MERCURY SYSTEMS INC (MRCY) Q2 2025 Earnings Summary

Executive Summary

Q2 FY25 revenue rose 13% year-over-year to $223.1M, gross margin expanded to 27.3% (from 16.0% a year ago), adjusted EBITDA reached $22.0M (9.9% margin), and adjusted EPS was $0.07; GAAP EPS was $(0.30) .
Bookings were $242.4M (book-to-bill 1.09), driving a record backlog of $1.35B and 12‑month backlog of $789.9M; trailing 12‑month book-to-bill stood at 1.12 .
Management pulled forward ~$30M of Q3 revenue into Q2 and raised the full-year outlook from flat to revenue growth “approaching mid‑single digits”; expects Q4 to have the highest margins of the year and H2 free cash flow around breakeven, with FY25 still cash-flow positive .
Operational improvements continued: lowest net EAC change impacts in years (~$4.4M), improving backlog margin profile, and strong working capital progress; record quarterly free cash flow of $81.9M and operating cash flow of $85.5M were reported .
Announced a January workforce reduction (~145 positions; ~$5M charges in Q3; ~$15M annualized savings, partly reinvested) to align with higher production mix—supporting FY26 profitability leverage .

What Went Well and What Went Wrong

What Went Well

Mix and execution: Over 80% of TTM bookings were production; company highlighted “solid execution across our broad portfolio” and “reduced operating expenses enabling increased positive operating leverage” .
Margin drivers improving: Q2 gross margin 27.3% vs. 16.0% in Q2 FY24, aided by sharply lower net EAC impacts (~~$4.4M, lowest in years) and lower inventory reserves (~~$12M) .
Cash and working capital: Record free cash flow $81.9M and operating cash flow $85.5M; net working capital down ~$115M YoY to the lowest level since Q3 FY22 .

Quote: “We delivered solid results… in line with or ahead of our expectations, and I’m optimistic about our ongoing efforts to improve performance as we move through the fiscal year.” — Bill Ballhaus, CEO .

What Went Wrong

GAAP loss persists: GAAP net loss $(17.6)M and GAAP EPS $(0.30) remain negative (though improved vs. $(45.6)M/$(0.79) prior-year quarter) .
Bookings softer YoY: Q2 bookings of $242.4M declined versus $325.4M in Q2 FY24 (book-to-bill fell from 1.65 to 1.09), though TTM book-to-bill remains >1 .
Manufacturing adjustments: CFO cited ~$4M of higher manufacturing adjustments as a gross margin headwind in the quarter; pull-forward of ~$30M from Q3 into Q2 implies a subsequent period headwind and drives H2 FCF to around breakeven .

Financial Results

Summary vs. Prior Periods and Prior Year

Metric	Q2 FY24	Q4 FY24	Q1 FY25	Q2 FY25
Revenue ($M)	$197.5	$248.6	$204.4	$223.1
GAAP EPS ($)	$(0.79)	$(0.19)	$(0.30)	$(0.30)
Adjusted EPS ($)	$(0.42)	$0.23	$0.04	$0.07
Gross Margin (%)	16.0%	—	25.3%	27.3%
Adjusted EBITDA ($M)	$(21.3)	$31.2	$21.5	$22.0
Adjusted EBITDA Margin (%)	—	—	10.5%	9.9%
Operating Cash Flow ($M)	$45.5	$71.8	$(14.7)	$85.5
Free Cash Flow ($M)	$37.5	$61.4	$(20.9)	$81.9
Bookings ($M)	$325.4	$284.4	$247.7	$242.4
Book-to-Bill (x)	1.65	1.14	1.21	1.09
Backlog ($M)	$1,278.4	$1,330.0	$1,300.0+	$1,354.9
12-Month Backlog ($M)	$786.4	$758.9	$777.0	$789.9

Notes:

Q2 FY25 revenue up 13% YoY (vs. Q2 FY24 $197.5M to $223.1M) .
Adjusted EBITDA swing from $(21.3)M in Q2 FY24 to $22.0M in Q2 FY25 .
Gross margin improved YoY; sequentially improved from Q1’s 25.3% to 27.3% .

KPIs and Operating Metrics

KPI	Q2 FY24	Q1 FY25	Q2 FY25
Trailing 12-mo Book-to-Bill (x)	—	—	1.12
Net EAC Impact in Quarter ($M)	~$31 (ref. YoY comparison)	~$8	~$4.4 (lowest in years)
Production Mix Indicator	—	>90% of bookings were production	>80% of TTM bookings production
Operating Cash Flow ($M)	$45.5	$(14.7)	$85.5
Free Cash Flow ($M)	$37.5	$(20.9)	$81.9
Cash & Cash Equivalents ($M)	$168.6 (as of 12/29/23)	$158.1 (as of 9/27/24)	$242.6 (as of 12/27/24)

Segment breakdown: The Q2 press release and 8‑K did not provide segment revenue disclosures; Mercury’s materials emphasize enterprise-level KPIs (bookings, backlog, cash flow) rather than segment reporting .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue growth (YoY)	FY25	“Relatively flat”	“Approaching mid‑single‑digits”	Raised
Adj. EBITDA margin	FY25	Low double‑digit overall; highest in Q4	Low double‑digit overall; highest in Q4	Maintained
Free Cash Flow	H2 FY25	Positive for FY25; H2 > H1	Positive for FY25; H2 around breakeven (front‑half acceleration)	Lowered H2 trajectory; FY maintained
Operational Levers	FY25+	Ramp CPA; improve backlog margin mix; opex leverage	Same priorities reiterated	Maintained
Restructuring	FY26 benefit; Q3 FY25 cost	—	~145 roles eliminated; ~$5M restructuring charges in Q3; ~$15M annualized savings in FY26 (partly reinvested)	New action

Earnings Call Themes & Trends

Topic	Q4 FY24 (prior)	Q1 FY25 (prior)	Q2 FY25 (current)	Trend
CPA (Common Processing Architecture) ramp	Returned to pilot production; risk retirement progress	Ramping toward full-rate; >$50M follow-on orders unlocked	Capacity expected fully available in H2; competitive takeaway vs. incumbent	Improving execution; share gains
Mix shift (Development → Production)	Expect shift to production; record backlog	>90% of bookings production	>80% of TTM bookings production; workforce aligned to production	Sustained shift to production
Backlog/Bookings	Record >$1.3B backlog	Record >$1.3B; book-to-bill 1.21	Record $1.35B; book-to-bill 1.09; TTM 1.12	Backlog up; bookings normalize
Gross margin and EAC	Margin headwinds lingering FY24	GM 25.3%; net EAC ~$8M	GM 27.3%; net EAC ~$4.4M (lowest in years); inventory reserve benefit; manuf. adjustments headwind	Margin drivers improving
Free cash flow / Working capital	Q4 FCF record $61.4M; turning WC trend	FCF −$20.9M; WC −$97M YoY	Record FCF $81.9M; WC −$115M YoY; H2 FCF ~breakeven	Strong 1H; H2 normalization
Supply chain / Workforce	Streamlining ops	No systemic supply chain constraints; focus on talent	Workforce reduction of ~145 roles to align with production	Constraints manageable; cost alignment

Management Commentary

Strategic positioning and delivery: “Our Q2 results reinforce my confidence in… delivering predictable organic growth with expanding margins and robust free cash flow.” — Bill Ballhaus, CEO .
Margin expansion path: Focus on converting backlog to higher margins over time and gaining positive operating leverage as volume improves; new bookings coming in at target margins .
Cash flow cadence: First-half outperformance driven by milestone inflows and pull-forwards; expect deferred revenue drawdown in H2 to drive around breakeven FCF .
Competitive wins: Notable takeaway in processor boards where a competitor could not meet security requirements; multiple wins across Navy/Air Force programs and a DoD satellite program leveraging Mercury’s processing platform .

Q&A Highlights

CPA ramp and capacity: Management expects full capacity availability as they progress through H2; benefits include unlocking production awards, revenue delivery, and reducing unbilled balances .
H2 free cash flow: H2 around breakeven as deferred revenue brought in Q2 is worked down; FY25 FCF still positive .
Path to low–mid 20% EBITDA margins: Two primary levers—(1) backlog margin mix improvement as new bookings at target margins replace lower‑margin backlog; (2) operating expense leverage with volume .
Pull‑forward context: ~$30M moved into Q2 from Q3 across multiple customers/products due to improved delivery execution; pull‑forward occurred in Q1 as well (from Q2) .
Production vs development margins: Production margins typically ~1,000 bps higher than development; bookings consistent with target model, supporting margin trajectory .

Estimates Context

Wall Street consensus (S&P Global/Capital IQ): We attempted to retrieve Q2 FY25 consensus for EPS and revenue but could not access due to S&P Global daily request limit at the time, so we cannot provide a definitive beat/miss vs. consensus for this quarter [Values would be retrieved from S&P Global if available]. Consequently, estimate comparisons are unavailable for Q2 FY25 at this time.

Key Takeaways for Investors

Margins are inflecting for the right reasons: net EAC impacts are falling, backlog margin mix is improving, and production mix is rising—constructive for forward EBITDA margin trajectory .
Strong cash execution, but cadence matters: Record Q2 FCF/OCF benefitted from milestone timing and pull-forwards; H2 FCF normalization (around breakeven) is expected as deferred revenue is worked down .
Backlog quality and production shift underpin visibility: Record backlog ($1.35B) with >80% TTM production bookings and TTM book-to-bill >1 support multi-quarter revenue visibility and operating leverage .
Raised top-line view: Management now expects FY25 revenue growth “approaching mid-single digits” vs. prior “flat,” with Q4 margin peak—positive momentum into FY26 if mix and capacity trends sustain .
Cost actions support margin expansion: Workforce realignment (~145 roles) targets ~$15M annualized savings (FY26), aligning resources with production-heavy mix .
Trading implications: Near term, the pull-forward dynamic and H2 FCF breakeven guide may temper momentum; medium term, improving margin drivers, production mix, and backlog quality create setup for estimate and multiple support as execution continues .
Watch items: Bookings trajectory (Q2 YoY was softer), CPA full‑rate execution timing, and the pace of backlog margin accretion will be key for sustaining EBITDA expansion through FY26 .