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MERCURY SYSTEMS INC (MRCY) Q1 2026 Earnings Summary

Executive Summary

  • Q1 FY26 revenue of $225.2M grew 10.2% YoY and materially beat S&P Global consensus by ~8.6% ($225.2M vs $207.3M*), while adjusted EPS of $0.26 beat by ~$0.17 ($0.26 vs $0.09*) as mix and accelerated deliveries drove upside . S&P Global estimates marked with *; values retrieved from S&P Global.
  • Adjusted EBITDA rose 66% YoY to $35.6M with a 15.8% margin as gross margin improved to ~28%, aided by a favorable program mix, lower manufacturing adjustments, and reduced net adverse EACs; management pulled forward ~$20M of revenue and ~$10M of adjusted EBITDA from Q2 into Q1, setting a lower near‑term Q2 bar .
  • Bookings of $250.2M (book‑to‑bill 1.11) and record backlog of ~$1.4B (+6.5% YoY) underpin FY26; 12‑month backlog rose to $815.6M .
  • Capital allocation/liquidity catalysts: new $200M share repurchase authorization and a five‑year extension of the $850M revolver (current draw $591.5M), enhancing flexibility as execution improves .

What Went Well and What Went Wrong

  • What Went Well
    • Beat on revenue and adjusted EPS as mix and accelerated deliveries outperformed internal expectations; adjusted EPS $0.26 vs $0.09* consensus, revenue $225.2M vs $207.3M* . S&P Global estimates marked with *; values retrieved from S&P Global.
    • Margin drivers improved: gross margin ~28% (+~260 bps YoY) on favorable mix; adjusted EBITDA margin 15.8% (+530 bps YoY); net adverse EACs trimmed to ~$4M, down ~51% YoY, reflecting maturing execution .
    • Demand indicators firm: bookings $250.2M (book‑to‑bill 1.11), record backlog ~$1.4B; management cited competitive takeaways and CPA momentum, plus international EW/radar follow‑ons, and potential tailwinds from Golden Dome and European re‑arm .
  • What Went Wrong
    • Q2 set‑up softer: pulling forward $20M revenue/$10M EBITDA into Q1 will reduce Q2 revenue YoY and drive “approaching double‑digit” Q2 EBITDA margins before re‑accelerating in 2H .
    • SG&A and litigation costs elevated: SG&A rose $12.8M YoY to $45.9M and litigation/settlement expense increased (adjusted out in non‑GAAP), pressuring GAAP results (GAAP net loss $(12.5)M) .
    • Free cash flow was an outflow of $(4.4)M in Q1 (improved vs prior year), with management reiterating FCF will skew to 2H as capacity is allocated to programs with unbilled balances (cash‑friendly, little revenue) .

Financial Results

MetricQ3 FY25Q4 FY25Q1 FY26
Revenue ($M)$211.4 $273.1 $225.2
Revenue Consensus ($M)*$204.2*$244.5*$207.3*
Adjusted EPS ($)$0.06 $0.47 $0.26
EPS Consensus ($)*$0.07*$0.22*$0.09*
Gross Margin %27.0% 31.0% ~28%
Adjusted EBITDA ($M)$24.7 $51.3 $35.6
Adjusted EBITDA Margin %11.7% 18.8% 15.8%
GAAP Net Income (Loss) ($M)$(19.2) $16.4 $(12.5)
Free Cash Flow ($M)$24.1 $34.0 $(4.4)
  • Company reports Adjusted EBITDA; consensus “EBITDA” definitions may differ. We compare company-adjusted actuals to consensus revenue/EPS. S&P Global estimates marked with *; values retrieved from S&P Global.

KPIs and Order Book

KPIQ3 FY25Q4 FY25Q1 FY26
Bookings ($M)$200.4 $341.5 $250.2
Book‑to‑Bill0.95 1.25 1.11
Backlog (Total)$1.34B $1.40B ~$1.4B
12‑month Backlog ($M)$787.6 $807.8 $815.6
Operating Cash Flow ($M)$30.0 $38.1 $2.2
Free Cash Flow ($M)$24.1 $34.0 $(4.4)

Notes: No formal segment financials disclosed in the press release/8‑K .

Guidance Changes

MetricPeriodPrevious Guidance (Q4 FY25)Current Guidance (Q1 FY26)Change
Revenue growthFY26Low single‑digits Low single‑digits; Q2 revenue down YoY due to Q1 pull‑in Maintained; near‑term cadence updated
Adj. EBITDA marginFY26Approaching mid‑teens; H1 low double‑digits; Q4 highest Approaching mid‑teens; H1 low double‑digits; Q2 approaching double‑digits; Q4 highest Maintained/clarified
Free Cash FlowFY26Positive FCF Positive FCF; 2H > 1H Maintained/strengthened 2H weighting
Capital returnsOngoing—New $200M share repurchase authorization New
LiquidityOngoing—Revolver extended 5 years; $850M capacity; $591.5M drawn New

