MERCURY SYSTEMS INC (MRCY) Q3 2025 Earnings Summary

Executive Summary

Q3 FY25 revenue rose to $211.4M (+1% YoY) and beat consensus ($204.2M); adjusted EPS was $0.06, a slight miss versus the $0.07 consensus, while gross margin expanded to 27.0% from 19.5% YoY . Revenue and EPS consensus values from S&P Global.*
Backlog reached $1.34B (+4% YoY) with 12-month backlog of $787.6M; bookings were $200.4M and book-to-bill was 0.95 (LTM book-to-bill 1.1) .
Adjusted EBITDA improved to $24.7M (11.7% margin) from -$2.4M YoY; operating cash flow was $30.0M and free cash flow was $24.1M, reflecting strong cash conversion and working capital progress .
Management maintained FY25 qualitative guidance: revenue growth approaching mid-single digits, FY25 adjusted EBITDA in low-double digits, and Q4 margins approaching mid-teens; full-year FCF expected above prior expectations (Q4 ~breakeven) – a constructive setup for margin trajectory despite a modest EPS miss in Q3 .

What Went Well and What Went Wrong

What Went Well

Margin and earnings quality improved: gross margin rose to 27.0% (+750 bps YoY), adjusted EBITDA reached $24.7M (11.7% margin), and adjusted EPS turned positive to $0.06 from -$0.26 YoY, driven by lower EAC change impacts and reduced operating expenses .
Cash generation and working capital discipline: operating cash flow of $30.0M and FCF of $24.1M; net working capital is at its lowest since FY22, supported by milestone billing and mix shift toward production .
Strategic positioning strengthened: $40M of CPA production awards in Q3, LTAMDS moving forward, and the Star Lab acquisition enhancing cybersecurity differentiation; management emphasized “predictable organic growth with expanding margins and robust free cash flow” .

What Went Wrong

Book-to-bill dipped below 1.0 in Q3 (0.95), reflecting timing of awards; management pointed to a strong start in early Q4 and highlighted the LTM 1.1 as the better indicator .
EPS modestly missed consensus (actual $0.06 vs $0.07*), partly as Q2 pull-forward (~$29M) shifted revenue left into Q2, dampening Q3 sequentially; management framed Q3 revenue as normalized for the pull-forward . EPS consensus from S&P Global.*
Development program/legacy backlog continues to weigh on backlog margin; management reiterated that margin improvement is gradual as lower-margin programs burn off and new bookings accrete .

Financial Results

Headline results vs prior year and vs estimates

Metric	Q3 FY24	Q3 FY25 (Actual)	Q3 FY25 Consensus*
Revenue ($USD Millions)	$208.3	$211.4	$204.2*
Adjusted EPS ($USD)	$(0.26)	$0.06	$0.071*
GAAP EPS ($USD)	$(0.77)	$(0.33)	N/A
Gross Margin %	19.5%	27.0%	N/A
Adjusted EBITDA ($USD Millions)	$(2.4)	$24.7	N/A

Notes: Consensus values from S&P Global.*

Sequential trend (Q2 → Q3 FY25)

Metric	Q2 FY25	Q3 FY25
Revenue ($USD Millions)	$223.1	$211.4
Gross Margin %	27.3%	27.0%
Adjusted EBITDA ($USD Millions)	$22.0	$24.7
Adjusted EBITDA Margin %	9.9%	11.7%
GAAP EPS ($USD)	$(0.30)	$(0.33)
Adjusted EPS ($USD)	$0.07	$0.06
Operating Cash Flow ($USD Millions)	$85.5	$30.0
Free Cash Flow ($USD Millions)	$81.9	$24.1

KPIs and order metrics

KPI	Q3 FY24	Q2 FY25	Q3 FY25
Bookings ($USD Millions)	$219.9	$242.4	$200.4
Book-to-Bill	1.06	1.09	0.95
Backlog ($USD Millions)	$1,289.9	$1,400.0	$1,340.9
12-Month Backlog ($USD Millions)	$761.1	$789.9	$787.6
Operating Cash Flow ($USD Millions)	$(17.8)	$85.5	$30.0
Free Cash Flow ($USD Millions)	$(25.7)	$81.9	$24.1

Segment breakdown: Not disclosed in Q3 press release/8-K; management commentary referenced radar, EW, C4I trends qualitatively without numeric segmentation .

