Aerospace and defense company Mercury Systems (NASDAQ: MRCY) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 9.9% year on year to $273.1 million. Its non-GAAP profit of $0.47 per share was significantly above analysts’ consensus estimates.

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StockStory’s Take

Mercury Systems delivered a positive second quarter, with results exceeding Wall Street expectations and a notable market reaction. Management attributed this performance to accelerated customer deliveries, improved program execution, and a disciplined focus on reducing operating expenses. CEO William Ballhaus emphasized that record bookings and backlog growth were driven by contracts across radar, electronic warfare, and aerospace subsystems. The company also benefited from operational changes that expanded gross margins and enabled higher operating leverage. Ballhaus highlighted, “Our focus on accelerating customer deliveries generated approximately $30 million of revenue and approximately $15 million of adjusted EBITDA planned for next year.”

Looking ahead, Mercury Systems’ outlook is underpinned by ongoing backlog margin improvement, automation initiatives, and efforts to streamline operations. Management believes continued execution on legacy low-margin programs and capacity allocation to unbilled receivables will support free cash flow, though near-term revenue growth is expected to be modest. Ballhaus cautioned that, while the company expects positive momentum, the pace of margin expansion will depend on the mix of backlog and the timing of program transitions, stating, “We expect backlog margin to continue to increase as we bring in new bookings that we believe will be in line with our targeted margin profile.”

Key Insights from Management’s Remarks

Mercury Systems’ quarterly results were shaped by a combination of accelerated deliveries, a diverse contract mix, and operational streamlining, all of which supported margin gains and bookings momentum.

• Accelerated deliveries impact: The company’s ability to pull forward approximately $30 million in customer deliveries contributed to strong top-line growth and higher adjusted EBITDA margins for the quarter. Management views this as a demonstration of operational agility and supply chain management effectiveness.

• Diverse contract awards: New bookings included major radar production contracts leveraging Mercury’s Common Processing Architecture, initial production for sensor subsystems in combat aircraft, and development awards for next-generation radio-frequency (RF) solutions. Management sees the breadth of these contracts as a key driver of both current results and future backlog quality.

• Margin expansion from mix: Margin improvement was largely attributed to the burn-down of older, lower-margin backlog and replacement with higher-margin bookings. The company’s efforts to simplify and automate operations further supported higher gross and adjusted EBITDA margins.

• Working capital reduction: Mercury reduced net working capital by $90 million year over year, improving cash conversion and freeing up balance sheet capacity. This was achieved by focusing on program execution, just-in-time materials, and tightening payment terms.

• International and defense demand: Management highlighted growing interest from European defense contractors and U.S. primes across land, sea, and space platforms. The company cited ongoing customer conversations around accelerated production and additional quantities as positive market signals.

Drivers of Future Performance

Mercury Systems’ near-term outlook hinges on backlog margin improvement, operational streamlining, and disciplined cash management.

• Backlog margin progression: Management expects margin expansion as older, lower-margin programs are completed and new bookings align with targeted margin profiles. The pace of this transition will influence gross and adjusted EBITDA margins in the coming quarters.

• Operational efficiency focus: Continued automation and simplification initiatives are intended to further reduce operating expenses and increase operating leverage. Management anticipates modest capital investment to support automation, with the goal of enabling faster and more efficient deliveries.

• Working capital and free cash flow: The company will allocate capacity to programs with unbilled receivable balances to improve free cash flow, though this approach will have limited impact on reported revenue. Management targets a normalized net working capital level of around 35% of sales, which could unlock additional cash as operational discipline continues.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) the pace at which Mercury Systems transitions from low-margin to higher-margin backlog, (2) continued progress in working capital reduction and free cash flow generation, and (3) new contract wins, particularly in radar, electronic warfare, and international markets. Execution on automation initiatives and the ability to accelerate deliveries will also be important indicators of operational discipline.

Mercury Systems currently trades at $57.88, up from $53.72 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free).

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