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Mercury Systems reported a robust Q3 FY26, featuring record bookings of $348.3 million and a 1.48 book-to-bill ratio, pushing total backlog to nearly $1.6 billion. Revenue grew 11.5% organically to $235.8 million, while adjusted EBITDA rose 46% year-over-year. The company is successfully transitioning from high-mix development programs to high-volume production, supported by a 50,000-square-foot expansion of its automated manufacturing footprint in Phoenix. Financial highlights include a significant reduction in net working capital, down $225 million from its 2024 peak, which enabled a $150 million revolver repayment. Management raised full-year FY26 guidance, now projecting mid-single-digit revenue growth and mid-teen EBITDA margins. A strategic shift in supply chain management—staging materials earlier rather than relying on just-in-time delivery—has improved revenue linearity and backlog conversion speed. Analysts questioned the company on margin sustainability and unbilled receivables, with management emphasizing that domestic revenue growth (up 17%) and the Common Processing Architecture (CPA) momentum are key drivers. Mercury sees major potential tailwinds from global defense spending and the Golden Dome initiative, positioning the firm for continued organic growth and margin expansion toward its long-term low-to-mid 20% target.

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Full Earnings Call Transcript — Q3 • 2026-05-05

Operator: Good day, everyone, and welcome to the Mercury Systems, Inc. Third Quarter Fiscal 2026 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the company's Vice President of Investor Relations, Tyler Hojo. Please go ahead, Mr. Hojo.
Tyler Hojo: Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, William L. Ballhaus, and our Executive Vice President and CFO, David E. Farnsworth. If you have not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that we will be referencing is posted on the Relations section of the website under Events and Presentations. Turning to slide two in the presentation, I would like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury Systems, Inc.'s financial outlook, future plans, objectives, business prospects, and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements on slide two in the earnings press release, and the risk factors included in Mercury Systems, Inc.'s SEC filings. I would also like to mention that, in addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, during our call we will also discuss several non-GAAP financial measures, specifically adjusted income, adjusted earnings per share, adjusted EBITDA, and free cash flow. A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation and in the earnings press release. I will now turn the call over to Mercury Systems, Inc.'s Chairman and CEO, William L. Ballhaus. Please turn to slide three.
William L. Ballhaus: Thanks, Tyler. Good afternoon. Thank you for joining our Q3 FY '26 earnings call. We delivered Q3 results that were ahead of our expectations, with significant year-over-year growth in backlog, revenue, and adjusted EBITDA. Strong demand signals and solid execution contributed to better-than-expected organic growth and margin expansion this quarter. Today, I will cover three topics. First, some introductory comments on our business and results. Second, an update on our four priorities: performance excellence, building a thriving growth engine, expanding margins, and driving free cash flow. And third, performance expectations for the balance of FY '26 and longer term. Then I will turn it over to Dave, who will walk through our financial results in more detail. Before jumping in, I would like to thank our customers for their collaborative partnership and the trust they put in Mercury Systems, Inc. to support their most critical programs. I would also like to thank our Mercury team for their dedication and commitment to delivering mission-critical processing at the edge. Please turn to slide four. Our Q3 results reflected robust organic growth and margin expansion. Record bookings of $348.3 million and a 1.48 book-to-bill resulted in a record backlog approaching $1.6 billion; revenue of $235.8 million, up 11.5% organically year over year; adjusted EBITDA of $36.1 million and adjusted EBITDA margin of 15.3%, up 46% and 360 basis points, respectively, year over year; and free cash outflow of $1.8 million, meaningfully outperforming our expectations. We ended Q3 with $332 million of cash on hand. These results reflect ongoing focus on our four priority areas, with highlights that include solid execution across our broad portfolio of production and development programs; backlog growth of 18% year over year and a sequential increase of twelve-month backlog of 10.3%; a streamlined operating structure enabling increased positive operating leverage and significant margin expansion; and continued progress on free cash flow drivers with net working capital down 4.1% year over year. Please turn to slide five. Starting with our four priorities and priority one, performance excellence, where we are focused on sound execution on development programs, accelerating deliveries for our customers broadly across our portfolio, and ramping the rate on numerous programs transitioning to higher-volume production. We accelerated progress across a number of programs and generated approximately $25 million of revenue, $15 million of adjusted EBITDA, and $25 million of cash all primarily planned for the fourth