Mercury Systems, Inc. (MRCY) | The Buildout — AI Infrastructure
The Verdict
Mercury Systems sells the rugged, secure electronics that go inside defense platforms: RF components, embedded processing boards, and integrated subsystems. Its flagship is the Common Processing Architecture, a security-hardened compute platform that management describes as carrying a narrow security moat. The link to the AI buildout is indirect. The company reports no AI segment, no AI bookings, and no AI revenue; its one announced AI partnership is internal, applying Palantir software to its own material planning and factory operations. The clearest long-range angle is management's stated ambition to eventually supply edge-compute hardware for what it calls AI distributed across the battle space.
| Market Cap | — |
| Revenue (TTM) | $984M |
| Revenue Growth | +7.9% |
| EBITDA Margin (TTM) | 7.9% |
| Net Debt | $287M |
| Earnings Beats | 6 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- FY26 bookings of ~$1.5 billion, up 49.8% year over year, a 1.57 book-to-bill that ended the year at a record pace.
- Backlog finished FY26 above $1.9 billion, up 38.4% year over year, with a record ~$1 billion expected to convert within 12 months.
- Management guides FY27 revenue approaching $1.1 billion and adjusted EBITDA approaching $200 million, and raised the long-term target to low-double-digit organic growth, low-to-mid-20s adjusted EBITDA margin, and 50% free cash flow conversion.
- Domestic revenue was 85.8% of FY26 revenue and grew 13% organically, the year's main growth driver.
- The company's reported earnings have come in ahead of analyst estimates in 6 of 7 tracked quarters.
What We’re Watching
- Backlog conversion: Q4 organic revenue growth was 6.1% against 38.4% backlog growth, and management explicitly excludes conversion improvements from its outlook.
- Sole-source supply: the 10-K discloses single-source or limited-source dependence on custom ASICs, SRAM, FPGAs, and microprocessors, with suppliers able to terminate without cause on 30 days' notice.
- International revenue fell ~15% in FY26 on a contract-manufacturer ramp; management expects it to unwind over the next couple of quarters.
- Customer mix is concentrated in a few primes: RTX was 17% of Q3 FY26 revenue and Lockheed Martin 11%, while the U.S. Navy dropped below 10% from 14% in the prior-year quarter.
The demand side of the thesis is strengthening; the cash side is not yet. Record bookings, record backlog, and a raised long-term target profile point to a genuine move from development-heavy programs toward production, and management has kept a conservative frame by excluding tailwinds, Palantir, automation, and conversion gains from guidance. Against that, the Q4 record quarter was simultaneously a year-over-year decline in gross margin, adjusted EBITDA, and adjusted EPS, and FY27 free cash flow conversion is guided below the company's own target with a larger-than-normal first-quarter outflow. The open question is whether record backlog actually converts into revenue, margin, and cash at the pace management has guided toward.
Earnings Beat
Q4 FY26 revenue was $289.8 million, up 6.1% organically, and gross margin was 27.3%. EBITDA was $34.5 million at an 11.9% margin on an operating-income-plus-D&A basis; on the company's adjusted basis, Q4 adjusted EBITDA was $49 million at 16.7%. The standout was bookings: roughly $660 million, up 93.1% year over year, a 2.28 book-to-bill.
| Metric | Q4 FY2026 | Q3 FY2026 | Q4 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $290M | $236M | $273M | +6.1% |
| Gross margin | 27.3% | 25.2% | 31.0% | -370bps |
| EBITDA | $34M | $25M | $44M | −20.7% |
| EPS | $0.01 | $-0.05 | $0.28 | −95.3% |
| Book-to-bill | 2.28 | 1.48 | n/a | — |
| Backlog | >$1.9B | ~$1.6B | n/a | +38.4% YoY |
Record bookings of $660 million up 93.1% year over year and nearly double our previous record bookings quarter.— William L. (Bill) Ballhaus, Chairman and CEO, 2026-08-18
Management tone: Management leaned conservative and specific. On the Q4 call they repeatedly said few of the tailwinds they discuss are reflected in the outlook, and they disclosed negatives directly: international revenue down about 15%, FY27 free cash flow conversion below the company's own target, and a year-over-year decline in Q4 margin and adjusted EPS. They declined to size the CPA opportunity or any product margin, and did not name the largest single award or confirm whether any program is 10% of backlog. On 2026-09-16 the company extended CEO Bill Ballhaus's employment contract through August 15, 2030 and reaffirmed prior guidance in the same release.
