Mercury Systems Inc

Good day, everyone, and welcome to the Mercury Systems Third Quarter Fiscal 2025 Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd 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 2 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 gap during our call we will also discuss several non-gap 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 Ballhouse.

Please turn to slide three. Thanks, Tyler. Good afternoon. Thank you for joining our Q3 FY25 earnings call. We delivered solid results in Q3 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 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 their most critical programs. I'd also like to thank our Mercury team for their dedication and commitment to delivering mission-critical processing at the edge. Please turn to slide four. Our Q3 results reinforce my confidence in our strategic positioning and our expectations to deliver predictable organic growth with expanding margins and robust free cash flow. Bookings of $200 million and a trailing 12-month book-to-bill of 1.1. Revenue of $211 million and year-to-date revenue growth of 8.9% year-over-year. Adjusted EBITDA of $25 million and adjusted EBITDA margin of 11.7%, both up substantially year-over-year. And free cash flow of $24 million, up $50 million year-over-year, resulting in $146 million of free cash flow over the last four quarters. We ended Q3 with $270 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 of production and development programs, backlog growth of 4% year-over-year, reduced operating expense enabling increased positive operating leverage, and continued progress on free cash flow drivers with net working capital down 148 million year-over-year, or 24.6%. Please turn to slide 5. Starting now with our four priorities and priority one delivering predictable performance. In the third quarter, our focus on predictable performance positively impacted our results primarily in two areas. First, in Q3 we recognized approximately 3.7 million of net EAC change impacts across our portfolio, which is again down sequentially to the lowest level in several quarters, reflecting our maturing capabilities in program management, engineering, and operations, and progress in completing development programs. And second, our focus on accelerating customer deliveries allowed us to largely offset the $29 million of revenue that we accelerated into Q2, as discussed in our last call. Please turn to slide six. Moving on to priority two, driving organic growth. Q3 bookings of $200 million resulted in a backlog of $1.34 billion, up 4% year over year. In the third quarter, we received a number of significant contract awards, including a total of $40 million in production contracts for our common processing architecture, adding to our backlog in this area, and a $20 million fall-on production order associated with the F-35 program. It's also worth noting that in the month of April, we had several meaningful bookings, including a $20 million follow-on production agreement with an innovative commercial space company that supports a US national security mission, a $7 million development contract with the US Navy for an electronic warfare capability, and a $6 million follow-on production order for a classified avionics program that leverages our commercial memory products and advanced packaging expertise. In line with our expectations, over 80% of trailing 12-month bookings were production in nature, which continues to drive a mix shift toward production. 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. In addition to this bookings progress, in early Q4, we entered into two agreements that we believe will enhance our competitive position going forward. First, we announced the acquisition from Wind River of Starlab, a longtime partner and provider of cybersecurity software that integrates with our common processing architecture products adding to our overall differentiation in this area. Second, we announced an agreement to divest and outsource our manufacturing operation in Switzerland, which we believe will enhance our ability to scale and increase capacity with improved efficiency as we pursue continued growth of our international operations. Please forward to slide seven. Now turning to priority three, expanding margins. As we've discussed in prior calls, to achieve our targeted adjusted EBITDA margins in the low to mid 20% range, we are focused on the following two drivers. Backlog margin expansion as we burn down lower margin existing backlog and replace with new bookings aligned with our target margin profile. And driving organic growth to realize positive operating leverage given our streamlined operations. Q3 adjusted EBITDA margin of 11.7% was in line with our expectations, up sequentially 180 basis points, 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. We expect backlog margin to continue to increase as we bring in new bookings that we believe will be both in line with our targeted margin profile and accretive to the current average margin in our backlog. Operating expenses are again down year over year and down significantly year to date as a result of prior and ongoing actions to streamline and focus our operations. Please forward to slide 8. 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, reduced networking capital, which at $453 million, is at the lowest level since Q2 of FY22, and down $207 million from peak networking capital levels in Q1 of FY24. Notably, combined free cash flow over the last four quarters is approximately $146 million and net debt is down to $322 million, the lowest level since Q1 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 net debt 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. For full year FY25, we continue to expect annual revenue growth approaching mid single digits with timing positively impact by our enhanced execution and accelerated deliveries earlier in the year. 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. We continue to expect Q4 adjusted EBITDA margins to be the highest level of the fiscal year approaching mid-teens. Finally, with respect to free cash flow, our year-to-date free cash flow of $85 million is above our previous expectations. Even with this acceleration of cash year-to-date, we expect free cash flow to be a round break-even for Q4, resulting in full-year free cash flow that is ahead of our prior expectations. In summary, given the operational improvements over the last several quarters and our recent momentum, I expect that our performance in FY25 will represent a positive step toward our target profile. And I look forward to providing commentary on expectations for FY26 in our call next quarter. With that, I'll turn it over to Dave to walk through the financial results for the quarter, and I look forward to your questions. Dave?