quarter. This acceleration, enabled by our efforts to align our supply base to yield faster backlog conversion, contributed to top-line growth, adjusted EBITDA margin, and free cash flow that exceeded our expectations for Q3 and will also factor into our outlook for Q4, which I will speak to shortly. Our strong bookings and record backlog combined with our ability to more rapidly convert backlog is translating into organic growth exceeding our expectations coming into FY '26. Notably, our domestic revenue, representing 88% of our Q3 revenue, generated 17% year-over-year growth. Beyond this solid performance, we progressed on a number of actions in the quarter to increase capacity, add automation, and consolidate subscale sites in our ongoing efforts to drive scalability and efficiency. Notably, we added capacity to our highly automated manufacturing footprint in Phoenix, Arizona, and initiated operations within our additional 50,000 square feet of factory space to support ramped production for our common processing architecture programs and to allow for efficient scaling. In the quarter, we also completed the acquisition of critical manufacturing process technology provider integral to a number of our key ramping programs. These are among a number of actions we have taken, along with prior investments across a number of critical technology developments that are driving our ability to accelerate delivery of vital capabilities to our warfighters and our allies. Please turn to slide six. Moving on to priority two, driving organic growth. We believe that our near-term organic growth will be driven by increased volume on existing production programs and the ongoing transition of a number of development programs to production. Additionally, we expect possible upside tied to potential tailwind from customer-driven acceleration and increased quantities across a broad set of production programs in our portfolio. Lastly, we are excited about new development programs and the potential of the production volume associated with those wins. In Q3, we delivered a record quarter with $348.3 million of bookings resulting in a book-to-bill of 1.48 and a record backlog approaching $1.6 billion. Our trailing twelve-month bookings are a record $1.23 billion. Q3 bookings were driven largely by follow-on production orders reflecting strong customer demand across core franchise programs. This bookings mix reflects the transitioning of our business toward higher-rate production and we believe does not meaningfully capture the potential incremental tailwinds we see in the market. The largest bookings in the quarter were across several missiles, C4I, and space programs. In addition, the quarter featured the strongest bookings of the fiscal year for solutions that leverage our common processing architecture. Finally, we secured a follow-on development award on a strategic program that has the potential to proliferate across multiple platforms. Beyond our backlog growth, we continue to see the potential for higher demand on multiple programs across our portfolio, driven by increased defense budgets globally and domestic priorities like Golden Dome. I remain optimistic that these potential market tailwinds may have a positive impact on our demand environment if funding is allocated across certain program priorities to our customers over the next several quarters and beyond. Please turn to slide seven. Now turning to priority three, expanding margins. In our efforts to progress toward our targeted adjusted EBITDA margins in the low- to mid-20% range, we are focused on the following drivers: backlog margin expansion as we convert lower-margin backlog and add new bookings aligned with our target margin profile; ongoing initiatives to further simplify, automate, and optimize our operations; and driving organic growth to increase positive operating leverage. Q3 adjusted EBITDA margin of 15.3% was ahead of our expectations and up 360 basis points year over year. Gross margin of 29.3% was up 230 basis points year over year, consistent with our expectation that average backlog margin will continue to increase as we convert legacy lower-margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. Operating expenses are down year over year, both on an absolute basis and as a percent of sales, reflecting our focus on continuously driving cost structure efficiencies to enable significant positive operating leverage as we accelerate organic growth. Please forward to slide eight. Finally, turning to priority four, improved free cash flow. We continue to make progress on the drivers of free cash flow, and in particular, reducing net working capital, which, at approximately $4.344 billion, is down $18.7 million year over year. Net debt was $259.7 million at the end of Q3. We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning, and supply chain management will continue to yield a strong balance sheet that provides sufficient flexibility for us to pursue and capture potential market tailwinds. Please turn to slide nine. Looking ahead, I am very optimistic about our team's performance, strategic positioning, the market backdrop, and our expectation to deliver results in line with our target profile of above-market top-line growth, adjusted EBITDA margins in the low- to mid-20% range, and free cash flow conversion of 50%. We believe our strong year-to-date results show meaningful progress toward this target profile, with an aggregate 1.3 book-to-bill, 9% top-line growth, 15% adjusted EBITDA margins, 400 basis points of EBITDA