MERCURY SYSTEMS INC Q1 FY2025 earnings call

1. Introductory comments: Started FY '25 with positive momentum, results in line with or ahead of expectations. 2. Four priority areas: - Delivering predictable performance: Made progress in mitigating transitory impacts, ramping toward full-rate production in common processing architecture, and saw acceleration of deliveries with a 21% year-over-year increase in point-in-time revenues. - Driving organic growth: Q1 bookings of $247.7 million resulted in a record backlog of over $1.3 billion, over 90% of bookings were production in nature, with several notable wins in different product areas. - Expanding margins: Focused on executing development programs, getting back to historical development to production program mix, driving organic growth for positive operating leverage and cost efficiencies. Q1 adjusted EBITDA margin was 10.5% in line with expectations. - Improving free cash flow: Made progress in reducing net working capital, with net working capital down $96.6 million year-over-year, inventory, unbilled receivables having changes reflecting focus on program execution and contract terms. 3. Performance expectations: Expect revenue for first-half to be approximately in line with last year, FY '25 revenue relatively flat year-over-year with exit run rate increase, adjusted EBITDA margins to be low-double-digit for FY '25 with high-single-digit in first-half and expanding in second-half, and free cash flow to be positive in FY '25 with second half higher than first half.

In Q1, Mercury Systems had bookings of $247.7 million, up 29% year-over-year with a book-to-bill of 1.21. Revenue was $204.4 million, up 13% year-over-year. Adjusted EBITDA was $21.5 million with an adjusted EBITDA margin of 10.5%, both up substantially year-over-year. Free cash flow was negative $20.9 million, up $26.2 million year-over-year. Gross margin for the first quarter decreased to 25.3% from 27.9% in the prior year, primarily driven by higher manufacturing adjustments and inventory reserves of $11 million, partially offset by lower net EAC change impacts of $8 million.

1. Will not provide specific detailed guidance for FY '25 at this time. 2. Expect revenue for first-half of FY '25 to be approximately in line with last year. 3. Expect FY '25 revenue to be relatively flat year-over-year with an increase in run rate as exiting the fiscal year. 4. Expect adjusted EBITDA margins to be low-double-digit for FY '25, with adjusted EBITDA margins in the high-single-digit range for the first-half of the year and expanding in the second-half as lower-margin development efforts are completed and mix shifts toward production. 5. Expect to be cash flow positive in FY '25 with second half free cash flow higher than the first half.

Q: Could you give more color on the common processing architecture programs? And about the cadence in the first half and gross margin?

A: Bill Ballhaus said they've moved away from calling them challenge programs, have made progress in ramping toward full-rate production, and there was follow-on awards unlocked in the quarter. Dave Farnsworth said they had talked about expectations being in the high-single digits, and with volume pulled in, had higher operating leverage even though gross margin was not.

Q: On the cadence in the first half, revenue pulled forward in Q1, and whether gross margin takes a step-down in Q2 before ramping in second half?

A: Bill Ballhaus had Dave Farnsworth address gross margins, saying what was seen was as a result of volume pulled in, had higher operating leverage and EBITDA was higher even though gross margin was not, and with lower volume in Q2, would still be in the same realm from a gross margin standpoint.

Q: On the R&D, when CPA programs get ramped up, how to think about the portion of the mix they will comprise? And on SG&A cadence?

A: Dave Farnsworth said they haven't specifically spoken about exactly what percentage of the portfolio CPA programs will comprise, and there is some cyclicality in SG&A with timing of expenses, but expect operating leverage to improve throughout the second half.

Q: On the bookings production mix, and R&D spend progress?

A: Bill Ballhaus said this quarter overall bookings were greater than 90% production, indicating shift in the mix. Bill Ballhaus said it's a combination of factors with R&D having completed some internal projects, streamlined focus, and expecting incremental lift in R&D as move through the year.

Q: On supply-chain, workforce, and free cash flow generation?

A: Bill Ballhaus said at current point, don't see significant constraints on performance tied to workforce or supply-chain. Dave Farnsworth said from supply-chain perspective, haven't seen elongation of lead times beyond where they've been. Dave Farnsworth said they expect to be positive for the year and have a stronger second-half than first-half, and believe the business should be a consistent positive free cash flow generator.