On August 18, Mercury Systems (NASDAQ:MRCY) reported fiscal fourth-quarter and full-year results that came in well ahead of its own plan. Bookings nearly doubled, backlog swelled past $1.9 billion, and management raised its long-term growth target just months after investors had gotten used to a slower, steadier Mercury. The numbers make a strong case that the company’s multiyear turnaround is finally converting into real demand, though the bottom line tells a more complicated story.
Backlog Is Doing The Heavy Lifting
The headline number is bookings. Mercury pulled in $660 million in the fourth quarter, up 93.1% year over year, pushing full-year bookings to $1.5 billion, a 49.8% increase, with a book-to-bill ratio of 1.57. That flowed straight into backlog, which reached over $1.9 billion as of July 3, 2026, up 38.4% from a year earlier. Next 12-month backlog stands at $1 billion, and management says that figure carries unusually high revenue coverage because several large orders bundled multiyear quantities that would normally show up as bookings later.
Margins moved in the right direction too. Full-year gross margin rose 70 basis points to 28.6%, and adjusted EBITDA margin climbed 217 basis points to 15.3%, with the fourth quarter hitting 16.7%, the best mark of the year. Operating expenses fell 150 basis points as a share of revenue as headcount cuts and efficiency work took hold. Domestic revenue, 85.8% of the total, grew 13% organically, and overtime revenue jumped 23.6% year over year to its highest level in 15 quarters, which management pointed to as evidence that its supply chain is finally catching up with demand.
Mercury also used the year to clean up its balance sheet, paying down $150 million on its revolver and cutting net debt 19.5% to $227 million. It struck a new agreement with Palantir (NASDAQ:PLTR) to apply AI software to material planning and factory operations, aimed at converting backlog faster, with none of the expected benefit yet baked into fiscal 2027 guidance.
The Fine Print Behind The Headline
The profit picture did not keep pace with the order book. Fourth quarter adjusted earnings per share fell to $0.37 from $0.47 a year earlier, and GAAP net income shrank to just $1 million, or $0.01 a share, versus $16 million a year ago. For the full fiscal year, Mercury posted a GAAP net loss of $30 million, compared with a loss of just $380,000 in fiscal 2025. Fourth quarter gross margin actually slipped to 30.6% from 31.0% on higher cost estimate adjustments.
Cash generation also moved the wrong way. Free cash flow for the year came in at $68 million, down from $119 million the prior year. Management is now guiding to free cash flow conversion near 35% in fiscal 2027, well below its 50% long-term target, as it spends on inventory and automation. International revenue fell about 15% year over year. CEO William Ballhaus said the company has “seen a slowdown in deliveries” while ramping up a new contract manufacturer overseas.
What The Market Is Pricing In
Hedge fund ownership ticked up slightly, with 33 funds holding a position in the most recent quarter versus 32 the quarter before, a modest sign of accumulating rather than fading interest. Short sellers have taken a real but not extreme position, with short interest at 9.60% of the float. The stock trades at a forward price-to-earnings ratio of 52.91 as of August 26, a multiple that assumes the backlog conversion and margin expansion management has promised actually shows up in earnings over the next year.
Two Timelines, One Stock
Mercury’s order book tells one story, and its income statement tells another, with fiscal 2027 set up as the year those two versions of the company are supposed to meet. The bull case rests on backlog converting into revenue at the margins management has promised, with the Palantir partnership and automation spending as unproven accelerants. For the growth story to hold, that record backlog needs to become record earnings, not just record orders.
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