margin expansion year over year, and free cash flow of $39.5 million. Coming out of Q3, we are raising our expectations for FY '26. We believe our efforts to stage material earlier have improved revenue linearity and increased forecast visibility, and that progress is now reflected in our updated expectations for FY '26. As a result, our outlook incorporates backlog conversion that historically may have materialized in accelerations and results above forecast. Our Q4 bookings have the potential to be the strongest of the year, based on a pipeline of opportunities that is more robust than our Q3 pipeline, which we believe could be an indicator of increased top-line growth and further margin expansion beyond FY 2026. We now expect annual revenue growth for FY '26 approaching mid single digits, up from low single digits. We expect full-year adjusted EBITDA margin of mid teens, up from approaching mid teens. Finally, with respect to free cash flow, we expect free cash flow to be positive for Q4. In summary, with our positive momentum year to date, and coming out of a very solid Q3, I expect FY '26 performance to deliver a significant step toward our target profile. Additionally, I am gaining optimism regarding the potential tailwinds associated with increased global defense budgets and domestic priorities like Golden Dome to materialize and drive upside bookings to our plan over time. With that, I will turn it over to Dave to walk through the financial results for the quarter, and I look forward to your questions. Dave?
David E. Farnsworth: Thank you, Bill. Our third quarter results reflect continued solid progress toward our goal of delivering organic growth and expanding margins. We still have work to do to reach our targeted profile, but we are encouraged by the progress we have made and expect to continue this momentum going forward. With that, please turn to slide 10, which details our third quarter results. Our bookings for the quarter were approximately $348 million, with a book-to-bill of 1.48. A record backlog of nearly $1.6 billion is up $240 million, or 17.9%, year over year. Revenues for the third quarter were nearly $236 million, up approximately $24 million, or 11.5% organically, compared to the prior year. During the third quarter, we were again able to accelerate progress on a number of customers' high-priority programs worth approximately $25 million of revenue primarily planned for FY '26. Gross margin for the third quarter increased approximately 230 basis points to 29.3% as compared to the same quarter last year. The gross margin increase during the third quarter was primarily driven by lower net EAC change impacts of nearly $2 million and lower net manufacturing adjustments of approximately $4 million. These increases were partially offset by higher inventory reserves of approximately $3 million. As Bill previously noted, we expect to see an improvement in our gross margin performance over time as the average margin in our backlog improves and through our continued focus to simplify, automate, and optimize our operations. We expect average backlog margin to continue to increase as we convert lower-margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. Operating expenses decreased approximately $11 million, or 14.3%, year over year. The decrease in operating expenses was driven primarily by lower restructuring and other charges, selling, general and administrative expenses, and research and development costs of approximately $5 million, $4 million, and $1 million, respectively. These decreases reflect the efficiency improvements and headcount actions we have previously discussed to align our team composition with our increased production mix, driving improved operating leverage. GAAP net loss and loss per share in the third quarter were approximately $3 million and $0.04, respectively, as compared to GAAP net loss and loss per share of approximately $19 million and $0.33, respectively, in the same quarter last year. Adjusted EBITDA for the third quarter was approximately $36 million, up $11 million, or 46.2%, as compared to the same quarter last year. The increase was partially driven by enhanced execution and improved operating leverage. Adjusted earnings per share was $0.27 as compared to $0.06 in the prior year. The year-over-year increase was primarily related to our improved execution and increased operating leverage in the current period as compared to the prior year. Free cash flow for the third quarter was an outflow of approximately $2 million as compared to an inflow of $24 million in the prior year. As we noted last quarter, we did expect to see a free cash outflow in the third quarter; however, we were able to successfully mitigate a large portion of that outflow through improved collections on billed receivables. Slide 11 presents Mercury Systems, Inc.'s balance sheet for the last five quarters. We ended the third quarter with cash and cash equivalents of $332 million, which represents an increase of approximately $62 million, or 23%, from the same period in the prior year. This increase was primarily driven by the last twelve months' free cash flow of approximately $73 million, which was partially offset by $15 million of shares repurchased and retired from our share repurchase program earlier this fiscal year. Billed and unbilled receivables decreased sequentially by approximately $10 million and $4 million, respectively. We continue to expect to allocate factory in the fourth quarter to programs with unbilled receivable balances, which will help