MRCY Q3 Deep Dive: Operational Improvements and Defense Demand Boost Growth, Margins Still in Focus

Aerospace and defense company Mercury Systems (NASDAQ:MRCY) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 10.2% year on year to $225.2 million. Its non-GAAP profit of $0.26 per share was significantly above analysts’ consensus estimates.

Is now the time to buy MRCY? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Mercury Systems delivered third quarter results that exceeded Wall Street’s expectations, with revenue and non-GAAP profit both coming in above analyst forecasts. Management attributed this outperformance to accelerated deliveries on high-priority defense programs and improved execution across manufacturing operations. CEO William Ballhaus emphasized the company’s progress in reducing net working capital and highlighted strong momentum in its backlog of customer orders. Ballhaus stated, “Our ability to accelerate deliveries on a number of our customers' high-priority programs once again contributed to strong results this quarter.”

Looking ahead, Mercury Systems expects continued progress toward margin expansion and positive free cash flow, driven by increasing automation and ongoing operational efficiencies. The company is closely monitoring potential tailwinds from rising global defense budgets and domestic initiatives like Golden Dome. Ballhaus explained, “We are very confident and believe we're well positioned to be able to capture those tailwinds, because of our broad exposure across that architecture.” Management also cautioned that the timing of these opportunities remains uncertain but reiterated a focus on building a scalable manufacturing platform to support future demand.

Key Insights from Management’s Remarks

Management attributed the positive quarterly performance to accelerated customer deliveries, operational efficiency gains, and a diverse mix of program awards, while also highlighting evolving market opportunities in defense.

• Accelerated program deliveries: Mercury Systems pulled forward roughly $20 million in revenue and $10 million in adjusted EBITDA by delivering ahead of schedule on several high-margin programs, supporting both revenue and margin outperformance in the quarter.
• Manufacturing automation and consolidation: The company expanded its automated production footprint in Phoenix, Arizona, adding over 50,000 square feet of capacity to support its Common Processing Architecture (CPA) program, a key technology for defense customers. This investment is aimed at enabling efficient scaling if demand increases.
• Backlog and bookings momentum: Mercury Systems secured $250 million in new awards, resulting in a record $1.4 billion backlog. The mix included competitive wins, follow-on production awards for electronic warfare and radar systems, and design contracts for next-generation defense platforms.
• International and domestic defense demand: Management noted growing opportunities from increased defense budgets globally, particularly in Europe under the ReArm initiative, and ongoing U.S. priorities such as the Golden Dome missile defense program. The company reported 15% growth in its direct and indirect European defense business over the past year.
• Margin expansion initiatives: The improvement in adjusted EBITDA margin was driven by converting lower-margin backlog and adding new bookings at higher target margins. Mercury also continued efforts to streamline operations and reduce net working capital, leading to year-over-year improvements in free cash flow.

Drivers of Future Performance

Mercury Systems’ outlook is fueled by ongoing operational streamlining, a robust defense market backdrop, and the potential for increased demand from global defense initiatives.

• Potential defense budget tailwinds: Management believes that increases in U.S. and European defense spending, with initiatives such as Golden Dome and ReArm Europe, could drive additional orders beyond current projections. However, the timing and allocation of these funds remain uncertain and are not yet included in guidance.
• Margin progression and backlog mix: The company expects to expand margins as it completes lower-margin legacy contracts and replaces them with higher-margin bookings. Management targets adjusted EBITDA margins in the low to mid-20% range over the next several quarters, with full realization dependent on backlog turnover and continued booking discipline.
• Operational scalability and automation: Mercury is investing in automation and flexible manufacturing capacity, particularly in Phoenix, to efficiently meet potential demand spikes. The company’s approach is to make incremental investments aligned with visibility into customer orders, minimizing risk while supporting growth.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will be watching (1) the pace at which Mercury Systems converts its backlog of lower-margin contracts into higher-margin bookings, (2) the impact of automation and added manufacturing capacity on production efficiency and margins, and (3) whether global defense spending initiatives translate into meaningful order growth. Updates on progress in European and U.S. defense programs, as well as any acceleration in customer deliveries, will also be closely tracked.

Mercury Systems currently trades at $78.59, up from $75.58 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free for active Edge members).

Stocks That Trumped Tariffs

Fresh US-China trade tensions just tanked stocks—but strong bank earnings are fueling a sharp rebound. Don’t miss the bounce.

Don’t let fear keep you from great opportunities and take a look at Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today.

StockStory is growing and hiring equity analyst and marketing roles. Are you a 0 to 1 builder passionate about the markets and AI? See the open roles here.