Mercury Systems Q4 Earnings Call Highlights

Key Points

• Record bookings and backlog drove Mercury Systems’ fiscal 2026 performance: fourth-quarter bookings surged 93.1% to $660 million, backlog rose 38.4% to more than $1.9 billion, and revenue reached nearly $290 million.
• Full-year revenue increased 7.9% to $984 million, while adjusted EBITDA climbed 25.7% to $150 million. However, fourth-quarter adjusted EPS and free cash flow declined, and the company still posted a $30 million GAAP loss for the year.
• Mercury expects fiscal 2027 revenue to approach $1.1 billion and adjusted EBITDA to near $200 million, supported by production growth and supply-chain improvements. Management also outlined potential additional defense demand, though much of it is not yet included in its outlook.

Mercury Systems NASDAQ: MRCY reported record fourth-quarter bookings, backlog and revenue for fiscal 2026, as the defense technology company cited broad demand across its portfolio and raised its long-term organic-growth target.

Chairman and Chief Executive Officer Bill Ballhaus said fourth-quarter bookings reached $660 million, up 93.1% from a year earlier, producing a book-to-bill ratio of 2.3. The quarter included the company’s largest-ever bookings for its Common Processing Architecture, or CPA, products, along with production awards in effectors, airborne applications, space and missile defense.

Fiscal-year bookings totaled $1.5 billion, an increase of 49.8% year over year, while total backlog rose 38.4% to more than $1.9 billion. Mercury’s next-12-month backlog reached $1 billion, which Ballhaus said provides greater visibility entering fiscal 2027 and into fiscal 2028.

Fourth-Quarter and Full-Year Results

Fourth-quarter revenue was a record nearly $290 million, representing organic growth of 6.1% from the prior-year quarter. Adjusted EBITDA was $49 million, or 16.7% of revenue, compared with $51 million, or 18.8% of revenue, a year earlier. Free cash flow was $29 million, down from $34 million in the prior-year period.

GAAP net income for the fourth quarter was about $1 million, or $0.01 per share, compared with $16 million, or $0.27 per share, in the same quarter last year. Adjusted earnings per share were $0.37, down from $0.47.

For the full fiscal year, revenue increased 7.9% to $984 million. Gross margin improved 70 basis points to 28.6%, while adjusted EBITDA rose 25.7% to $150 million. Full-year adjusted EBITDA margin expanded 217 basis points to 15.3%.

Mercury reported a GAAP net loss of about $30 million, or $0.50 per share, for fiscal 2026, improving from a loss of $38 million, or $0.65 per share, in fiscal 2025. Adjusted earnings per share rose to $1.06 from $0.64. Free cash flow was $68 million, compared with $119 million in the previous fiscal year.

Executive Vice President and CFO David Farnsworth said full-year gross-margin improvement was driven primarily by lower manufacturing adjustments and reduced net estimate-at-completion, or EAC, change impacts. Operating expenses rose 2.5% during the year, though they declined by 150 basis points as a percentage of revenue.

Backlog, Production and Supply Chain Initiatives

Ballhaus said Mercury is seeing increased volume on existing production programs and a transition of development programs into production. Domestic revenue, which accounted for about 85.8% of fiscal 2026 revenue, grew organically by 13% year over year.

The company said its overtime revenue rose 23.6% in the fourth quarter, reaching its highest level in 15 quarters. Ballhaus attributed the improvement largely to material receipts and said the company has made progress aligning its supply chain with increased production demand.

Mercury also recently announced a strategic agreement with Palantir to use AI software in material planning and factory operations. Ballhaus said the Department of Defense-sponsored initiative is intended to accelerate deliveries to warfighters and could potentially support revenue growth, margin expansion and cash-flow improvement. However, he said the company is still early in the initiative and has not incorporated benefits from the agreement into its outlook.

International sales declined about 15% during the year, according to management. Ballhaus said Mercury had outsourced manufacturing in its international business to a contract manufacturer and experienced slower deliveries while that operation ramped. He characterized the slowdown as temporary and said the company expects the issues to be resolved over the next several quarters.

Fiscal 2027 Outlook and Fiscal 2028 Reference Points

For fiscal 2027, Mercury expects revenue growth approaching double digits, with total revenue approaching $1.1 billion. The company expects first-quarter revenue to be its lowest of the year but to rise by high single digits year over year, followed by revenue growth through the rest of the fiscal year.

Mercury expects full-year adjusted EBITDA to approach $200 million, representing nearly 30% year-over-year growth, with adjusted EBITDA margin in the high teens. Management expects margin to increase through the year, as lower-margin legacy backlog is converted and newer bookings move through production.

The company expects fiscal 2027 free-cash-flow conversion to approach 35%, below its 50% target, as it makes targeted investments in inventory, automation and factory optimization. Mercury expects first-quarter cash flow to be a larger outflow than normal because of material purchases intended to support anticipated growth. Free cash flow is expected to be higher in the second half than in the first half.

Mercury ended the fourth quarter with $214 million in cash and cash equivalents and $227 million in net debt, down 19.5% from a year earlier. The company made a $150 million payment on its revolving credit facility during the fiscal year. Net working capital declined $18 million year over year to about $431 million.

For fiscal 2028, Mercury provided reference points rather than formal guidance: low-double-digit organic revenue growth, adjusted EBITDA margin at the low end of its low-to-mid-20% target range, and free-cash-flow conversion returning toward its 50% target.

Ballhaus said the company’s outlook includes only a limited amount of defense-market tailwinds that have become firm bookings. Potential increases in demand across CPA, effectors, airborne applications, space, missile defense and munitions have not been included in the outlook, he said.

About Mercury Systems (NASDAQ:MRCY)

Mercury Systems, 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.

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