drive free cash flow with minimal impact to revenue. Inventory increased sequentially by approximately $12 million. The increase was driven primarily by work in process as we bring product to its final state in support of our increased proportion of point-in-time revenue on many of the company's production programs. Prepaid expenses and other current assets decreased sequentially by approximately $10 million primarily due to insurance proceeds and normal operating expenses. Accounts payable decreased sequentially by approximately $2 million, driven primarily by the timing of payments to our suppliers. Accrued expenses decreased approximately $3 million sequentially, primarily due to the payments of a legal settlement and restructuring activities we announced earlier this fiscal year. Accrued compensation increased approximately $2 million sequentially, primarily due to our incentive compensation plans. The amount due to our factoring facility decreased sequentially by approximately $18 million, primarily due to the timing of payments from our customers due back to our counterparty. Deferred revenues decreased sequentially by approximately $11 million, primarily driven by execution across a number of programs during the period. Working capital decreased approximately $19 million year over year, or 4.1%. Our continued working capital improvement year over year, which is evidenced by our strong balance sheet position, has enabled us to make a $150 million payment against our revolver during the fourth quarter. This continues to demonstrate the progress we have made in reversing the multiyear trend of growth in working capital, resulting in a reduction of approximately $225 million, or 34%, from the peak net working capital in Q1 fiscal 2024. Our balance sheet provides sufficient flexibility for us to pursue and capture potential market tailwinds. Turning to cash flow on slide 12. Free cash flow for the third quarter was a slight outflow of approximately $2 million as compared to an inflow of $24 million in the prior year. We continue to expect free cash flow to be positive for the year, with positive cash flow expected in the fourth quarter, as Bill previously noted. We believe our continuous improvement in program execution, hardware deliveries, just-in-time material, and appropriately timed payment terms will lead to continued reduction in working capital. In closing, we are pleased with the performance in the third quarter and the higher level of predictability in the business. With that, I will now turn the call back over to Bill.
William L. Ballhaus: Thanks, Dave. With that, operator, please proceed with the Q&A.
Operator: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, please press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Kenneth George Herbert. Your line is now open.
Kenneth George Herbert: Good afternoon, Bill and Dave. Really nice results. Bill, maybe just to start on implied margins in the fourth quarter. Seasonally, you typically have a nice step up into the fourth quarter. The revised outlook for the full year implies more modest margin expansion into the fourth quarter. Maybe you can just talk about some of the puts and takes into the fourth quarter and then, I guess more importantly, not to get too far ahead, but how much of the move towards the longer-term target up into the low 20s could we expect to see in fiscal '27?
David E. Farnsworth: Hey, Ken. If it is okay, I will start, and then Bill can jump in. As far as the sequential growth in margin, we have seen that in the past, and it is accompanying a real significant change in the linearity of our business. As you recall, in the fourth quarter, we have typically seen a higher level of revenue, and the mix has been a bit different. One of the things we have been able to do this year is start to flatten out that linearity a little bit. So a stronger Q3 and with stronger margins accompanying Q3 as well. Where in the past we have seen a step up of potentially a couple hundred basis points, it was from a much lower starting point normally. We do not expect to see that rate of a jump up in the fourth quarter—more of a gradual trend—but we feel good about the total year. And as Bill said, mid teens around the margin for the year. We do feel we are headed in absolutely the right direction and in keeping with our expectation of getting towards our target margins.
William L. Ballhaus: What I will add is what Dave highlighted just reflects this smooth transition of the business from this high mix and concentration of development programs a couple of years ago, to completion of those programs, transition into low-rate production, and then increased levels of production. What we have been expecting to see as we have evolved was a combination of increasing top-line growth and then further acceleration of the bottom line. If you adjust for some of what we pulled forward from last year into Q4, what that has translated into is a relatively smooth progression to mid single-digit top-line growth last year and now to high single-digit top-line growth, with nice margin expansion on the bottom line, and some recent indicators of that continuing as we move forward. A couple of things that I would point to would be the growth in our domestic business in Q3, which was up 17% year over year, and then in the quarter, a really nice step up in our next-twelve-months backlog, up 10% from Q2 to Q3. So more than anything, Ken, I think Dave's point around linearity is that we are just seeing a nice smooth progression of the business.