Earnings Call Themes & Trends

TopicQ3 FY25 (Q‑2)Q4 FY25 (Q‑1)Q1 FY26 (Current)Trend
Program accelerationOffset $29M pulled into Q2; execution improving ~$30M of FY26 deliveries accelerated into Q4 $20M revenue/$10M EBITDA pulled from Q2 to Q1 Persistent lever; near‑term headwind to Q2
Backlog/mixLTM book‑to‑bill 1.1; CPA wins; bookings at/above target margins Record bookings/backlog; 1.25 book‑to‑bill Book‑to‑bill 1.11; 6.5% YoY backlog growth; higher production mix Improving quality/mix
Margins pathGross margin 27%; low‑margin backlog burning down Adj. EBITDA margin 18.8% on mix Gross margin ~28%; EBITDA margin 15.8%; Q2 dip then 2H expansion Gradual progress; 2H stronger
Working capital/FCFNWC lowest since FY22; FCF $24M Record FY25 FCF $119M Q1 FCF $(4.4)M; 2H > 1H; capacity to unbilled programs Structural improvement; timing lumpy
CPA (Common Processing Architecture)$40M production contracts; Starlab acquisition Additional CPA awards highlighted Ramp continuing; Phoenix capacity expansion to support CPA in Q3 FY26 Scaling
International/Europe——Europe re‑arm tailwinds; ~15% TTM growth in EU/FMS channels Strengthening
Tariffs/MacroMinimal FY25 tariff exposure noted —Shutdown risk minimal to date; strong domestic priorities (Golden Dome) Watch but limited direct impact so far
LegalAccrued litigation costs elevated in Q3 —Class action settlement in principle accrual; higher SG&A/litigation One‑off, adjusted out

Management Commentary

  • “We delivered Q1 results that were ahead of our expectations…accelerate deliveries on a number of our customers’ high‑priority programs…solid execution…significant margin expansion” – Bill Ballhaus, CEO .
  • “We recognized $4M of net adverse EAC changes…down 51% YoY…we accelerated customer deliveries…~$20M of revenue and ~$10M of Adjusted EBITDA previously planned for Q2” .
  • “Gross margin…nearly 28%…driven by favorable program mix, lower manufacturing adjustments of $7.4M, and a reduction in net EAC change impacts” – Dave Farnsworth, CFO .
  • “We expect to bring online over 50,000 sq ft of factory space in Q3 FY26 to support ramped production for our Common Processing Architecture programs” – CEO .
  • “We continue to expect annual revenue growth of low single digits…Q2 revenue to be down YoY…full‑year Adjusted EBITDA margin approaching mid‑teens…Q4 margin highest of the year…expect to be Free Cash Flow positive” – CEO .

Q&A Highlights

  • Pull‑forwards and cadence: Mgmt emphasized ongoing efforts to accelerate deliveries but does not embed future accelerations in outlook, contributing to Q2 revenue down YoY and EBITDA margin “approaching double‑digits” before 2H expansion .
  • Capacity expansion: Phoenix adds >50k sq ft in Q3 FY26 to support CPA ramps; capacity scalable via shifts/automation; incremental, demand‑tied investments .
  • Backlog mix transition: Low‑margin backlog expected to largely convert over ~8 quarters from FY24 year‑end (i.e., through FY27), with new bookings aligned to target margins .
  • Golden Dome/Defense budgets: Broad exposure across layers (space/air/ground/shipboard) positions Mercury to benefit as funding priorities become clear; timing still uncertain .
  • Working capital/FCF: Continued focus on reducing unbilled/billed receivables and inventory; plan to allocate factory time to cash‑releasing programs; 2H FCF greater than 1H .

Estimates Context

  • Q1 FY26 results vs S&P Global consensus: Revenue $225.2M vs $207.3M* (beat); Primary EPS (adj.) $0.26 vs $0.09* (beat) . S&P Global estimates marked with *; values retrieved from S&P Global.
  • Near‑term (Q2 FY26) consensus: Revenue ~$210.0M* and EPS ~$0.07*; management guided Q2 revenue down YoY and EBITDA margin approaching double digits, implying possible downward risk to Q2 revenue trajectory, followed by 2H improvement . S&P Global estimates marked with *; values retrieved from S&P Global.
  • Definition note: Company reports Adjusted EBITDA/Adjusted EPS; consensus “EBITDA” may use differing methodologies; we compare company‑adjusted actuals to consensus revenue/EPS.

Key Takeaways for Investors

  • Mix‑driven beat with durable demand: Strong Q1 beat on revenue/EPS supported by favorable mix, lower EACs, and pull‑forwards; record backlog/book‑to‑bill >1.0 supports FY26 .
  • Expect a Q2 air‑pocket, then re‑acceleration: Pull‑forwards set a lower bar for Q2 (down YoY) before margins/volume expand in 2H; trade the cadence accordingly .
  • Margin trajectory intact: Backlog quality improving and OpEx streamlined; path to low‑mid‑20% adjusted EBITDA margins remains via mix, automation, and operating leverage .
  • Cash phasing: Q1 FCF outflow was expected; management reiterated FY26 positive FCF with stronger 2H; watch progress on unbilled conversions and inventory turns .
  • Strategic exposure/catalysts: CPA ramp (Phoenix capacity), EW/radar wins, European re‑arm, and Golden Dome priorities are meaningful multi‑year tailwinds; new $200M buyback and extended $850M revolver add flexibility .
  • Risk checks: Litigation expenses (adjusted out), potential government shutdown booking delays, and near‑term Q2 softness are key watch‑items; tariff exposure minimal so far .

S&P Global consensus estimates (marked with *) used for comparison; values retrieved from S&P Global.

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