Release Date: August 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Mercury Systems Inc (MRCY, Financial) reported Q4 bookings of $284 million and $1.02 billion for the full year, in line with their guidance.
- Q4 adjusted EBITDA increased by 42% year over year to $31 million.
- Q4 free cash flow was $61 million, marking the highest quarterly free cash flow in the company's history.
- The company ended the fourth quarter with $181 million in cash on hand after paying down $25 million of debt.
- Mercury Systems Inc (MRCY) has a record backlog of $1.3 billion, up 16% year over year.
Negative Points
- Q4 revenue was $249 million, down 2% compared to the prior year.
- GAAP net loss for the fourth quarter was $10.8 million, compared to a net loss of $8.2 million in the prior year.
- Operating expenses increased by approximately $5 million year over year, driven by higher SG&A expenses and restructuring charges.
- Gross margin for the fiscal year 2024 decreased to 23.5% from 32.5% in the prior year.
- Fiscal year 2024 revenues were $835 million, down 14% compared to the prior year.
Q & A Highlights
Q: Can you provide more details about the reliability testing and production ramp-up for the CPA area and the four challenged programs?
A: David Farnsworth, Chief Financial Officer: We've implemented corrective actions and ramped up the production line with in-process testing. We plan to reach full rate production in the first half of the year. We have the necessary capital equipment and trained personnel in place. We expect to work through the backlog and unbilled balances as we ramp up production.
Q: What are the key factors that could impact your results positively or negatively in FY 2025?
A: David Farnsworth, Chief Financial Officer: Key factors include the completion of development programs, the ramp-up of our common processing architecture, and the transition of development programs to production. The speed of these transitions will dictate how quickly we move towards our target profile of above-industry growth rates, EBITDA margins in the low to mid-20s, and free cash flow conversion of 50%.
Q: When do you expect to achieve a 20/80 split between development and production programs?
A: David Farnsworth, Chief Financial Officer: We are seeing about 80% of our firm fixed price bookings as production bookings, which is a good leading indicator. Over the next 12 months, we expect to transition our backlog margin to higher levels as we complete low-margin development programs and replace them with higher-margin bookings.
Q: Are the CPA-related programs expected to be margin dilutive?
A: David Farnsworth, Chief Financial Officer: No, there is nothing about the corrective actions that would affect gross margins negatively. In fact, given the strong demand and our unique capabilities, these programs could be margin additive.
Q: Can you elaborate on the expected EBITDA margin trends for FY 2025?
A: William Ballhaus, President and CEO: We expect to start the first half of FY 2025 with high single-digit EBITDA margins, improving in the second half due to higher volume and transitioning backlog margins. This improvement will be driven by positive operating leverage and the completion of low-margin development efforts.
Q: What metrics or KPIs are you focusing on for FY 2025?
A: David Farnsworth, Chief Financial Officer: We are focused on above-industry growth rates, EBITDA margins in the low to mid-20s, and free cash flow conversion of 50%. We also aim to continue reducing high working capital and transitioning development programs to production.
Q: Can you provide more details on the LTM program and its impact on bookings?
A: William Ballhaus, President and CEO: The LTM program is not one of our challenged programs. It represents a successful transition from development to production, and we expect it to drive organic growth. We are executing this program with strong program management and disciplined material ordering.
Q: Are you losing market share given the decline in bookings over the past two years?
A: William Ballhaus, President and CEO: We have seen some delays in bookings due to development program challenges, but not losses. Our pipeline and conversion rates do not indicate competitive losses. We feel good about our book-to-bill ratio and expect follow-on orders as we ramp up production.
Q: When do you expect the business to achieve positive GAAP net income on a full-year basis?
A: David Farnsworth, Chief Financial Officer: We expect to see a step-up in our financial metrics in FY 2025, including top-line growth and EBITDA margins. However, achieving positive GAAP net income will depend on the successful execution of our development programs and the transition to production.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