Kenneth George Herbert: That is great. Appreciate that, Bill. Maybe for either Dave or Bill, as we think about the strong bookings in the quarter—you called out missiles, C4I, and some space programs—are there any particular programs within those broader buckets you are comfortable calling out or you would specifically highlight as significant sources of bookings?
William L. Ballhaus: One of the real strengths of our business is the diversification across our portfolio—no real concentration. No one program makes up more than 10%. The strong bookings really just reflect strong demand across our portfolio in areas like space, C4I, and missile defense, and we think that is a real strong attribute of our business. No single program, no real lumpiness in the bookings—just a strong indication of demand across our broad portfolio. It really is, as we have been talking about—
David E. Farnsworth: As we look, there is not one area that we would say is an area you would not focus too much energy on because it is either declining or flat. All the areas from a bookings standpoint are seeing solid activity, and it is in keeping with what the market is doing. To a large degree, these are the production efforts we have been talking about, and this is gearing up more production on those same programs that we have been working.
William L. Ballhaus: It really reflects, again, that transition from a heavy concentration of development to the follow-on production, with a nice progression in the quarter.
Operator: Thank you for your question. Your next question comes from the line of Peter John Skibitski. Your line is now open.
Peter John Skibitski: The book-to-bill, which is really strong this quarter, and it seemed like just the tone of your commentary was more positive in terms of the sales outlook. You have raised the guide here to the mid single-digit range. Even looking at that guide, the fourth quarter revenue looks like it would imply to be down year over year. I just wanted to know if there is continued conservatism there in the guide or if there is just a large percentage of unbilled receivable-type work in the fourth quarter relative to the third quarter. Or maybe something else?
William L. Ballhaus: One way that you could think about it is, aside from the $30 million that we accelerated from FY '26 into Q4 of last year, the year-over-year growth comparison in top-line growth looks pretty consistent with what Q1, Q2, and Q3 look like. Again, it more reflects a steady progression of our business to mid single digits last year and then high single digits this year, with some real positive indicators again based on the book-to-bill, the continuing growth of our backlog—which we expect to continue to grow—and then, in particular, the portion of our backlog that we expect to convert over the next twelve months.
Peter John Skibitski: And then just on the unbilled receivables, they were down only modestly this quarter. What is the right way to think about that? Does that mean some of these cycles are just going to take a lot longer? I am a little confused as to why we did not see a bigger step down in the receivables.
David E. Farnsworth: Some of what is reflected in there and in our inventories is a bit of the up cycle we are seeing in terms of production coming in. There is always a bit of a timing phenomenon. There was a much more significant decline, but there were things added in as we were ramping up on new activities. Nothing more than the timing of things; I would not read anything else into it. We are still focused on burning down some of our older unbilled balances. But as we ramp up revenue, there will be new unbilled balances—certainly better than the terms were in the past—but there will be some from a timing standpoint. Nothing different than what we have been saying. We are still focused on working through the older balances and getting them cleared from our books, so we have the capacity to do all the new work that we see.
William L. Ballhaus: There are definitely more dynamics under the hood than you would see if you just looked at the quarter-to-quarter number. And then, Pete, the other thing that I would point out is close to 12% growth year over year and the net working capital coming down year over year despite that growth, which reflects the progress that we are continuing to make and the increased efficiency of our net working capital.
Operator: Thank you for your question. Your next question comes from the line of Austin Moeller from Canaccord Genuity. Austin, your line is now open.
Austin Moeller: Hi. Good afternoon. Are you looking at the IBAS defense industrial base investments within the fiscal year 2027 budget? And do you see any opportunities to get incremental investments from that program to expand your capacity?
William L. Ballhaus: Hey, Austin. Thanks very much for the question. We have had interactions with IBAS. We have programs that are funded by IBAS, and that continues to be an area where we look for opportunities to go after things that they are interested in investing in and that we think can increase our capacity, our efficiency, and our innovation. So, yes, definitely something that is in front of us.
