• Revenue: $223 million, up 13% year over year.
• Bookings: $242 million with a book to bill of 1.09.
• Backlog: $1.4 billion, up 6% year over year.
• Adjusted EBITDA: $22 million with a margin of 9.9%.
• Gross Margin: 27.3%, up from 16% in the same quarter last year.
• Free Cash Flow: Record $82 million, up from $38 million in the prior year.
• Cash on Hand: $243 million at the end of Q2.
• Net Working Capital: Down $115 million year over year, or 19.5%.
• Net Debt: $349 million, the lowest level since Q2 of FY22.
• GAAP Net Loss: $18 million, or $0.30 per share.
• Adjusted Earnings Per Share: $0.07.

• Warning! GuruFocus has detected 8 Warning Signs with MRCY.

Release Date: February 04, 2025

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

Positive Points

• Mercury Systems Inc (NASDAQ:MRCY) reported a 13% year-over-year increase in revenue for Q2, reaching $223 million.
• The company achieved a record free cash flow of $82 million, up $44 million year over year.
• Bookings for the quarter were strong at $242 million, resulting in a record backlog of $1.4 billion.
• Gross margin improved significantly to 27.3% from 16% in the same quarter last year.
• The company successfully reduced net working capital by $115 million year over year, or 19.5%.

Negative Points

• Despite improvements, Mercury Systems Inc (NASDAQ:MRCY) reported a GAAP net loss of $18 million for the quarter.
• The adjusted EBITDA margin was 9.9%, which is below the company's long-term target of low- to mid-20% range.
• The company expects free cash flow to be around breakeven in the second half of the fiscal year.
• Backlog margin remains lower than desired due to low-margin development programs and adverse impacts from FY24.
• The company did not provide specific guidance for FY25, creating some uncertainty about future performance.

Q & A Highlights

Q: Can you talk about the progress in the second quarter on the CPA processes and programs in terms of maturity? Are there any technical risks remaining? A: William Ballhaus, CEO: Our progress on CPA is as planned and consistent with previous discussions. We are ramping to full-rate production and expect full capacity availability in the second half of the year. This progress has already led to significant production awards and competitive takeaways, benefiting our business in multiple ways.

Q: How are we expecting order flow to trend in the second half of the year, and how has the continuing resolution impacted order flow? A: William Ballhaus, CEO: We don't focus too granularly on orders by quarter due to potential lumpiness. However, our trailing 12-month book-to-bill ratio of 1.12 reflects solid performance. We remain confident in our strategic positioning and the enduring demand for mission-critical processing at the edge.

Q: Can you explain the back half of the year free cash flow breakeven commentary, given the progress in reducing unbilled receivables and deferred revenue growth? A: David Farnsworth, CFO: Our first-half cash was ahead of expectations due to milestone achievements, leading to increased deferred revenue. In the second half, we will perform efforts against that cash, reducing deferred revenue. We continue to focus on reducing unbilled receivables and improving cash flow performance.

Q: Can you provide more parameters around the opportunity to get adjusted EBITDA margins back into the low 20% range? A: William Ballhaus, CEO: We focus on converting backlog margin and achieving positive operating leverage. Our backlog margin is expected to improve as we bring in new bookings at targeted margins. We've made significant progress in reducing operating expenses, which will drive positive operating leverage as we increase volume.

Q: What drove the $30 million in pull-forward contract activity, and was it concentrated in a single program? A: William Ballhaus, CEO: The pull-forward was due to our focus on delivering for customers, resulting in point-in-time revenue from multiple programs. It was not concentrated in a single contract or customer but spread across various products and customer sets.

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