Merlin, Inc. (MRLN) Q3 2026 earnings review
Merlin wins new military contracts, but its cash reserves shrink
Merlin, the developer of autonomous flight software for military and cargo airplanes, grew its defense contract revenue while trying to rein in heavy cash burn. Third-quarter sales rose 80% from a year ago to $3.5 million, and the US military awarded another $9.4 million in contracts in early November by our math. Even so, operating expenses more than doubled from last year to $30 million, while a non-cash warrant accounting adjustment created a headline profit.
| Revenue | $3.5M +80% from a year ago |
|---|---|
| Adjusted EBITDA loss | $24.1M $27.8M loss last quarter |
| Cash and short-term investments | $161.6M down $22.2M from June |
| 2027 operating expense plan | New below 2026 spending levels |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because new military task orders and a pledge to cut 2027 costs are offset by ongoing cash drain and quiet commercial progress. Chief executive Matt George moved the flagship C-130J military program into aircraft integration and promised lower spending next year to stretch cash into 2029. One caution: the company burned $22 million of cash in three months and gave no update on its commercial cargo agreements or civil aviation approval.
The question now is whether focusing on funded defense contracts slows down the commercial cargo software that carries the long-term growth case. Either Merlin trims overhead while keeping its commercial Condor system on track, or it delays commercial launches to survive on military research money. The 2027 budget details in the fourth-quarter report will tell.
🐂 Bull Case
New Defense Awards Move Autonomy Toward Flight Tests
Merlin builds Merlin Pilot, a hardware and software system that flies airplanes without human intervention. The aerospace group relies on military research contracts for nearly all of its current sales while it works toward regulatory approval. Chief executive Matt George said the company is advancing its programs where defense customers need automated flight most.
Revenue rose 80% from a year ago to $3.5 million, up 58% from the second quarter. In November, right after the quarter closed, the US military awarded the company two new contracts totaling $9.4 million by our math. "The new $8.9 million task order with USSOCOM moves our C-130J autonomy program into its integration phase," George said, referring to the US Special Operations Command. US Africa Command also awarded $500,000 to test automated medical evacuations on a Cessna Caravan.
These awards matter because they pay the engineering bills to put Merlin Pilot onto military transport planes. Moving from design reviews into aircraft integration brings the system closer to live flight tests and future production orders across the military fleet.
What to watch: fourth-quarter revenue recognition from the $8.9 million Special Operations task order. A rise above $4 million in quarterly revenue would show that integration work converts into cash faster than earlier design phases.
Gross Loss Narrowed as Revenue Scaled
Merlin loses money even before counting research and overhead because its contract fulfillment costs exceed its small revenue base. In the first half of the year, accounting adjustments for money-losing contracts masked the underlying cost of delivering its engineering work.
In the third quarter, the company recorded no contract loss adjustments, giving a clean read on contract delivery. Revenue grew 80% from a year ago to $3.5 million, while the direct cost of delivering that revenue grew 33% to $5.2 million. As a result, gross margin improved by 53.7 percentage points from a year ago, to negative 51.3% by our math, and the gross loss narrowed from $2.0 million to $1.8 million.
What to watch: direct cost of revenue in the fourth quarter as the new integration task order begins. If revenue grows faster than direct fulfillment costs for a second clean quarter, the company moves closer to covering its field engineering expenses.
🐻 Bear Case
Cost Growth Doubled While Revenue Remains Small
Merlin went public in March and raised additional equity in May, building a cash pile to fund its software development. Since then, operating expenses have far outpaced sales, creating a heavy cash drain that threatens that reserve.
- Total operating expenses: $29.7 million, up 103.6% from a year ago by our math
- General and administrative overhead: 374.0% of revenue, up 54.8 percentage points from a year ago
- Selling and marketing costs: 58.9% of revenue, up 44.3 percentage points from a year ago
- Research and development costs: 425.1% of revenue, up 0.8 percentage points from a year ago
- Unrestricted cash and short-term investments: $161.6 million, down $22.2 million from June
Spending fell 11.1% from the second quarter, and the operating loss excluding non-cash items narrowed slightly to $24.1 million. Even so, operating expenses were more than eight times total revenue, so the business burns over $20 million of cash every three months.