Austin Moeller: Great. And just my next question, do you see more contract opportunities within Golden Dome or within the Defense Autonomous Working Group within the fiscal year '27 budget request?
William L. Ballhaus: We definitely see opportunities across the board. That is not only in our existing portfolio of programs but also tied to administration priorities like Golden Dome, missile defense, and armaments—across the board right now we are seeing opportunities. We feel like our capabilities are really well aligned with the administration's priorities broadly. One of the things that we have said before and think is unique about our positioning is we have exposure to a broad set of tailwinds across the market. That is what we are focused on capturing right now.
Austin Moeller: Excellent. I will pass it back there. Thank you.
William L. Ballhaus: Thanks, Austin.
Operator: Thank you for your question. Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Sheila, your line is now open.
Analyst: Hi, guys. This is Egan McDermott on for Sheila. Maybe just building off of the missile questions that have been asked. Curious, one, if you could sort of size how big Mercury's missile exposure is as a percent of sales, even roughly, and two, with a few large LTAMDS contracts out there of late—you know, thinking like the $8 billion FMS to Kuwait—how would you think about what an order of that magnitude means for your business?
William L. Ballhaus: Thanks very much for the question. We do not size up the missile portfolio publicly, but we do have a number of programs with exposure to missiles for sure. Relative to LTAMDS, we typically do not comment on any one program or go into much detail. I will say that it is publicly available that there are conversations around increased demand and increased quantities on LTAMDS, and that really has not factored into any of our bookings to date, but certainly would be a positive if there were increased quantities and accelerations of deliveries. It is one of the potential tailwinds that we are keeping our eye on as we are looking forward.
Analyst: Thank you. And maybe just a follow-up on that. Is it fair to think that margins on an order like that out of Kuwait or other FMS would differ from U.S. orders at all or be at all higher?
David E. Farnsworth: For us, it is typically something that we work with the prime on, and so we would work with them as to what pricing makes sense and how it makes sense. Typically, the higher margin rates are on foreign direct versus FMS contracts at the prime level. I think that is something you would have to have that conversation broadly with the prime.
Operator: Thank you.
Analyst: Thank you.
Operator: Thank you for your question. Your next question comes from the line of Jonathan Frank Ho from William Blair. Jonathan, your line is now open.
Analyst: Hi. This is Garrett Berkham on for Jonathan, and thanks for taking the question. It is nice to see the strong results, and it sounds like demand is strong and relatively broad-based across the board. Are there any areas where you see the most opportunity for reordering and restocking over the near term, just given the ongoing geopolitical conflicts? Thanks.
William L. Ballhaus: Thanks for the question. To break down our growth vectors, first and foremost, the primary driver of our near-term organic growth is the transition of our business from a really high concentration of development programs—and it is dozens of programs, not one or two—to the low-rate production phase and then the higher-rate production phase. We are seeing that start to manifest in '25 to '26 and expect our organic growth to continue to accelerate based on those programs ramping up. That really does not have anything to do with tailwinds that we see in the market. Beyond the existing portfolio, we are continuing to win new development programs that are really exciting, where we are bringing together technology and innovation across our portfolio, doing things that nobody else can do and winning new development programs that, over time, are going to add to that production content. Beyond those two items, we do see a number of potential tailwinds tied to a number of different factors: the size of the domestic budgets, the size of the global budgets, and other tailwinds like Golden Dome and rearmament of munitions. We are starting to see those tailwinds manifest in the form of multiyear strategic agreements at increased quantities and increased deliveries with the primes. Right now, none of those tailwinds are reflected in any of our bookings, and we view them as all additive to the target profile that we have talked about and are converging on. We have said for a couple of quarters now that we think that some of those tailwinds could start to manifest likely by the end of calendar 2026 but potentially as early as our fourth quarter, which is our current quarter. We are watching those items as they progress in our pipeline with a lot of excitement. Beyond that, there is a broad set of demand and a lot of tailwinds that we have exposure to, and we are looking forward to seeing how that all plays out over the next quarter and beyond.
