Mercury Systems’ third quarter results were met with a negative market reaction, as the company’s non-GAAP earnings per share missed Wall Street estimates by a small margin. Management pointed to operational progress, citing a shift toward higher-margin production contracts and reduced exposure to lower-margin legacy development programs. CEO Bill Ballhaus acknowledged recent improvements, stating, “Our Q3 results reinforce my confidence in our strategic positioning and our expectations to deliver predictable organic growth with expanding margins and robust free cash flow.” The company also highlighted better execution in hardware delivery and a focus on driving down working capital as key contributors to the quarter’s performance.
Is now the time to buy MRCY? Find out in our full research report (it’s free).
Mercury Systems (MRCY) Q1 CY2025 Highlights:
- Revenue: $211.4 million vs analyst estimates of $202.1 million (1.5% year-on-year growth, 4.6% beat)
- Adjusted EPS: $0.06 vs analyst estimates of $0.07 ($0.01 miss)
- Adjusted EBITDA: $24.69 million vs analyst estimates of $23.05 million (11.7% margin, 7.1% beat)
- Operating Margin: -8.2%, up from -21.9% in the same quarter last year
- Backlog: $1.34 billion at quarter end
- Organic Revenue rose 1.5% year on year (-21% in the same quarter last year)
- Market Capitalization: $3 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions Mercury Systems’s Q1 Earnings Call
- Peter Arment (Baird) asked about updates on the LTAMDS program as it moves into production. CEO Bill Ballhaus responded that Mercury is working closely with the customer and remains optimistic about the program’s long-term growth potential.
- Michael Ciarmoli (Truist Securities) questioned the optimal level of working capital and its impact on free cash flow. CFO Dave Farnsworth stated that while progress has been made, further reductions are targeted, aiming for a working capital level closer to 35–40% of revenue over time.
- Rockwell Collins (for Seth Seifman, JPMorgan) asked if sequential revenue declines were due to accelerated deliveries. Ballhaus confirmed that $30 million was pulled forward into the previous quarter, normalizing the current quarter’s revenue.
- Ken Herbert (RBC Capital Markets) inquired about the scale and backlog share of common processing architecture contracts. Ballhaus highlighted the strategic wins and growing backlog in this area but did not provide a specific breakdown.
- Noah Poponak (Goldman Sachs) pressed for details on when the legacy low-margin backlog would be fully replaced. Ballhaus explained this transition would take several more quarters, with steady progress expected as new bookings come in at targeted margins.
Catalysts in Upcoming Quarters
In the quarters ahead, the StockStory team will monitor (1) the pace at which higher-margin bookings replace legacy low-margin contracts in the backlog, (2) the impact of operational streamlining on margin and free cash flow trends, and (3) execution on significant production programs such as F-35 and LTAMDS. Additionally, we will track the integration of Star Lab and the effects of the Swiss manufacturing divestiture on international expansion and competitiveness.
Mercury Systems currently trades at $50.81, in line with $50.43 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free).
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