Mercury Systems Q1 Earnings Call Highlights

Key Points

• Mercury Systems raised its fiscal 2027 outlook after record first-quarter revenue of $253 million, up 12.4% organically. It now expects revenue near $1.1 billion, adjusted EBITDA around $210 million, and free cash flow conversion approaching 40%.
• Bookings rose 48% to approximately $371 million, with a 1.46 book-to-bill ratio; backlog reached a record $2.1 billion. The company cited wins and follow-on orders across weapons, missile defense, electronic warfare, satellite, and missile-tracking programs.
• Adjusted EBITDA margin expanded to 22.3% from 15.8%, helped by program mix and lower inventory reserves, though management expects some normalization. First-quarter free cash flow was negative $24 million due largely to inventory investments, with positive cash flow expected in the second quarter.

Mercury Systems NASDAQ: MRCY raised its fiscal 2027 outlook after reporting record first-quarter revenue and bookings, as defense programs moved from development into production and margins improved.

The company reported revenue of $253 million for the quarter, up 12.4% organically from a year earlier. Adjusted earnings before interest, taxes, depreciation and amortization rose 58.6% to approximately $56 million, with the adjusted EBITDA margin expanding to 22.3% from 15.8%.

Chairman and CEO Bill Ballhaus said the quarterly margin was an early indication of Mercury’s ability to deliver results within its target range over time, though executives said favorable program mix helped the quarter and would likely normalize over the rest of the year.

Higher Outlook After Record Bookings

Mercury now expects fiscal 2027 revenue to approach $1.1 billion, with double-digit year-over-year growth. Its previous outlook called for growth approaching double digits.

The company raised its adjusted EBITDA expectation to around $210 million, representing approximately 40% growth from fiscal 2026. It had previously forecast adjusted EBITDA approaching $200 million and growth of nearly 30%. Mercury also lifted its expected free cash flow conversion to approaching 40%, from approaching 35%.

For the second quarter, Ballhaus said Mercury expects revenue to rise 10% year over year and adjusted EBITDA margin to expand by roughly 500 basis points. Revenue and adjusted EBITDA margin are expected to increase quarterly through the balance of the year after the second quarter.

First-quarter bookings were approximately $371 million, up 48% from a year earlier, with a book-to-bill ratio of 1.46. Total backlog reached a record $2.1 billion, up 44.7%, while backlog expected to convert over the next 12 months exceeded $1 billion.

Ballhaus said the revised outlook includes a limited set of defense-spending tailwinds that have already resulted in firm bookings, but excludes potential additional demand across production programs and benefits from automation initiatives. Mercury did not update the fiscal 2028 reference points it provided in the prior quarter; executives said they would revisit them in the second half of fiscal 2027.

Production Programs and Margin Gains

Ballhaus said bookings strength spanned effectors, radar and electronic warfare. Awards included a production order for advanced weapon systems that expands Mercury’s role on the program, a follow-on order for an established missile defense platform and an electronic warfare competitive win on the F-35.

The company also received follow-on orders for existing satellite programs and funding for early-stage Golden Dome-related missile tracking work. Ballhaus described the Golden Dome work as relatively small and at an early development stage.

Executives said the company’s backlog increasingly reflects programs transitioning from development to production, which generally carries higher margins. Mercury is also working through older, lower-margin contracts. Ballhaus said the company expects that legacy backlog dynamic to cease being a topic as it moves through fiscal 2027, though it did not quantify the remaining work.

Gross margin rose to 35.2% from 27.9% a year earlier. EVP, CFO and COO Dave Farnsworth attributed the increase primarily to program mix and approximately $5 million less in inventory reserves compared with the prior year. Operating expenses declined by approximately $1 million, even as revenue grew.

Farnsworth cautioned that first-quarter deliveries included a higher proportion of programs above the average margin in backlog. “Our expectation is that that’s going to normalize a little bit for the rest of the year,” he said.

Cash Flow and Capacity

Mercury posted a first-quarter free cash outflow of approximately $24 million, compared with an outflow of $4 million a year earlier. Farnsworth said the result was largely driven by deliberate inventory investments intended to support growth. The company expects positive free cash flow in the second quarter and more free cash flow in the second half than in the first.

Mercury repaid $100 million on its revolving credit facility during the quarter, bringing repayments over the past two quarters to $250 million. Net debt stood at $232 million, down 19.2% from a year earlier.

Ballhaus said Mercury has unused factory capacity and generally operates on one shift. The company could add a second shift without additional capital investment if demand warrants it, he said. Mercury also announced that it had formalized Farnsworth’s role as both CFO and COO.

About Mercury Systems (NASDAQ:MRCY)

Mercury Systems, Inc. develops and supplies secure processing systems and subsystems for the aerospace and defense industries. Its products include embedded computing, signal processing, radio-frequency and microwave components, and other technologies used to process and manage critical data. The company's technologies support applications such as radar, electronic warfare, communications, avionics, and command-and-control systems. Mercury works with defense contractors and government customers, providing components and systems designed for use in demanding environments.

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