Mercury Systems Inc

Good day, everyone, and welcome to the Mercury Systems second quarter fiscal 2025 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the company's Vice President of Investor Relations, Tyler Hojo. Please go ahead, Mr. Hojo.

Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, Bill Ballhouse, and our Executive Vice President and CFO, Dave Farnsworth. If you have not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that we will be referencing to is posted on the investor relations section of the website under events and presentations. Turning to slide two in the presentation, I'd like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury's financial outlook, future plans, objectives, business prospects, and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements on slide two in the earnings press release and the risk factors included in Mercury's SEC filings. I'd also like to mention that in addition to reporting financial results in accordance with generally accepted accounting principles or DAP, during our call, we will also discuss several non-DAP financial measures, specifically adjusted income, adjusted earnings per share, adjusted EBITDA, and free cash flow. A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation and in the earnings press release. I'll now turn the call over to Mercury's Chairman and CEO, Bill Ballhaus. Please turn to slide three.

Thanks, Tyler. Good afternoon. Thank you for joining our Q2 FY25 earnings call. We delivered solid results in Q2 that were once again in line with or ahead of our expectations, and I'm optimistic about our ongoing efforts to improve performance as we move through the fiscal year. Today I'd like to cover three topics. First, some introductory comments on our business and results. Second, an update on our four priorities, delivering predictable performance, building a thriving growth engine, expanding margins, and driving improved free cash flow. And third, performance expectations for FY25 and longer term. Then I'll turn it over to Dave, who will walk through our financial results in more detail. Before jumping in, I'd like to thank our customers for their collaborative partnership and the trust they put in Mercury to support the most critical programs and our Mercury team for their dedication and commitment to delivering mission-critical processing at the edge. Please turn to slide four. Our Q2 results reinforce my confidence in our strategic positioning and our expectations in delivering predictable organic growth with expanding margins and robust free cash flow. Bookings of $242 million and a trailing book-to-bill of 1.12. Revenue of $223 million. up 13% year over year. Adjusted EBITDA of $22 million and adjusted EBITDA margin of 9.9%, both up substantially year over year. And record free cash flow of $82 million, up $44 million year over year. We ended Q2 with $243 million of cash on hand. These results reflect continued progress in each of our four priority areas, with highlights that include solid execution across our broad portfolio production and development programs, a record backlog of 1.4 billion, reduced operating expense, enabling increased positive operating leverage and continued progress on free cashflow drivers with networking capital down 115 million year over year, or 19 and a half percent. Please turn to slide five. Starting now with our four priorities and priority one, delivering predictable performance. In the second quarter, our focus on predictable performance positively impacted our results primarily in three areas. First, we continue to make progress mitigating what we believe to be predominantly transitory impacts as discussed over the last several quarters. In Q2, We recognized approximately 4.4 million of net EAC change impacts across our portfolio, which is the lowest in the last few years and reflects the progress we are making in maturing our processes in program management, engineering, and operations. Second, we continue to make progress in the quarter ramping production in our common processing architecture product area. We expect to have our full capacity become available as we move through the second half of the year. This progress is enabling follow-on production awards, as we discussed last quarter, and led to a notable takeaway in Q2 from a processor board competitor that wasn't able to meet the security requirements provided by our common processing architecture. This reflects our ability to take share in this attractive market segment based on our technology leadership position. And third, our focus on accelerating customer deliveries generated a 29 million or 31% year-over-year increase in point-in-time revenue, the majority of which was driven by pull-forward deliveries and revenue from Q3. Please turn to slide six. Moving on to priority two, driving organic growth. Solid Q2 bookings of 242 million resulted in a record backlog of 1.4 billion, In line with our expectations, over 80% of trailing 12-month bookings were production in nature, which has driven a mixed shift toward production. In line with this shift, we recently announced a workforce restructuring to align our team composition with this increased production mix. Some wins in the quarter worth noting. A development contract from a U.S. defense prime contractor where we will replace and upgrade a competitor's existing processing capabilities with a solution leveraging a common processing architecture. Our additional protection features enable the system to be eligible for export to allied nations to support forward deployed operations. A $24.5 million contract to develop a data processing and storage subsystem for a U.S. Defense Department satellite program. Under this contract with an innovative Space Systems Prime contractor, we will deliver a number of subsystems that leverage our commercial products and deep expertise