Management Guidance
For FY27, management guides revenue approaching $1.1 billion with growth approaching double digits, adjusted EBITDA margin in the high teens and adjusted EBITDA approaching $200 million, free cash flow conversion approaching 35% against a 50% target, and capex flat year over year. Q1 is expected to be the lowest revenue quarter, up high single digits year over year, with adjusted EBITDA margin in line with Q1 FY26 and a larger-than-normal cash outflow; margin rises through the year and free cash flow is second-half weighted. The outlook explicitly excludes potential tailwinds, Palantir benefits, automation, and backlog-conversion improvements.
Trajectory
Revenue built through FY26, from $225.2 million in Q1 to $289.8 million in Q4, and EBITDA margin on an operating-income-plus-D&A basis rose from 4.6% in Q1 to 11.9% in Q4. Over the trailing twelve months revenue was $983.7 million, EBITDA $77.7 million (7.9%), and free cash flow $65.0 million. The orders moved faster than the income statement: FY26 bookings of ~$1.5 billion at a 1.57 book-to-bill, with Q4 bookings of ~$660 million at 2.28. Domestic revenue was 85.8% of FY26 sales and grew 13% organically while international fell ~15% on a contract-manufacturer ramp.
The Model
The model projects FY+1 revenue of $1,110 million and EBITDA of $158 million, a 14.2% margin, then FY+2 revenue of $1,245 million and EBITDA of $205 million, a 16.5% margin (EBITDA here is operating income plus D&A as reported). The near-term figure sits close to management's own FY27 guide of revenue approaching $1.1 billion, anchored on backlog above $1.9 billion. The FY+2 step-up depends on that backlog converting at better margins as legacy lower-margin programs burn off and fixed costs spread over higher volume.
| Metric | FY2026 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $984M | $1.1B | $1.2B |
| YoY Growth | — | +12.8% | +12.2% |
| EBITDA | $78M | $158M | $205M |
| EBITDA Margin | 7.9% | 14.2% | 16.5% |
Projections are the median of 5 independent model runs. The model’s revenue sits 6.2% above analyst consensus.
For FY27, management guides revenue approaching $1.1 billion with growth approaching double digits, adjusted EBITDA margin in the high teens and adjusted EBITDA approaching $200 million, free cash flow conversion approaching 35% against a 50% target, and capex flat year over year. Q1 is expected to be the lowest revenue quarter, up high single digits year over year, with adjusted EBITDA margin in line with Q1 FY26 and a larger-than-normal cash outflow; margin rises through the year and free cash flow is second-half weighted. The outlook explicitly excludes potential tailwinds, Palantir benefits, automation, and backlog-conversion improvements.
What Could Go Right — and Wrong
- Multiyear munitions and missile-defense frameworks convert from pipeline into firm bookings; management says these potential tailwinds may have a positive impact on its demand environment if funding is allocated to customers' program priorities.
- Backlog conversion accelerates, narrowing the gap between 38.4% backlog growth and 6.1% Q4 organic revenue growth.
- Gross margin reaches the target profile by the end of FY27 as legacy low-margin backlog is worked off, which management says would end the margin-drag discussion.
- FY28 free cash flow conversion returns toward the 50% target, confirming the FY27 step-down was investment rather than a structural cash leak.
- Smaller-form-factor CPA wins arrive on named platforms — management calls that opportunity a whole new additional TAM.
- Backlog conversion stalls and revenue growth reverts toward mid-single digits while inventory and purchase commitments keep building.
- Memory or component cost inflation is not recoverable in price, holding gross margin below the target profile.
- A sole-source component shortfall delays the CPA ramp — the 10-K notes single-source availability for ASICs, SRAM, FPGAs, and microprocessors.
- An RTX or Lockheed program is lost or re-phased; RTX was 17% of Q3 FY26 revenue.
- International revenue fails to unwind beyond the stated couple of quarters, turning a delivery slowdown into permanent share loss.
