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Mercury Systems’ Earnings Call: Positive Growth Amid Challenges

Mercury Systems’ Earnings Call: Positive Growth Amid Challenges

Mercury Systems ((MRCY)) has held its Q3 earnings call. Read on for the main highlights of the call.

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The recent earnings call for Mercury Systems painted a generally positive picture, highlighting significant improvements in free cash flow and adjusted EBITDA, alongside robust revenue and backlog growth. Despite these achievements, the company faces ongoing challenges with sequential revenue declines due to timing shifts and the pursuit of target EBITDA margins.

Strong Free Cash Flow Performance

Mercury Systems reported a remarkable turnaround in free cash flow for the third quarter, achieving approximately $24 million compared to an outflow of $26 million in the previous year. Year-to-date free cash flow stands at $85 million, surpassing previous expectations and showcasing the company’s improved financial health.

Revenue and Backlog Growth

The company experienced solid revenue and backlog growth, with Q3 revenue reaching $211 million and a year-to-date growth of 8.9% year-over-year. The backlog also saw a 4% increase year-over-year, totaling $1.34 billion, indicating strong future business prospects.

Improvement in Adjusted EBITDA

Adjusted EBITDA for the third quarter was $24.7 million, a significant improvement from a negative $2.4 million in the same quarter last year. The adjusted EBITDA margin improved to 11.7%, reflecting the company’s efforts to enhance profitability.

Operational Efficiency

Mercury Systems achieved a reduction in operating expenses by approximately $12 million year-over-year. This decrease is attributed to strategic actions taken to streamline and focus operations, contributing to the company’s overall financial improvement.

Notable Contract Wins

The company secured significant contract awards, including $40 million for the common processing architecture and $20 million for the F-35 program. These wins underscore Mercury’s competitive position and its ability to secure substantial defense contracts.

Sequential Revenue Decline

Despite the positive growth metrics, the company experienced a sequential revenue decline due to a $29 million pull forward into Q2, resulting in flat year-over-year revenue for Q4. This highlights the timing challenges that Mercury Systems is navigating.

Adjusted EBITDA Margin Challenge

While the adjusted EBITDA margin improved to 11.7%, it remains below the company’s long-term target of low to mid-20% range. This indicates ongoing efforts are needed to achieve desired profitability levels.

GAAP Net Loss

The GAAP net loss for the third quarter was approximately $19 million, a notable improvement from a loss of $45 million in the same quarter last year, reflecting Mercury’s progress in reducing overall losses.

Forward-Looking Guidance

Looking ahead, Mercury Systems provided guidance indicating expectations for annual revenue growth approaching mid-single digits for FY 2025, with low double-digit adjusted EBITDA margins. The company anticipates Q4 adjusted EBITDA margins to be the highest of the fiscal year, approaching mid-teens. These projections suggest continued focus on enhancing profitability and growth.

In summary, Mercury Systems’ earnings call highlighted a positive trajectory with significant improvements in key financial metrics, despite some challenges. The company is making strides in enhancing free cash flow, revenue, and adjusted EBITDA, while addressing the hurdles of sequential revenue declines and margin targets. Investors can look forward to the company’s strategic efforts to sustain growth and profitability in the coming quarters.

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