you could think about it is aside from the $30 million that we accelerated from Q1 of FY 2026 into Q4 of last year, the year-over-year growth comparison and top line growth looks pretty consistent with what Q1, Q2, and Q3 look like. Again, it more reflects a steady progression of our business to more like mid-single digits last year and then high single digits this year, with, I think, some real positive indicators, again, based on the book-to-bill, the continuing growth of our backlog, which we expect to continue to grow, and then in particular, the portion of our backlog that we expect to convert over the next 12 months.

[Pete Skibitski, Analyst at Alembic Global]

Okay. Just on the unbilled receivables, they were down only modestly this quarter. What's the right way to think about that? Or, you know, does that mean some of these cycles are just gonna take a lot longer? You know, I'm a little confused as to why we didn't see a bigger step down in the receivables.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Yeah. This is Dave again. I think what you, what you see, some of what's reflected in there and in our inventories is a bit of the upcycle we're seeing in terms of this production coming in. you know, there's always a bit of a timing phenomena, and I think you're seeing, you know, a bit of a decline. There was a much more significant decline, but there were things added in as we were ramping up on new activities. you know, nothing more than kind of the timing of things. I wouldn't read anything else into it. you know, we're still focused on burning down some of our older unbilled balances. there will be, as we ramp up revenue, there will be new unbilled balances and, you know, certainly better than the terms were in the past.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

There'll be some from a timing standpoint. You know, nothing different than what we've been saying in here. We're still focusing capacity on working through the older balances and getting them cleared from our books, so we have the capacity to do all the new work that we see.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Well, definitely more dynamics under the hood than you would see.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Yeah

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

if you just looked at

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Yeah. Right.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

quarter-to-quarter number. Pete, the other thing that I'd point out is, you know, close to 12% growth year-over-year, and the Net Working Capital coming down year-over-year despite that growth, I think reflects just some of the progress that we're continuing to make and the increased efficiency of our Net Working Capital.

[Operator]

Thank you for your question. Your next question comes from the line of Austin Moeller from Canaccord Genuity. Austin, your line is now open.

[Austin Moeller, Analyst at Canaccord Genuity]

Hi, good afternoon? I just wanted to ask, are you looking at the IBAS defense industrial base investments within the fiscal year 2027 budget? Do you see any opportunities to get incremental investments from that program to expand your capacity?

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Hey, Austin. Thanks, thanks very much for the question. We have had interactions with IBAS, and we continue. We have programs that are funded by IBAS, and that continues to be an area where we look for, you know, opportunities to go after things that they're interested in investing in, and we think can increase our capacity, our efficiency, and our innovation. Yeah, definitely something that is in front of us.

[Austin Moeller, Analyst at Canaccord Genuity]

Great. Just my next question, do you see more contract opportunities, within Golden Dome or within the Defense Autonomous Working Group within the fiscal year 2027 budget request?

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Well, I mean, we definitely see opportunities across the board. You know, that's not only in our existing portfolio of programs, but it's also tied to administrative priorities like Golden Dome, missile defense, armaments. Kind of across the board right now we're seeing opportunities. We feel like our capabilities are really well aligned with the administration's priorities broadly. One of the things that we've said before is, something that we think is unique about our positioning is we have exposure to a broad set of tailwinds across the market, and that's what we're focused on capturing right now.

[Austin Moeller, Analyst at Canaccord Genuity]

Excellent. I'll pass it back there. Thank you.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Okay. Thanks, Austin.

[Operator]

Thank you for your question. Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Sheila, your line is now open.

[Eagan McDermott, Analyst at Jefferies]

Hi, guys. This is Eagan McDermott on for Sheila.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

You didn't sound like Sheila.

[Eagan McDermott, Analyst at Jefferies]

No, I did not. Maybe just building off of the missile questions that have been asked. You know, curious, one, if you could sort of just size how big Mercury's missile exposure is as a percent of sales, even, you know, roughly. Two, with a few large LTAMDS contracts kind of out there of late, thinking like the $8 billion FMS to Kuwait, wondering how you would think about what an order of that magnitude kind of means for your business.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Yeah. Thanks very much for the question. I mean, we don't size up the size of our missile portfolio, but we do have a number of programs with exposure to missiles for sure. Relative to LTAMDS, you know, we typically don't comment on any one program or go into much detail. I will say that, you know, it is publicly available that there are conversations around increased demand, increased quantities on LTAMDS, that really hasn't factored into any of our bookings to date. Certainly would be a positive if there were increased quantities and accelerations of deliveries. It's one of the potential tailwinds that we're keeping our eye on as we're looking forward.