David E. Farnsworth: On the current business—what we are executing on today—when you look at the queue, you will see the areas that have significant growth in the revenue. Space is up significantly for us. Radar is up, as you would expect. Other sensors and effectors—if you think effectors—that is up significantly in our revenue so far this year. Those are things that the customer needs delivered as fast as possible. You will see that across our entire portfolio of roughly 300 programs.
William L. Ballhaus: One of the best indicators of that is, again, if you look at our domestic business, how it is up 17% year over year. A couple of years ago, this is where a lot of our development programs existed in the portfolio, and you can really see now the phenomenon of us having completed the development programs, transitioning into low-rate production, and now starting to ramp up. There are a lot of things that we are seeing in the portfolio and the business that we are excited about.
Analyst: That is great. Thank you.
Operator: Thank you for your question. At this time, we would like to remind you, if you would like to ask a question or an additional follow-up, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. There are no further questions at this time. Oh, pardon me. Next question comes from the line of Peter J. Arment from Baird. Peter, your line is now open.
Peter J. Arment: Hey. Thanks. Good afternoon, Bill, Dave, Tyler. Nice results.
Tyler Hojo: Hey.
Peter J. Arment: Bill, it has been a common theme the last few quarters that you have talked about the ability to stage material earlier and better align your supply base that is leading to better performance on the top line. Could you give a little more insight into that staging or a little more color around it?
William L. Ballhaus: I think it has been one of the big improvements in the business, and we are not done—we still have work to do on this front—but you can see the impact of our efforts in this quarter, the linearity, and our outlook for the year. If we go back close to three years ago, we really swung the pendulum hard on our material focus to a just-in-time delivery model. This was largely because of the buildup in our net working capital and our need to address that. We swung the pendulum hard, and the upside is we have been able to reduce our net working capital by about $250 million over the last couple of years. But it introduced some constraints in being able to accelerate our backlog conversion. It was not so much that availability of material or items in our supply chain were hard to get; it was that we staged the delivery to the right because of the net working capital buildup in the business. Over time, we have worked to accelerate the delivery of material, which has led to accelerations that we cited into past quarters. But that led to a bathtub in the future quarters that made it hard for us to forecast what those quarters would look like because we had a lot of unknowns associated with filling the bathtub and trying to accelerate more material. Over the last several quarters, we have focused on pulling our supply chain to the left—bringing the due dates for material ahead of our need date—so that we have more flexibility and more degrees of freedom in how we convert our backlog. That has translated into a higher organic growth rate and our ability to convert backlog faster than we thought we would be able to coming into the year. It is a great shift in the business. We are really excited about it. We have more work to do, but for future quarters it gives us much better visibility into our deliveries, and we can incorporate that into our forecast. That is a pivot and a transition that we have made this quarter. Hopefully, that is helpful in explaining the dynamics.
Peter J. Arment: Very helpful. And you mentioned you had the strongest bookings quarter for the CPA—the Common Processing Architecture—so it sounds like momentum is really building there. What other color can you give us around the CPA that you are seeing with customers?
William L. Ballhaus: We have a number of different degrees of freedom to drive there. We have always said that as we increase production, the follow-on bookings would come, and we certainly are seeing that—this quarter was evidence of that. We are seeing strong demand for our current products, and this is an area where we have differentiation in the market. There are certain security standards that we are the only ones that can meet, so we have a nice moat around this business. As we have made progress on the development programs, it has given us the opportunity to focus on the next set of innovations we want to bring to the market. That is showing up as higher performance for our current form factors—getting the latest processing and memory capabilities into the hands of our customers with our common processing architecture wrapped around it. Maybe even more exciting, we are driving into smaller form factors and secure chiplets, which we think opens up a big TAM for that capability. There has been a lot of progress over the last couple of years on our development programs and our technology. The production follow-on orders are coming as a result of that, and we see a lot of room to run into different form factors to open up the market. Eventually, over time, as we take our mission-critical processing to the edge and increase performance while driving to smaller form factors, we see ourselves providing the compute infrastructure needed to have AI distributed across the battlespace. That is where we see being able to take this capability in the future.
Operator: There are no further questions at this time. I will now turn the call back to William L. Ballhaus, CEO, for closing remarks.
William L. Ballhaus: With that, we will conclude our call. We really appreciate everybody's participation and interest and look forward to getting together next quarter. Thank you.