Mercury (MRCY) Earnings Aug 18: Bookings +74%, Cash Out

TL;DR

• Mercury Systems reports fiscal Q4 and full-year results after the close on Tuesday, August 18, with the call at 5:00pm ET. The fiscal year ended in June.
• Last quarter's bookings were a record $348 million, up 73.7%, against $236 million of revenue. Book-to-bill of 1.48, and backlog reached a record $1.6 billion.
• Free cash flow was minus $1.8 million in the same quarter, against positive $24.1 million a year earlier. The order book is growing faster than the cash conversion behind it.
• Mercury gives no formal guidance. The outlook commentary on the 5:00pm call is the entire event, which is unusual and is why the options are priced the way they are.
• The stock closed Friday at $111.12 against a 52-week range of $62.78-$128.45, on 82x forward earnings and about 6.9x trailing sales. It has no trailing GAAP profit.
• Nine analysts rate it a Buy and their average target is $103.75, about 6% below the share price. The people who like it most have targets under the last trade.
• UPDATE (August 18): the cash-conversion trigger fired, and the stock fell anyway. Revenue was $289.8 million (about a 9% beat versus the roughly $265 million Street estimate), adjusted EPS of $0.37 narrowly missed the $0.38 estimate, and free cash flow was positive, about $29 million, reversing the prior quarter's -$1.8 million and satisfying the exact condition this preview said would retire the bear case. Bookings hit a record $660 million, up 93.1% year over year, for a book-to-bill of 2.28, and backlog rose to a record over $1.9 billion. GAAP net income was positive (about $1 million) for the first time in several quarters. Despite all of that, operating margin fell to about 5% from 8.6% a year earlier, and the stock fell roughly 10-12% in after-hours trading, to around $94-100 from Friday's $111.12 close. The valuation this preview flagged as priced for perfection got the good outlook and sold it anyway on the margin line.

The Board

Every operating number set a record last quarter. The cash line went the other way.

When Does Mercury Systems Report Earnings?

After the close on Tuesday, August 18, with the call at 5:00pm ET, per Mercury's own announcement. It shares the evening with Keysight, Toll Brothers and La-Z-Boy, and it lands the day before Lyntris prices its defense-tech IPO. Anyone pricing that book will be reading this print.

Everything Went Right Except the Cash

The April quarter was, by the operating numbers, the best Mercury has had. Revenue of $236 million, up 11.5% organically. Bookings of $348 million, up 73.7%. Backlog of about $1.6 billion, up 17.9%. Adjusted EBITDA of $36 million at a 15.3% margin, up 46.2%, and adjusted EPS of $0.27 against $0.06. The detail is in Mercury's Q3 release.

Divide bookings by revenue and you get 1.48, so Mercury booked half again as much work as it shipped. On a GAAP basis it still lost $3 million, or four cents a share.

Free cash flow was minus $1.8 million, against positive $24.1 million in the same quarter a year earlier. That is a $26 million swing in the quarter where bookings grew 74%.

Those two facts are the same fact. Defence electronics work gets booked, then bought for, then built, then delivered, then invoiced, then paid. A book-to-bill of 1.48 means Mercury is funding a larger pile of work in progress out of its own balance sheet, and the cash shows up quarters later. That is a normal and even healthy pattern for a company winning share. It is also exactly how a growing defence supplier gets into trouble if the conversion slips, and it is the reason I care more about Tuesday's cash flow statement than about the backlog headline everyone will lead with.

Of the $1.6 billion backlog, management said $891 million converts to revenue within twelve months. Against trailing twelve-month revenue of $967 million, that is a year of work already sold. The visibility is genuinely good.

The Valuation Has Priced the Good Version

Here is what the market is paying for it. Market cap of $6.67 billion on trailing revenue of $966.95 million is about 6.9x sales, for a company with a trailing net loss of $14.1 million and a forward multiple around 82x. The shares are up roughly 63% over a year and sit 13% below the 52-week high.

Then the part that made me look twice. Nine analysts cover it, all averaging a Buy rating, and their mean target is $103.75. The stock closed Friday at $111.12. The people who like the company most have, on average, a price objective below where it trades. Piper Sandler's recent Overweight initiation at $126 is the outlier pulling that average up, not down.

That does not make the stock a short. Targets lag fast-moving names constantly, and Mercury has been fast-moving: the Palantir factory-automation partnership, a production order for 1,000 BuiltSECURE servers, and the SolderMask acquisition all landed in the last few months and all point the same way. It does mean there is no cushion in the valuation if Tuesday's outlook is merely fine.

The Options Angle

An implied ±16% is roughly $17.80 on Friday's $111.12. That is wide, and for once I think it is close to right rather than expensive.

The reason is structural. Mercury does not issue formal revenue or EPS guidance, so there is no published range for the market to anchor a reaction to. Every other name reporting this week gives the Street a number to be measured against; here the entire content of the event is what Bill Ballhaus says about fiscal 2027 at 5:00pm, unfiltered by a guide. Events without an anchor produce fat tails in both directions, which is what a 16% implied move is describing.

So I have no edge in the volatility. I do have a view on the shares, and it is that I am not a buyer at $111 into this print. Six point nine times sales and 82x forward earnings is a price for a company converting a record backlog into cash, and last quarter it converted a record backlog into negative free cash flow. I would want to see one clean quarter of cash conversion before paying that multiple, and if Tuesday delivers it I am happy to pay up afterwards and miss the first move. Buying a straddle to express that uncertainty at 16% is paying full price for a coin toss I have already declined.

What would change my mind quickly: positive free cash flow in the June quarter with backlog held above $1.6bn. That combination retires the only real bear argument here, and it is entirely possible, because Mercury's fiscal fourth quarter is seasonally its strongest for collections.

Trade log

#	Stance	Structure	Strikes and expiry	Cost or credit	Spot at writing	Implied move	Conviction	Breakeven
1	Pass, won	Long MRCY common stock into the print	n/a	n/a	$111.12, Aug 14 close	±16.0% (realised ~10-12%)	6/10	n/a
2	Pass, won	Long straddle	$110 strike, Aug 21 weekly	~16.0% of spot, no live chain sourced	$111.12, Aug 14 close	±16.0% (realised ~10-12%)	5/10	needs >16.0% either way

Scored: shares fell about 10-12% after hours, so row 1 (the directional pass) wins, avoiding a double-digit loss on a name with no cushion in its valuation. Row 2 also wins on the numbers, since the realised move stayed inside the 16% implied, though the judgement behind it, that 16% was a fair price rather than an edge either way, is the harder claim to take credit for since the move landed closer to the implied than a clean "fair pricing" read would suggest. The ledger is at /data/track-record.

The One-Line Read

Mercury booked 1.48 times what it shipped in Q3, and the Q4 print resolved it the good way: bookings up 93%, backlog past $1.9 billion, and free cash flow back to positive $29 million. The stock fell anyway, on margin compression the backlog does not fix, which is the valuation catching up with the story rather than the story breaking.