Core Insights - Mercury Systems, Inc. is a technology company specializing in secure and safety-critical processing subsystems for aerospace and defense applications, facing competition from major players like Raytheon Technologies and Northrop Grumman [1] Financial Performance - The company recently experienced a 25% decline in its stock price despite beating second-quarter sales expectations, attributed to a $30 million revenue pull-forward [3] - Current stock price is $82.20, with a market capitalization of approximately $4.93 billion and a trading volume of 640,979 shares [5] - The stock has fluctuated between $79.20 and $83.28 during the day, with a yearly high of $103.84 and a low of $39.89 [5] Analyst Insights - Jefferies analyst Sheila Kahyaoglu set a new price target of $85 for MRCY, down from a previous target of $95, reflecting the challenges the company is facing [2][6] - Investors are disappointed with management's reluctance to raise guidance despite consistent revenue pull-forwards, contributing to the recent weakness in share price [4][6] Future Outlook - The company's gross margins are expected to improve by 2028 as it works through low-margin projects [4]

Core Viewpoint - Mercury Systems, Inc. (MRCY) experienced a significant stock decline of 25% despite surpassing analyst expectations, indicating persistent net losses [1] Company Summary - Mercury Systems is a provider of chips specifically for the defense industry, highlighting its niche market focus [1] - The stock price of Mercury Systems has increased by 36.5% since the last report, suggesting some recovery or positive sentiment prior to the recent decline [1] Analyst Background - The analysis is conducted by Dhierin-Perkash Bechai, an aerospace, defense, and airline analyst with a background in aerospace engineering, providing insights into the complex industry with growth potential [1] - The investing group, The Aerospace Forum, aims to identify investment opportunities within the aerospace, defense, and airline sectors, utilizing data-informed analysis [1]

Core Insights - Mercury Systems, Inc. (MRCY) experienced a significant stock decline of 25% despite surpassing analyst expectations in terms of earnings, indicating persistent net losses [1] - The stock has shown a notable increase of 36.5% since the last report, suggesting potential volatility and investor interest [1] Company Overview - Mercury Systems is a provider of chips specifically designed for the defense industry, highlighting its niche market focus [1] - The company operates within the aerospace and defense sector, which is characterized by significant growth prospects [1] Analyst Background - The analysis is conducted by Dhierin-Perkash Bechai, who has a background in aerospace engineering and specializes in the aerospace, defense, and airline industries [1] - The investing group, The Aerospace Forum, aims to identify investment opportunities within these sectors, utilizing data-informed analysis [1]

Core Insights - Mercury Systems (MRCY) reported adjusted earnings of 16 cents per share for Q2 fiscal 2026, exceeding the Zacks Consensus Estimate by 128.6% and significantly up from 7 cents per share in the same quarter last year [1] - Revenues for the second quarter reached $232.87 million, marking a 4.4% year-over-year increase and surpassing the Zacks Consensus Estimate by 12.29% [1] Q2 Details - Total bookings for Q2 fiscal 2026 were $288 million, resulting in a book-to-bill ratio of 1.23 [2] - The company achieved a record backlog of $1.5 billion, which is an 8.8% increase year over year [2] Q2 Operating Details - Adjusted EBITDA for Q2 fiscal 2026 was $30 million, a 36.3% increase from $22 million in Q2 fiscal 2025 [3] - The adjusted EBITDA margin improved to 12.9% year over year [3] - GAAP net loss for the quarter was $15.1 million, with a diluted loss per share of 26 cents, compared to a net loss of $17.6 million and a loss per share of 30 cents in the prior year [3] Balance Sheet & Cash Flow - As of December 26, 2025, cash and cash equivalents were $335 million, up from $304.7 million as of September 26, 2025 [4] - Long-term debt remained unchanged at $591.5 million [4] - Cash flow from operations was $51.6 million, a significant increase from $2.2 million in the previous quarter [4] - Free cash flow for Q2 fiscal 2026 was $45.7 million, compared to negative $4.4 million in Q1 fiscal 2026 [4] Fiscal 2026 Outlook - The company maintains its full-year fiscal 2026 outlook, expecting low single-digit annual revenue growth and an adjusted EBITDA margin approaching the mid-teens [5] - Anticipates positive free cash flow for the year, with Q3 revenues expected to decline year over year, followed by a ramp-up in Q4 [5] - Q3 adjusted EBITDA margin is projected to approach double digits, while Q4 is expected to have the highest adjusted EBITDA margin of the fiscal year [5] Zacks Rank & Stocks to Consider - MRCY currently holds a Zacks Rank 4 (Sell) [6] - Other stocks in the aerospace sector with better rankings include CAE (Rank 2), Innovative Solution (Rank 1), and Bae Systems (Rank 2) [6]

