Mercury Systems Q4 2025: Key Contradictions in Working Capital, Backlog Margins, and Revenue Projections

Working capital and deferred revenue management, backlog margin improvement, unbilled receivables impact on revenue and cash flow, gross margin projections, backlog and revenue progression are the key contradictions discussed in Mercury Systems' latest 2025Q4 earnings call.



Strong Revenue and Bookings Growth:
- Revenue grew to $273 million in Q4, up 9.9% year-on-year, and full-year revenue was $912 million, up 9.2% year-over-year.
- Record quarterly bookings reached $342 million, up 20% year-over-year.
- The growth was driven by increased demand in defense primes, the acquisition of Star Lab adding new production awards, and expanded production agreements with European defense primes.

Improved Adjusted EBITDA and Margin Expansion:
- Adjusted EBITDA increased to $51 million in Q4, with an adjusted EBITDA margin of 18.8%.
- Gross margin improved to 31%, an increase of 160 basis points year-over-year.
- Margin expansion was attributed to favorable program mix, reduced net EAC changes, and backlog margin expansion.

Free Cash Flow and Working Capital Reduction:
- Free cash flow for the fourth quarter was $34 million, and for the full fiscal year, it reached $119 million.
- Net working capital was reduced by $90 million year-over-year or 16.7%.
- This was achieved through continuous improvement in program execution, accelerating deliveries, and better demand planning.

Focus on Organic Growth and Margin Improvement:
- The company's record backlog of $1.4 billion was a result of a full-year book-to-bill ratio of 1.13.
- Organic growth was driven by significant contract awards in ground-based radar programs, sensor processing subsystems, and space programs.
- Margin improvement was influenced by backlog margin expansion and operational efficiency initiatives.