[Eagan McDermott, Analyst at Jefferies]

Thank you. Maybe just to follow up on that, you know, is it fair to think that margins on, you know, an order like that out of Kuwait or, you know, other FMS would differ from U.S. orders at all or be at all higher?

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Yeah. For us, it is typically something that we work with the prime, we would work with them as to what pricing makes sense and how it makes sense. Typically the higher margin rates are on foreign direct versus FMS contracts for at the prime level. You know, I think that's something you'd have to have that conversation broadly with the prime.

[Eagan McDermott, Analyst at Jefferies]

Okay. Thank you.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Thank you.

[Operator]

Thank you for your question. Your next question comes from the line of Jonathan Ho from William Blair. Jonathan, your line is now open.

[Garrett Berkowitz, Analyst at William Blair]

Hi, this is Garrett Berkowitz on for Jonathan, and thanks for taking the question.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Sure.

[Garrett Berkowitz, Analyst at William Blair]

It's nice to see the strong results, and it sounds like demand is strong and relatively broad-based across the board. Are there any areas, or just more broadly, like where do you see the most opportunity, for reordering and restocking activity over the near term just given the ongoing, geopolitical conflicts? Thanks.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Yeah, no, thanks for the question. I mean, just to sort of break down our growth vectors, first and foremost, the primary driver of our near term organic growth is this transitioning of our business from this really high concentration of development programs, and it's dozens of programs. It's not one or two, it's dozens of programs, to the low-rate production phase and then the higher-rate production phase. We're seeing that start to manifest itself in 2025-2026, and expect our organic growth to continue to accelerate based on those programs ramping up. That really doesn't have anything to do with tailwinds that we see in the market.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Beyond the existing portfolio, we're continuing to win new development programs that are really exciting, where we're bringing together technology and innovation from across our portfolio, doing things that nobody else can do, and winning new development programs over time are going to add to that production, content. Beyond those two items, we do see a number of potential tailwinds, tied to a number of different factors.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

The size of the domestic budgets, the size of the global budgets, other tailwinds like Golden Dome, rearmaments, acceleration of munitions. We're starting to see those tailwinds manifest in the form of multi-year strategic agreements at increased quantities, increased deliveries with the primes. Right now, none of those tailwinds are reflected in any of our bookings or our outlook, and we view them as all additive to the target profile that we've talked about and are converging on. We have said for a couple quarters now that we think that some of those tailwinds could start to manifest likely by the end of calendar 2026, but potentially as early as our fourth quarter, which obviously is our current quarter. You know, we're obviously watching those items as they progress in our pipeline with a lot of excitement.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Beyond that, there's a, you know, broad set of demand, a lot of tailwinds right now that we have exposure to, and we're looking forward to seeing how that all plays out over the next quarter and beyond.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Yeah. The one thing I would add is, from a current business, like what we're executing on today, when you look at the queue, you'll see the areas that have significant growth in the revenue, and that's, you know, Bill was laying out kind of on the go-forward basis. You can see space is up significantly for us.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Yeah.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

You know, when you look at, you know, radar is up as you'd expect. You know, other sensors and effectors, if you think effectors, you know, that's up significantly in our revenue so far this year.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Yeah.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Those are things that the customer needs delivered as fast as possible. You see those things. We see everything from a, from an opportunity standpoint, from our pipeline standpoint, as Bill said, you know, just a significant improvement in across the board. You know, you'll see it across our entire portfolio of 300 programs.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Yeah. I think one of the best indicators of that is, again, if you look at our domestic business, how it's up 17% year-over-year. A couple of years ago, this is where a lot of our development programs existed in the portfolio, you can really see now the phenomenon of us having completed the development programs, transitioning into low rate production, and now starting to ramp up. A lot of things that we're seeing in the portfolio and the business that we're excited about.

[Garrett Berkowitz, Analyst at William Blair]

That's great. Thank you.

[Operator]

Thank you for your question. At this time, we would like to remind you if you would like to ask a question or an additional follow-up, to please press star one to raise your hand. To withdraw your question, please press star one again. There are no further questions at this time. Oh, pardon me. Your next question comes from the line of Peter Arment from Baird. Peter, your line is now open.