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Core Insights - Mercury Systems reported revenue of $232.87 million for the quarter ended December 2025, reflecting a year-over-year increase of 4.4% and a surprise of +12.29% over the Zacks Consensus Estimate of $207.39 million [1] - The company's EPS for the quarter was $0.16, significantly higher than the $0.07 reported in the same quarter last year, resulting in an EPS surprise of +128.57% compared to the consensus estimate [1] Revenue Performance - Net Revenue from Sensor & Effector - Radar was $53.72 million, exceeding the two-analyst average estimate of $34.55 million, with a year-over-year change of +14% [4] - Net Revenue from Sensor & Effector - Electronic Warfare reached $27.48 million, surpassing the average estimate of $20.07 million, marking a year-over-year increase of +14.9% [4] - Net Revenue from Other was reported at $36.85 million, slightly below the average estimate of $39.5 million, showing a year-over-year decline of -11.2% [4] - Total Net Revenue from Sensor & Effector was $105.16 million, compared to the average estimate of $74.32 million, indicating a year-over-year change of +12.9% [4] - Net Revenue from C4I was $90.87 million, slightly below the average estimate of $93.33 million, with a year-over-year change of +2.7% [4] - Net Revenue from Other Sensor & Effector was $23.95 million, exceeding the average estimate of $19.7 million, representing a year-over-year increase of +8.2% [4] Stock Performance - Shares of Mercury Systems have returned +15.5% over the past month, outperforming the Zacks S&P 500 composite's +1.8% change [3] - The stock currently holds a Zacks Rank 4 (Sell), suggesting potential underperformance relative to the broader market in the near term [3]

Core Viewpoint - Mercury Systems (MRCY) reported quarterly earnings of $0.16 per share, exceeding the Zacks Consensus Estimate of $0.07 per share, marking a significant earnings surprise of +128.57% compared to $0.07 per share a year ago [1] Financial Performance - The company achieved revenues of $232.87 million for the quarter ended December 2025, surpassing the Zacks Consensus Estimate by 12.29% and showing an increase from $223.13 million year-over-year [2] - Over the last four quarters, Mercury Systems has exceeded consensus EPS estimates three times and topped revenue estimates four times [2] Stock Performance - Mercury Systems shares have increased approximately 28.6% since the beginning of the year, significantly outperforming the S&P 500's gain of 1.9% [3] Future Outlook - The company's earnings outlook will be crucial for determining the sustainability of its stock price movement, with current consensus EPS estimates at $0.22 for the coming quarter and $1.01 for the current fiscal year [4][7] - The Zacks Rank for Mercury Systems is currently 4 (Sell), indicating expectations of underperformance in the near future due to unfavorable estimate revisions prior to the earnings release [6] Industry Context - The Aerospace - Defense Equipment industry, to which Mercury Systems belongs, is currently ranked in the top 26% of over 250 Zacks industries, suggesting a favorable environment for stocks in this sector [8]