What to watch: the quarterly cash drop in the fourth-quarter report. A cash reduction below $20 million would show that cost controls have started to slow the drain before 2027 begins.
Accounting Gains Hid a Deep Operating Loss
Merlin highlighted GAAP net income of $73.8 million in its financial summary bullets, comparing it with a $58.4 million net loss in the second quarter. A reader looking only at the bottom line would think the business turned profitable.
That profit came entirely from an accounting rule rather than aircraft contracts. The company recorded a $103.6 million non-cash gain from the drop in fair value of its warrant liabilities, which are "periodic mark-to-market adjustments that will recur each reporting period as long as warrants remain outstanding". Without that accounting gain, Merlin lost $29.8 million in the third quarter by our math, and its loss from operations widened by 89.5% from a year ago to $31.5 million.
What to watch: loss from operations in the fourth quarter. Because warrant adjustments swing with the equity value rather than business performance, operating loss is the cleanest measure of whether cost cuts are working.
Commercial and Regulatory Milestones Received No Update
Earlier this year, George positioned civil regulatory approval in New Zealand and the US, along with the Condor commercial freighter product, as the core pillars of Merlin's growth. In the first two quarters, the company highlighted clearing the third of four software verification gates and signing preliminary agreements with World Star Aviation and Israel Aerospace Industries.
The third-quarter release gave no update on civil certification gates or commercial cargo agreements. Instead, the company announced it plans on "concentrating our investment on the programs and customers with funded work and a clear path to revenue". That shift in focus matters because deferring unfunded commercial development could delay the high-margin software licensing sales management promised earlier this year.
What to watch: any disclosure in the annual report on which unfunded programs lost budget for 2027. Cutting funds for Condor or civil certification would leave Merlin dependent on government task orders for longer.
👓 Other Themes
Management Plans Lower Spending Next Year
Merlin initiated its budget planning for 2027 and pledged to cut operating expenses below 2026 levels. George said the company must "demonstrate discipline in the investments we make along the way" as it advances its flight software. Management wants a smaller cost base that "funds our plan into 2029, without depending on capital raises", though it gave no specific dollar savings target or restructuring charge yet.
💲 Other KPIs
Fell 31.8% from the second quarter by our math, after jumping in the first half from $0.4 million at the end of 2025. Accounts receivable is money customers owe for work already billed, so the drop from June shows Merlin collected cash from earlier defense milestones during the third quarter.
Rose 45.2% from a year ago and 13.0% from the second quarter by our math. The increase reflects shares issued in the March public listing, the May private financing, and employee stock grants, which totaled $6.4 million in the third quarter alone.
🔮 Guidance
New. The aerospace group plans to reduce its 2027 operating expenses below the 2026 total, after spending $91.9 million across the first nine months of this year. Management did not give a dollar range for either fourth-quarter or 2027 expenses, stating only that the reductions should stretch its $161.6 million cash balance into 2029.
❓ Key Questions
How much will operating expenses fall in 2027?
Merlin burned $22.2 million of cash in the third quarter and holds $161.6 million. Reaching 2029 without raising capital requires cutting annual cash burn nearly in half from the current $89 million pace, so investors need the exact 2027 spending target.
Which unfunded programs will lose budget under the new plan?
Management said it will concentrate spending on customers with funded work. That raises the question of whether commercial development for Condor with World Star Aviation and Israel Aerospace Industries will slow down next year.
Where does final civil certification stand in New Zealand?
After clearing the third of four software verification gates in the second quarter, the third-quarter release did not mention the New Zealand or US aviation regulators. Investors need to know when the final fourth gate will conclude.
Over how many quarters will the $8.9M award convert?
The Special Operations C-130J task order is more than double Merlin's third-quarter revenue. Knowing whether that $8.9 million spans six months or two years determines the near-term revenue trajectory.