Mer in the First Quarter: Cash Cut Debt, Backlog Still Needs Binding Orders and Financing
Mer opened 2026 with stronger profit and operating cash flow, but underlying revenue growth was modest and the gap between firm backlog and framework-backed backlog widened. The next quarters will test whether awards, framework understandings and customer financing turn into revenue, cash collection and durable margins.
Mer entered 2026 with a quarter that looks strong at the bottom line, but the economics are more nuanced than the jump in net profit suggests. Revenue rose only 2.9% to NIS 158.2 million, while net profit increased 65.2% to NIS 10.0 million, helped by gross profit improvement and a sharp drop in net finance expenses. Operating cash flow was much stronger at NIS 47.5 million, but much of it came from working-capital release rather than a step-change in activity. That cash allowed the company to reduce bank credit and reach net cash over financial debt of about NIS 8.5 million, an important change for a company whose financing profile used to be a central pressure point. Still, the proof point has not moved to the balance sheet alone: firm backlog declined year over year, while backlog including frameworks and commercial understandings increased. That makes 2026 less a year of proving demand and more a year of execution, financing and collection: whether orders and awards become revenue, cash and margin rather than only a lower finance-expense story.
Revenue Barely Moved, the Profit Source Changed
Mer is a defense technology and integration company operating on two layers: a global business of homeland security, intelligence, command-and-control, critical infrastructure and communications projects, and an Israeli business tied to the Ministry of Defense, the defense industry, communications infrastructure and data centers. This is not a pure product company, and not a standard infrastructure contractor. Its economics sit on backlog, execution pace, project margins, customer financing and collection.
The first quarter shows better profitability without a revenue breakout. Revenue rose to NIS 158.2 million from NIS 153.7 million, and gross profit rose to NIS 30.8 million from NIS 28.0 million. Gross margin improved from 18% to 19%, but the jump in net profit also came from net finance expenses falling to only NIS 1.6 million, compared with NIS 5.3 million in the prior-year quarter. That is a real balance-sheet improvement, but it also means this quarter's net profit depended less on revenue acceleration and more on debt reduction that had already happened.
The product-level split is sharper than the consolidated number. Communications infrastructure became the main operating-profit engine in the quarter, with NIS 67.3 million of revenue and NIS 11.4 million of operating profit. Military technologies contributed NIS 27.2 million of revenue and NIS 2.6 million of operating profit. Homeland security, by contrast, generated NIS 62.5 million of revenue but recorded an operating loss of NIS 1.5 million, after contributing NIS 2.2 million of operating profit in the comparable quarter.
The implication is that the company has not yet fully proven that defense and global demand is translating everywhere into higher profitability. The Global segment itself looked better at the operating-profit line, NIS 9.8 million versus NIS 8.1 million, but within the product split homeland security was weaker. Israel segment revenue was slightly higher at NIS 76.8 million, but operating profit slipped to NIS 3.3 million. In this kind of quarter, the question is not whether the company is growing, but which parts of the growth are actually leaving profit behind.
The Larger Backlog Is Less Firm Than the Total Number
The issue that continues from the previous annual analysis is backlog quality. Firm backlog stood at NIS 628.9 million at the end of March, down 7.6% from NIS 680.6 million at the end of March 2025. At the same time, backlog including framework agreements rose to NIS 946.1 million from NIS 846.8 million, but the company notes that this figure includes commercial understandings agreed with customers as of March 31, 2026, where the agreement was signed after the balance-sheet date.
That is not immediate weakness, but it is a different risk layer. Backlog including frameworks gives commercial visibility, not the same certainty as a binding order already in execution. During and after the quarter, the company signed or received new engagements totaling about NIS 241 million, including about NIS 108 million in homeland security, NIS 73 million in military technologies, NIS 43 million in communications infrastructure and NIS 17 million in data centers. That is a strong number, but parts of it still need to move through the normal conversion stages of a project company: binding order, customer financing, approvals, execution, revenue recognition and collection.
Two examples show the gap. The May 2026 West Africa engagement, with expected revenue of about EUR 32 million, depends on a full financing agreement between the customer and a banking institution, and part of the work is subject to Israeli defense export approval. By contrast, the binding April 2026 orders for intelligence and communications collection sites in Israel, totaling about NIS 43 million, look firmer and came together with an extension of the agreement through April 2027. That is exactly the distinction raised in the April review of Ministry of Defense filings: the customer name matters, but the quality of the engagement matters more.
Strong Cash Flow Bought Debt Reduction, Not Just Higher Profitability
The most positive part of the quarter is the conversion of profit and collection timing into cash. Operating cash flow was NIS 47.5 million, compared with NIS 8.1 million in the comparable quarter. The central driver was a NIS 30.9 million decline in customers and contract assets and a NIS 5.7 million decline in inventory. The company did not merely earn more; it released cash from items that were key monitoring points in the 2025 coverage.
Still, recurring cash generation should be separated from all-in cash flexibility after actual cash uses. In the first quarter, the company used NIS 3.3 million for investment activity, paid NIS 2.7 million for lease liabilities, and reduced credit and loans by about NIS 45.1 million. After all of that, cash declined by NIS 3.7 million to NIS 64.0 million. That is not a sign of weakness because debt fell at the same time, but it does show that most of the cash flow went to deleveraging rather than staying as additional cash on the balance sheet.
The balance sheet is now more comfortable: short-term bank credit and other credit fell to NIS 54.8 million from NIS 99.8 million at the end of 2025, and the company has net cash over financial debt. Covenant headroom also looks wide: equity-to-balance-sheet ratio of about 34% versus a 22% minimum for the current period, negative net debt to EBITDA because of the net cash position, and backlog to LTM sales of about 94% versus a 35% minimum. Financing risk has fallen, but it has been replaced by another test: whether the company can maintain strong collection as the new backlog enters execution.
Conclusion
The first quarter strengthens the read that Mer has moved from a balance-sheet survival question to an execution-quality question. Debt fell, finance expenses fell, strong cash flow closed part of the old concern, and the company continues to receive orders in areas where defense and infrastructure demand support it. On the other hand, revenue growth is still modest, homeland security did not contribute operating profit in the quarter, and firm backlog declined even as broader backlog including frameworks increased.
The current read leans positive but is not yet complete: the company looks financially stronger, but the quality of 2026 will be decided by converting the new engagements into binding orders, revenue, margin and collection. The counter-thesis is that the net-profit improvement relies too much on lower finance expenses and one-quarter working-capital release, while the operating business has not yet shown broad acceleration. The next quarters will improve the read if customers and contract assets keep declining without a new inventory build, the Israeli orders are executed quickly, and customer financing is signed for the new West Africa engagement. The read will weaken if financing is delayed, homeland security margin remains weak, or backlog keeps growing in frameworks rather than firm contractual work.
Disclosure: Deep TASE analyses are general informational, research, and commentary content only. They do not constitute investment advice, investment marketing, a recommendation, or an offer to buy, sell, or hold any security, and are not tailored to any reader's personal circumstances.
The author, site owner, or related parties may hold, buy, sell, or otherwise trade securities or financial instruments related to the companies discussed, before or after publication, without prior notice and without any obligation to update the analysis. Publication of an analysis should not be read as a statement that any position does or does not exist.
The analysis may contain errors, omissions, or information that changes after publication. Readers should review official filings and primary sources before making decisions.