• Q1 Revenue: $204.4 million, up 13% year-over-year.
• Q1 Bookings: $247.7 million, up 29% year-over-year.
• Book-to-Bill Ratio: 1.21.
• Q1 Adjusted EBITDA: $21.5 million.
• Adjusted EBITDA Margin: 10.5%.
• Q1 Free Cash Flow: Negative $20.9 million, improved by $26.2 million year-over-year.
• Cash on Hand: $158.1 million at the end of Q1.
• Gross Margin: 25.3%.
• Backlog: Over $1.3 billion, up 16% year-over-year.
• Net Working Capital: Down $97 million year-over-year, or 14.6%.
• Inventory: Down $11.8 million year-over-year.
• Unbilled Receivables: Down $90.3 million year-over-year, or 23.2%.

• Warning! GuruFocus has detected 5 Warning Signs with MRCY.

Release Date: November 05, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Mercury Systems Inc (NASDAQ:MRCY) reported Q1 bookings of $247.7 million, up 29% year-over-year, with a book-to-bill ratio of 1.21.
• Q1 revenue increased by 13% year-over-year to $204.4 million, indicating strong sales performance.
• The company achieved a record backlog of over $1.3 billion, up 16% year-over-year, reflecting strong demand and future revenue potential.
• Adjusted EBITDA for Q1 was $21.5 million, showing substantial improvement from the previous year.
• Mercury Systems Inc (NASDAQ:MRCY) made significant progress in reducing net working capital by $97 million year-over-year, enhancing financial efficiency.

Negative Points

• Q1 free cash flow was negative $20.9 million, although this was an improvement from the previous year.
• Gross margin decreased to 25.3% from 27.9% in the prior year, primarily due to higher manufacturing adjustments and inventory reserves.
• The company experienced approximately $8 million of net EAC change impact in Q1, affecting revenue and gross margin.
• Operating expenses, while reduced, still reflect the need for further cost management and efficiency improvements.
• The company anticipates low double-digit adjusted EBITDA margins for FY25, indicating ongoing margin pressure.

Q & A Highlights

Q: Can you provide more details on the common processing architecture programs and any remaining challenges? Are these still considered challenge programs? A: We have moved away from using the term "challenge programs," reflecting the progress made over the last five quarters. We have systematically closed out these programs, and the risk is now in line with ordinary course risk. We are ramping up toward full-rate production, with resources and capital in place, and have seen positive indicators such as follow-on awards becoming unlocked. - William Ballhaus, CEO

Q: With revenue pulled forward into Q1, will Q2 be down sequentially and year-over-year? Will gross margins also decrease in Q2 before improving in the second half? A: We expect Q2 volume to be lower, which may impact operating leverage, but gross margins should remain in the same realm. The focus is on improving operating leverage throughout the year. - David Farnsworth, CFO

Q: How should we think about the transition of development programs to production, and how does this affect unbilled receivables? A: We are transitioning from development to production, with operating expenses reflecting this shift. We are ramping down development programs and beginning production, which should help reduce unbilled receivables over time. - William Ballhaus, CEO

Q: What is the expected impact of the common processing architecture on future revenue mix when at full-rate production? A: While we haven't specified the exact percentage, the common processing architecture is a significant contributor to revenue. We expect increased production booking activity to be impactful in the second half of the year. - David Farnsworth, CFO

Q: How are supply chain and workforce issues affecting Mercury Systems? A: Currently, there are no significant constraints on performance tied to workforce or supply chain. We are focused on these areas but have not seen systemic issues affecting lead times or workforce availability. - William Ballhaus, CEO

For the complete transcript of the earnings call, please refer to the full earnings call transcript.