Financial Data and Key Metrics Changes - Bookings reached $288 million with a book-to-bill ratio of 1.23, resulting in a record backlog of nearly $1.5 billion, an increase of 8.8% year-over-year [7][21] - Revenue for Q2 was $233 million, reflecting a year-over-year increase of 4.4% [21] - Adjusted EBITDA was $30 million, up 36.3% year-over-year, with an adjusted EBITDA margin of 12.9%, an increase of 300 basis points [7][24] - Free cash flow was $46 million, significantly ahead of expectations, with cash on hand totaling $335 million [8][25] Business Line Data and Key Metrics Changes - The company recognized $4 million in net adverse EAC changes, consistent with previous quarters, indicating sound execution on development and production programs [9] - Approximately $30 million of revenue was accelerated from Q3 into Q2, positively impacting adjusted EBITDA by $10 million [9][24] Market Data and Key Metrics Changes - The company experienced solid execution across its broad portfolio, contributing to a record first-half revenue and the highest first-half point-in-time revenue since FY 2021 [9][17] - Bookings included significant awards from both domestic and international customers, reflecting a mix of franchise program extensions and new design wins [11][12] Company Strategy and Development Direction - The company is focused on four priorities: performance excellence, driving organic growth, expanding margins, and improving free cash flow [5][10] - The strategy includes increasing capacity, adding automation, and consolidating subscale sites to drive scalability and efficiency [10] - The company aims for adjusted EBITDA margins in the low-to-mid 20% range and free cash flow conversion of 50% [17][19] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism regarding the market backdrop and the potential for increased global defense budgets to positively impact demand [19][90] - The company maintains its full-year outlook for FY 2026, expecting low single-digit annual revenue growth, with Q3 revenue anticipated to decline year-over-year [18][19] Other Important Information - The company ended Q2 with net debt of $257 million, the lowest level since Q1 FY 2022, and continues to focus on reducing net working capital [16][25] - Operating expenses decreased year-over-year, driven by efficiency improvements and headcount reductions [23] Q&A Session Questions and Answers Question: How much lower margin backlog is left to convert? - Management indicated that the lower margin backlog will continue to flow through over time, with expectations for most of the impact to be resolved by FY 2027 [33][34] Question: What is the current capacity for the Common Processing Architecture (CPA)? - The company is ramping up production in CPA and is confident in meeting increased demand without significant additional investment [41][42] Question: Why is there no upward revision in guidance despite strong performance? - Management explained that while they have outperformed expectations, they are cautious about future accelerations due to uncertainties in material availability [44][48] Question: What is the impact of unbilled receivables on revenue? - Management acknowledged that unbilled balances are still high and represent a drag on revenue, but they did not quantify the exact impact [73] Question: What is the status of the Golden Dome initiative and international orders? - Management noted ongoing conversations regarding Golden Dome and international opportunities, with potential for significant increases in quantities if these materialize [90]

Financial Data and Key Metrics Changes - Bookings reached $288 million with a book-to-bill ratio of 1.23, resulting in a record backlog of nearly $1.5 billion, an increase of 8.8% year-over-year [7][21] - Revenue for Q2 was $233 million, reflecting a year-over-year increase of 4.4% [21] - Adjusted EBITDA was approximately $30 million, up 36.3% year-over-year, with an adjusted EBITDA margin of 12.9%, an increase of 300 basis points [7][24] - Free cash flow for the quarter was $46 million, down from $82 million in the prior year, primarily due to accelerated cash receipts [25][28] Business Line Data and Key Metrics Changes - The company recognized $4 million of net adverse EAC changes, consistent with previous quarters, indicating sound execution on development and production programs [9] - Approximately $30 million of revenue was generated from accelerated progress on high-priority programs, primarily planned for Q3 [22] Market Data and Key Metrics Changes - The company noted increased defense budgets globally and domestic priorities like Golden Dome as potential drivers for higher demand across multiple programs [13][19] - Customer conversations are progressing regarding significant increases in quantities for various programs, indicating optimism for future demand [90] Company Strategy and Development Direction - The company is focused on four priorities: performance excellence, driving organic growth, expanding margins, and improving free cash flow [5][10] - Efforts to increase capacity and automate processes are ongoing, with a new 50,000 sq ft factory space in Phoenix to support ramp production [10][41] - The company aims for adjusted EBITDA margins in the low-to-mid 20% range and free cash flow conversion of 50% [17][19] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the market backdrop and the company's ability to deliver results in line with targeted profiles, despite expecting Q3 revenue to be down year-over-year [18][19] - The company maintains its full-year view for FY 2026, anticipating low single-digit annual revenue growth [18] Other Important Information - The company ended Q2 with $335 million in cash, with net debt reduced to $257 million, the lowest level since Q1 FY 2022 [16][25] - Operating expenses decreased year-over-year, driven by efficiency improvements and headcount reductions [23] Q&A Session Summary Question: How much lower margin backlog is left to convert? - Management indicated that the lower margin backlog will continue to flow through over time, with expectations for improvement as higher margin bookings replace it [33][34] Question: What is the impact of the stop work order on the SCAR program? - Management stated that they do not quantify individual contracts, but the SCAR program is incorporated into their outlook without significant changes [83] Question: What are the potential choke points affecting acceleration? - Management noted that they are actively working with suppliers to address material availability, but cannot guarantee acceleration until materials are confirmed [75][76]

Mercury Systems (NasdaqGS:MRCY) Q2 2026 Earnings call February 03, 2026 05:00 PM ET Speaker7Good day, everyone, and welcome to the Mercury Systems second quarter fiscal 2026 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the company's Vice President of Investor Relations, Tyler Hojo. Please go ahead, Mr. Hojo.Speaker10Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer ...