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MRCY
Earnings call · Jun 2026 (Q4 FY26)

MERCURY SYSTEMS Q4 FY26 earnings call MRCY

Aug 18, 2026 Source

Executive summary

Mercury Systems Q4 FY26 — Record Bookings and Backlog Drive Strong Outlook

Mercury Systems concluded FY26 with record bookings and backlog, providing enhanced visibility and an increased outlook for organic growth in FY27 and FY28. The company is focused on converting lower-margin backlog, optimizing operations, and making targeted investments to scale efficiently, despite near-term free cash flow impacts from inventory build-up. The Palantir partnership is expected to improve backlog conversion and operational efficiency, potentially offering upside to the current outlook.

Highlights

5

  • Record bookings of $660 million in Q4, up 93.1% year-over-year, leading to a 2.3 book-to-bill ratio.

  • Record total backlog of over $1.9 billion, up 38.4% year-over-year, and record next 12-month backlog of $1 billion.

  • Record Q4 revenue of $290 million, up 6.1% organically year-over-year, and FY26 organic revenue growth of 7.9%.

  • FY26 adjusted EBITDA grew 25.7% to $150 million, with margin expanding 217 basis points to 15.3%.

  • Net debt reduced by 19.5% year-over-year to $227 million, driven by $68 million in FY26 free cash flow.

Concerns

4

  • Q4 gross margin declined to 30.6% from 31.0% year-over-year, primarily due to program mix and higher net EAC change impacts of approximately $4 million.

  • Q4 adjusted EBITDA margin decreased to 16.7% from 18.8% year-over-year.

  • FY27 free cash flow conversion expected to be beneath 50% target, approaching 35%, with Q1 expected to be a larger outflow than normal.

  • International sales were down approximately 15% in FY26 due to a temporary slowdown in deliveries from a new contract manufacturer.

Guidance & targets

CategoryTargetConfidence
Organic revenue growth
low double digits
high materiality
High
Adjusted EBITDA margin
low to mid-20s
high materiality
High
Free cash flow conversion
50%
high materiality
High
Revenue growth
approaching double digits year-over-year
high materiality
High
Total revenue
approaching $1.1 billion
high materiality
High
Q1 revenue growth
up high single digits year-over-year
medium materiality
High
Adjusted EBITDA margin
high teens
high materiality
High
Adjusted EBITDA
approaching $200 million
high materiality
High
Adjusted EBITDA margin progression
generally increase through the year
medium materiality
High
Free cash flow conversion
approaching 35%
high materiality
High
Q1 Free cash flow
larger outflow than normal
medium materiality
High
Top line organic growth
low double digits
high materiality
Medium
Adjusted EBITDA margin
in line with the low end of our target margin profile
high materiality
Medium
Free cash flow conversion
return towards conversion in line with our target
high materiality
Medium

Segment performance

SegmentRevenueYoYQoQMargin
Domestic
Domestic revenue grew 13% organically year-over-year in FY26, representing approximately 85.8% of total FY26 revenue.
Revenue share: 85.8%
—13% organically——
International
International sales were down approximately 15% year-over-year in FY26 due to a temporary slowdown in deliveries from a new contract manufacturer. Demand and backlog remain strong, and the slowdown is expected to unwind over the next couple of quarters.
—down 15%——

Orderbook & backlog

Total backlog over $1.9 billion Q4 FY26

up $540 million or 38.4% year-over-year

Next 12-month backlog $1 billion Q4 FY26

up 23.3% year-over-year

Higher than typical due to recent larger orders including consolidated quantities that would have otherwise manifested in bookings and revenue recognized in FY27.

Deals & partnerships

Palantir Strategic agreement to leverage AI software to enhance material planning and factory operations.

This DOW-sponsored initiative aims to get technology benefits into the hands of the warfighter faster. It is among many actions taken to scale ability to rapidly deliver vital capabilities.

Risks & headwinds

Temporary slowdown in international deliveries next couple of quarters

International sales down approximately 15% in FY26

Mitigation:Working to resolve issues with the new contract manufacturer; demand and backlog remain strong internationally.