[Peter Arment, Analyst at Baird]

Hey, thanks. Good evening, or good afternoon, Bill, Dave, Tyler? Nice results.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Hey, Peter.

[Dave Farnsworth, EVP and CFO at Mercury Systems]

Hey, Peter.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Thanks.

[Peter Arment, Analyst at Baird]

Bill, you know, it's been a common theme the last, you know, few quarters that you've talked about kind of the ability to stage material earlier and kind of better align your supply base. It's leading to kind of better performance on the top line. Can you maybe just give us a little more insight into kind of that staging or a little more color around that?

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Yeah. I think it's been one of the big improvements in the business, and we're not done. We still have work to do on this front. You can see the impact of our efforts in this quarter, the linearity, and our outlook for the year. Just a reminder, you know, if we go back close to three years ago, we really swung the pendulum hard on our material focus to a just-in-time delivery model. This was largely because of the buildup in our Net Working Capital and our need to address that. We swung the pendulum hard, and the upside is we've been able to reduce our Net Working Capital by about $250 million over the last couple of years. It really did introduce some constraints in being able to accelerate our backlog conversion.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

It wasn't so much that availability of material or items in our supply chain were hard to get. It was, we just staged the delivery to the right because of the Net Working Capital buildup in the business. Over time, what we've done is we've worked to accelerate the delivery of material, which has led to accelerations that we've cited into past quarters. That led to a bathtub in the, in the future quarters that made it hard for us to forecast what that quarter would look like, because we had a lot of unknowns associated with filling the bathtub and trying to accelerate more material.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Over the last several quarters, we've been focused on pulling our supply chain to the left, bringing the due dates for material ahead of our need date so that we have more flexibility and more degrees of freedom in how we convert our backlog. What that's translated into is a higher organic growth rate, our ability to convert backlog faster than we thought we'd be able to coming into the year. It's a great shift in the business. We're really excited about it. We have still more work to do, what it does is for future quarters, it gives us much better visibility into our deliveries, and we can incorporate that into our forecast. That's a pivot and a transition that we've made this quarter. Hopefully that's helpful in explaining the dynamics.

[Peter Arment, Analyst at Baird]

Yeah, very, very helpful. Just, if I could just ask on, you mentioned you had the strongest bookings quarter for the CPA or the Common Processing Architecture, you know. It sounds like momentum's really building there. What other kind of color can you give us around the CPA that you're seeing with customers? Thanks.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Well, I think we've got a number of different degrees of freedom to drive growth there. I mean, we've always said that as we're able to increase production, the follow-on bookings would come, and that we certainly are seeing that, and this quarter was evidence of that. We're seeing strong demand for our current products. Again, this is an area where we've got differentiation in the market, and there are certain security standards that we're the only ones that can meet those standards. We've got a nice moat around this business. As we've made progress on the development programs, it's given us the opportunity to focus on the next set of innovations that we wanna bring to the market.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

That's showing up as higher performance for our current form factors, so being able to get the latest processing and memory capabilities into the hands of our customers with our Common Processing Architecture wrapped around it. I think maybe even more exciting, being able to drive into smaller form factors and secure chiplets, which I think opens up a big TAM for that capability. A lot of progress over the last couple of years on our development programs, on our technology. The production follow-on orders are coming as a result of that, and we see a lot of room to run into different form factors to open up the market.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

You know, eventually, over time, as we're taking our mission-critical processing to the edge and we're increasing the performance and driving the smaller form factors, we see ourselves as being able to provide the compute infrastructure that's needed to have AI distributed across the battle space, and that's where we see being able to take this capability in the future.

[Operator]

There are no further questions at this time. I will now turn the call back to Bill Ballhaus, CEO, for closing remarks.

[Bill Ballhaus, Chairman and CEO at Mercury Systems]

Well, with that, I think we'll conclude our call. We really appreciate everybody's participation and interest, and look forward to getting together next quarter. Thank you.

[Operator]

This concludes today's call. Thank you for attending, you may now disconnect.

Participants

Executives

• Bill Ballhaus, Chairman and CEO
• Dave Farnsworth, EVP and CFO
• Tyler Hojo, Vice President of Investor Relations

Analysts

• Austin Moeller, Analyst at Canaccord Genuity
• Eagan McDermott, Analyst at Jefferies
• Garrett Berkowitz, Analyst at William Blair
• Ken Herbert, Analyst at RBCCM
• Pete Skibitski, Analyst at Alembic Global
• Peter Arment, Analyst at Baird