in data recording, data processing, and subsystem integration for defense applications. Two awards with Naval Air Systems Command, a $16.5 million delivery order for data transfer units, and a $14 million contract option for high-definition video recorders that support U.S. and allied military aircraft, and following production awards for two long-running U.S. Navy programs of record supported by multiple lines of business and two key U.S. Air Force programs of record where Mercury is the sole source provider of memory modules. These awards are important not only because of their value and impact on our growth trajectory, but also because they reflect those customers' trust in Mercury to support their most critical franchise programs. We know from engagements with our customers that our unique capabilities providing mission-critical processing at the edge align well with their priorities and what we believe is strong demand in growth markets. including sensors and effectors, electronic warfare, avionics, C4I, and space. All in all, Q2 was a good bookings quarter with multiple competitive wins where we believe we are growing share based on our technical differentiation. Please forward to slide seven. Now turning to priority three, expanding margins. As we've discussed in prior calls, in our efforts to achieve our targeted adjusted EBITDA margins in the low to mid 20% range, we are focused on the following levers, executing on our development programs in minimizing cost growth impacts, getting back toward a more historical 2080 mix of development to production programs, driving organic growth to generate positive operating leverage, and achieving cost efficiencies. Q2 adjusted EBITDA margin of 9.9% was in line with our expectations and indicative of progress on each of these levers in our effort to reach our targeted margins over time. Gross margin of 27% was in line with our expectations and largely driven by the average margin in our backlog coming into FY25. As we've discussed over the last two quarters, our backlog margin coming out of FY24 was lower than what we expect to see on a go forward basis, driven primarily by a small number of low margin development programs and programs that incurred adverse net EAC change impacts in FY24. We expect backlog margin to increase going forward as we continue to bring in new bookings, as we did once again in Q2, that we believe will be in line with our targeted margin profile and accretive to the current average margin in our backlog. Operating expenses, specifically R&D and SG&A, are down significantly year over year as a result of prior and ongoing actions to streamline and focus our operations. As expected, R&D levels increased sequentially in the quarter. Please forward to slide eight. Finally, turning to priority four, improved free cash flow. We continue to make significant progress on the drivers of free cash flow, and in particular, in reducing net working capital, which at $475 million is at the lowest level since Q3 of FY22. Combined free cash flow over the last three quarters is approximately $122 million, and net debt is down to $349 million, the lowest level since Q2 of FY22. We believe our continuous improvement related to program execution and hardware delivery, just-in-time material, and appropriately timed payment terms will lead to continued reduction in working capital and improved free cash flow performance going forward. Please turn to slide nine. Looking ahead, I am optimistic about our team, our leadership position in delivering mission critical processing at the edge, and our expected ability over time to deliver results in line with our target profile of above market top line growth, adjusted EBITDA margins in the low to mid 20% range, and free cash flow conversion of 50%. As we discussed last quarter, Although we will not be providing specific guidance for FY25, I will update the color we previously discussed. First half revenue, up 13% year over year, exceeded our expectation that the first half would be in line with last year. The overperformance was largely driven by the acceleration of about $30 million in customer deliveries and revenue into Q2 from Q3. For full year FY25, We now expect revenue growth approaching mid-single digits year over year versus our prior expectation that revenue growth would be relatively flat. As we discussed last quarter, our current backlog margin is lower than what we expect to see on a go-forward basis, driven primarily by a small number of low-margin development programs and programs that incurred adverse net EAC change impacts in FY24. Although we are encouraged that our recent quarter bookings are accretive to our overall backlog margin, we continue to expect low double-digit adjusted EBITDA margins overall for FY25 as we complete lower margin development efforts and continue to shift our mix toward production. We expect Q4 adjusted EBITDA margins to be the highest level of the fiscal year. Finally, with respect to free cash flow, we continue to expect to be cash flow positive in FY25. Given the large acceleration of cash from Q3 into the first half and first half free cash flow of $61 million, which is well ahead of our prior expectation, we expect free cash flow to be around break even in the second half. In summary, given the operational improvements over the last several quarters and our recent momentum, I expect that our performance in FY25, in particular our exit run rate, will represent a positive step toward our target profile. Given our progress in the first half and our momentum heading into the second half, I look forward to providing additional insights relative to our expectations for full-year performance as we progress through the back half of the year. With that, I'll turn it over to Dave to walk through the financial results for the second quarter, and I look forward to your questions. Dave?