Guidance Changes

Metric	Period	Previous Guidance (Q2 FY25)	Current Guidance (Q3 FY25)	Change
Revenue growth	FY25	“Approaching mid-single digits” vs prior expectation of flat	“Continue to expect annual revenue growth approaching mid-single digits”	Maintained
Adjusted EBITDA margin	FY25	Low double digits overall; Q4 highest of year	Low double digits overall; Q4 approaching mid-teens	Maintained/clarified
Free Cash Flow	FY25	Cash flow positive FY25; H2 ~breakeven due to accelerated cash in H1	Full-year FCF ahead of prior expectations; Q4 around breakeven	Raised (full-year)
Mix/production	FY25 onward	Mix shift toward production; CPA ramp capacity in H2	Over 80% LTM bookings production; CPA production awards in Q3; capacity to support backlog burn/cash	Positive trajectory

Earnings Call Themes & Trends

Topic	Previous Mentions (Q2 FY25)	Current Period (Q3 FY25)	Trend
Backlog margin improvement	Backlog margin lower due to dev/EAC in FY24; new bookings accretive; margin uplift expected over time	Reiterated gradual improvement; Q3 bookings at/above target margins; Q4 margins approaching mid-teens	Improving
EAC change impacts	~$4.4M net EAC impacts in Q2, lowest in years	~$3.7M net EAC impacts in Q3, lowest level in several quarters	Improving
CPA (Common Processing Architecture)	Ramping capacity; notable competitive takeaway; awards across DoD programs	$40M CPA production awards; capacity to allocate between backlog burn and cash collection	Scaling
Working capital & FCF	Net working capital at lowest since FY22; strong FCF; H2 FCF ~breakeven due to milestone timing	Net working capital lowest since FY22; LTM FCF ~$146M; Q4 FCF ~breakeven, FY25 FCF above prior expectations	Sustained discipline
Tariffs/macro	Not called out [Q2]	No material FY25 impact; exclusions mitigate BOM risk; sourcing and cost manageable	Neutral
LTAMDS program	Progress through development; large future production potential	Customer milestone achieved; ramp consistent with schedule; growth prospects intact	Positive
Strategic moves (M&A/manufacturing)	N/A	Acquired Star Lab to deepen cyber protection; outsourcing Switzerland manufacturing to scale and efficiency	Strengthening moat

Management Commentary

“We delivered solid results... reinforcing the confidence we have in our strategic positioning and expectations to deliver predictable organic growth with expanding margins and robust free cash flow.” – Bill Ballhaus, Chairman & CEO .
“Q3 adjusted EBITDA margin of 11.7% was in line with our expectations, up sequentially 180 basis points... backlog margin is increasing as new bookings align with our target margin profile.” .
“We recognized approximately $3.7 million of net EAC change impacts... lowest level in several quarters... focus on accelerating customer deliveries allowed us to largely offset the $29M of revenue that we accelerated into Q2.” .
“We continue to expect Q4 adjusted EBITDA margins to be the highest level of the fiscal year, approaching mid-teens... full year free cash flow ahead of prior expectations; Q4 around breakeven.” .
“Tariffs: certainly no material impact in FY ’25... a number of exclusions apply to a significant piece of our bill of material.” .

Q&A Highlights

Working capital targets and FCF conversion: management aims for ~50% FCF conversion from EBITDA long-term; net working capital target range 35–40% of revenue over time .
Backlog margin trajectory: improvements are gradual across “several quarters” as low-margin development/legacy contracts burn off and new bookings accrete .
Revenue mix: bookings >80% production LTM; revenue split not disclosed but expected to follow bookings over time .
Sequential revenue context: Q3 step-down tied to ~$29M delivery pull-forward into Q2; underlying full-year trajectory unchanged .
Deferred revenues: milestone payments and customer-funded components elevate deferred revenue, offsetting inventory; expected to draw down as work completes .

Estimates Context

Q3 FY25 revenue beat consensus ($211.4M vs $204.2M*), while adjusted EPS modestly missed ($0.06 vs $0.071*); backdrop includes sequential timing from Q2 pull-forward and improving backlog margin . Consensus values from S&P Global.*
Prior quarters showed beats on revenue and adjusted EPS relative to consensus in Q1/Q2 FY25, supporting the narrative of improving execution and demand . Consensus values from S&P Global.*
Implications: Street may adjust models for continued margin expansion into Q4 (mid-teens EBITDA margin) and stronger full-year FCF, while EPS cadence remains sensitive to delivery timing and backlog mix .

Key Takeaways for Investors

Revenue and gross margin performance underscore operational improvements; YoY margin expansion (+750 bps) and adjusted EBITDA margin (11.7%) signal backlog quality is rising .
Cash generation remains a highlight; LTM FCF ~$146M and disciplined working capital reductions support deleveraging and flexibility .
The EPS miss was modest and timing-related (Q2 pull-forward); management reaffirmed Q4 margin inflection to mid-teens, a key near-term catalyst .
CPA traction (production awards, competitive wins) and LTAMDS progress support the medium-term mix shift toward higher-margin production programs .
Star Lab acquisition and manufacturing outsourcing in Switzerland enhance differentiation and capacity, potentially accelerating margin and cash conversion over time .
Watch bookings/BTB normalization (Q3 0.95 vs LTM 1.1); early Q4 activity was strong, suggesting timing rather than demand weakness .
Risk checks: lingering lower-margin backlog and program execution remain variables; management’s commentary on tariffs suggests neutral impact near-term .

Values retrieved from S&P Global.*