Q1 FY27 Free Cash Flow Outflow Q1 FY27

Expected to be a larger outflow than normal

Mitigation:Primarily reflects receipt of materials to support growth outlook and defense spending tailwinds; free cash flow in H2 FY27 expected to be higher than H1.

What to watch in Q1 FY27

International Sales Recovery

next couple of quarters
Current down approximately 15% in FY26
Target unwinding of slowdown in deliveries

Why it matters

Recovery of international sales is crucial for overall revenue growth and indicates successful integration with the new contract manufacturer.

As we've discussed in prior calls, over the last year, we have outsourced our manufacturing in our international business to a contract manufacturer. And we've seen a slowdown in deliveries as we've ramped up that contract manufacturer. These are issues that are natural, common in moving to a relationship like that, and we expect to have them work out over the next couple of quarters.

Q&A highlights

What are the key drivers behind the expected margin improvement throughout FY27, especially in the second half?

Management expects margin improvement to be a continuation of converting lower-margin backlog and bringing in new bookings aligned with their target margin profile, combined with volume leverage. They anticipate operating in line with their target profile by the end of the fiscal year.

“I think it's a continuation of what we've been discussing around the progression of our backlog margin as we've continued and for the most part, and we've said this all along that as we work our way through FY '27, we're not going to be talking about this dynamic anymore.”

asked by Peter Arment · answered by William Ballhaus

2 min read 6 chapters

Detailed narrative

Operational Momentum & Supply Chain Alignment

Mercury Systems achieved record Q4 overtime revenue, which was up 23.6% year-over-year and marked the highest in 15 quarters. This performance indicates improved alignment of the supply chain with increased organic growth across several business areas. Domestic revenue, comprising 85.8% of FY26 revenue, demonstrated robust organic growth of 13% year-over-year, reflecting strong execution capabilities.

Record Backlog and Bookings Strength

The company reported record Q4 bookings of $660 million, representing a 93.1% increase year-over-year and nearly doubling the previous record quarter. This resulted in a strong 2.3 book-to-bill ratio for the quarter and record fiscal year bookings of $1.5 billion, up 49.8% year-over-year. Total backlog reached over $1.9 billion, a 38.4% increase year-over-year, with next 12-month backlog at $1 billion, up 23.3% year-over-year, providing enhanced visibility into FY27 and FY28.

Margin Trajectory and Efficiency Improvements

Gross margin for FY26 improved by 70 basis points to 28.6% compared to 27.9% in FY25, driven by lower manufacturing adjustments and reduced net EAC change impacts. Operating expenses as a percentage of revenue decreased by 150 basis points year-over-year in FY26, reflecting ongoing efficiency initiatives and headcount reductions. Full-year adjusted EBITDA margin reached 15.3%, an increase of 217 basis points year-over-year, demonstrating improved operating leverage.

Free Cash Flow and Capital Allocation

FY26 free cash flow totaled $68 million, contributing to a $55 million year-over-year reduction in net debt, which stood at $227 million at quarter-end. Net working capital decreased by $18 million year-over-year and by $229 million from its peak in Q1 FY24, enabling a $150 million payment against the revolving credit facility. The company prioritizes further net debt reduction and targeted investments in inventory, facilities, and CapEx to support organic growth.

Strategic Partnerships and Future Growth Drivers

Mercury Systems announced a strategic agreement with Palantir to leverage AI software for material planning and factory operations, aiming to improve backlog conversion and delivery speed. Management highlighted potential market tailwinds from increased defense budgets globally and domestic priorities in areas such as Common Processing Architecture (CPA), effectors, airborne applications, space, and missile defense. These potential tailwinds are not yet fully incorporated into the current financial outlook.

Common Processing Architecture (CPA) Performance

The company achieved its largest quarter ever for CPA bookings, reflecting the differentiation of its CPA solutions and reinforcing confidence in this area's growth prospects. New program opportunities and emerging customer interest in smaller form factors for CPA technology are expected to expand the total addressable market and accelerate growth, particularly in areas requiring high security on mobile platforms.

AI-generated summary of the company's earnings call. Not investment advice.