Looking Ahead
The next 12 months are a sequence of execution tests. Q1 FY27 has to deliver revenue up high single digits with a larger-than-normal cash outflow, then management expects clarity on multiyear munitions and missile-defense frameworks in the first and second quarters. Margin is guided to rise through the year, free cash flow is second-half weighted, and management says it expects to be operating in line with its target margin profile by the end of FY27. Palantir and automation benefits are excluded from guidance, so any measurable contribution would land as upside.
- Q1 FY27Q1 FY27 results — Tests revenue up high single digits and a larger-than-normal cash outflow.
- Q1–Q2 FY27Multiyear framework clarity — Munitions and missile-defense agreements move from pipeline to bookings.
- FY27Margin progression — Gross margin rises through the year toward the target profile.
- FY27 second halfFree cash flow inflection — Management expects second-half free cash flow above the first half.
- FY27–FY28Palantir and automation — Early effort; benefits excluded from guidance, updates as results appear.
- FY28FY28 reference points — Low-double-digit growth, low-end target margin, FCF toward target. Not guidance.
Financials
Annual Summary
| Metric | FY2025 | FY2026 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $912M | $984M | $984M | +7.9% |
| Gross Margin | 27.6% | 26.6% | 26.6% | 105bps |
| EBITDA | $62M | $78M | $78M | +24.5% |
| EBITDA Margin | 6.8% | 7.9% | 7.9% | +106bps |
| Net Income | −$38M | −$30M | −$30M | +21.6% |
| Free Cash Flow | $119M | $65M | $65M | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)26.6%
- EBITDA Margin (TTM)7.9%
- Net Margin (TTM)-3.0%
- ROIC0.2%
- FCF Conversion83.7%
- SBC / Revenue3.0%
The Company
Mercury Systems sells mission-critical processing hardware into aerospace and defense platforms. The products climb a ladder: RF and microwave components, then modules and subassemblies such as embedded processing boards and rugged servers, then integrated subsystems enabled with software. The flagship is the Common Processing Architecture, a security-hardened compute platform whose RTBX06 BuiltSECURE servers management says make Mercury the only provider of CPA technology in the security apparatus that includes it. Customers are predominantly U.S. defense primes and the U.S. government.
The company reports as one operating and reportable segment, so no per-segment margin tables exist; the disclosed cuts are by platform (Airborne, Land, Naval, Space, Other), end application, end user, and product grouping. Internally there are four business units: Signal Technologies, Processing Technologies, Integrated Processing Solutions, and International. Mercury is headquartered in Andover, Massachusetts, with over 20 locations worldwide, DMEA-certified trusted design in Andover, IPC1791 and DMEA-certified trusted manufacturing in Phoenix, and Advanced Manufacturing Centers including Hudson NH, West Caldwell NJ, Oxnard CA, Huntsville AL, Phoenix AZ, and Torrance CA.
Business Segments
Competitive Landscape
Mercury's competition comes from two directions. The 10-K states plainly that the company competes with in-house design teams at its customers, which caps how much of a platform's content Mercury can defend. Against peer suppliers, management claims a narrow, security-driven position around CPA — on the Q4 call the CEO said Mercury has been the only provider of the CPA technology in the security apparatus that includes it, and on the earlier call pointed to certain security standards the company is able to meet. TTM Technologies, a verified competitor, lists Mercury among its aerospace and defense principal competitors in its own filing and is expanding A&D capacity while chasing overlapping programs.
- TTM TechnologiesA verified competitor that names Mercury among its aerospace and defense principal competitors in its own filing. Its A&D book-to-bill of 1.3 and $1.7B backlog describe a strong demand environment alongside an expanding peer.
- In-house design teams at customersThe 10-K states Mercury competes with in-house design teams at its customers.
- Named in the supply-chain wiring file as a competitor; not discussed in filings.
- BAE SystemsNamed in the supply-chain wiring file as a competitor; not discussed in filings.
- Named in the supply-chain wiring file as a competitor; not discussed in filings.
Supply Chain
Mercury sits between component suppliers and defense primes. Its embedded processing uses NVIDIA GPUs, AMD FPGAs, Altera server-class products, and Intel server-class processors — placing it downstream of the same memory and advanced-packaging capacity the AI data-center buildout is consuming. No neighbor in the source material mentions Mercury by name.
More on MRCY: Earnings recap