Mercury Systems (MRCY) Plunges 9% on Q4 Earnings & Sales Miss

Mercury Systems MRCY stock plunged 8.6% in Tuesday’s extended trading session following the company’s dismal fourth-quarter fiscal 2022 results, wherein revenues and earnings missed the respective Zacks Consensus Estimate.

The aerospace and defense tech firm reported non-GAAP earnings of 81 cents per share, approximately 11% higher than the 73 cents per share reported in the year-ago quarter but way lower than the consensus mark of $1.01. Mercury Systems’ bottom line fell short of the Zacks Consensus Estimate of $1.01 per share and missed its own guidance range of 96 cents-$1.06.

The dismal bottom-line performance was mainly due to lower-than-expected revenue growth and inflationary pressure.

Mercury Systems Inc Price, Consensus and EPS Surprise

Mercury Systems Inc price-consensus-eps-surprise-chart | Mercury Systems Inc Quote

Revenue Details

Mercury Systems’ fourth-quarter non-GAAP revenues increased 15.5% to $289.7 million. However, the top line fell short of the consensus mark of $307.8 million as well as its own guidance range of $301.5-321.5 million. Lower-than-expected revenues were mainly due to order delays and component supply-chain constraints, which negatively impacted MRCY’s ability to ship finished goods.

Mercury Systems’ acquired businesses (7% of the total revenues) — Pentek, Avalex Technologies and Atlanta Micro — cumulatively contributed $19.6 million to fourth-quarter revenues. Additionally, organic revenues (93% of the total revenues) increased 9.1% year over year and contributed $270.1 million to fourth-quarter sales.

Mercury Systems’ total bookings were $331.5 million, resulting in a 1.14 book-to-bill ratio.

The company ended the quarter with a backlog of $1.04 billion, up $128.1 million on a year-over-year basis. Within the next 12 months, products worth $646.7 million from this order backlog are expected to be shipped.

Operating Details

Mercury Systems’ gross profit was $119.6 million, up 16.3% year over year. Moreover, its gross margin expanded by 30 basis points (bps) to 41.3%, mainly driven by growth in margin production and licensing revenues, partially offset by material inflation and increased direct allocation engineers to customer-funded programs.

Adjusted EBITDA jumped by 21% year over year to $71.6 million, while the margin increased by 120 bps to 24.7%, mainly driven by the improved operating leverage.

Total operating expenses increased 14% to $92 million. As a percentage of revenues, operating expenses declined 30 bps to 31.8% from 32.1% in the year-ago quarter.

Balance Sheet & Other Details

As of Jul 1, 2022, MRCY’s cash and cash equivalents were $65.7 million compared with $91.7 million as of Apr 2, 2022. The long-term debt was $451.5 million at the end of fiscal 2022.

The company used $19.4 million of cash for operational activities in the fourth quarter and $18.9 million in full fiscal 2022. It generated negative free cash flow of $27.6 million in the fourth quarter and $46.5 million in fiscal 2022.

First-Quarter and Fiscal 2023 Guidance

For the first quarter of fiscal 2023, Mercury Systems projects revenues between $215 million and $225 million. Adjusted EBITDA is anticipated between $27 million and $30 million. Adjusted earnings are projected in the range of 19 cents-23 cents per share.

For fiscal 2023, Mercury Systems expects revenues between $1 billion and 1.05 billion. Adjusted EBITDA is expected in the range of $200-$215 million. Adjusted earnings are anticipated between $1.96 and $2.17 per share.

Zacks Rank & Stocks to Consider

Mercury Systems currently carries a Zacks Rank #3 (Hold). Shares of MRCY have increased 4.4% year to date (“YTD”).

Some better-ranked stocks worth considering from the broader technology sector are 8x8, Inc. EGHT, Cadence Design Systems CDNS and CrowdStrike CRWD. 8x8 and Cadence Design Systems each sport a Zacks Rank #1 (Strong Buy), while CrowdStrike carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for 8x8's second-quarter fiscal 2023 earnings has been revised upward by a penny to four cents per share over the past seven days. For fiscal 2023, the Zacks Consensus Estimate for 8x8's earnings has moved north by 10 cents to 23 cents per share in the past seven days.

8x8's earnings beat the Zacks Consensus Estimate thrice in the preceding four quarters while matching the same in one, the average surprise being 175%. Shares of EGHT have plunged 69.1% YTD.

The Zacks Consensus Estimate for Cadence Design Systems' third-quarter 2022 earnings has been revised upward by five cents to 97 cents per share over the past seven days. For 2022, earnings estimates have moved north by 3.5% to $4.11 per share in the past seven days.

Cadence Design Systems' earnings beat the Zacks Consensus Estimate in each of the preceding four quarters, the average surprise being 9.8%. Shares of CDNS have decreased 1.5% YTD.

The Zacks Consensus Estimate for CrowdStrike's second-quarter fiscal 2023 earnings has been revised upward by a couple of cents to 29 cents per share in the past 60 days. For fiscal 2023, earnings estimates have moved south by a penny to $1.23 per share in the past 30 days.

CrowdStrike's earnings beat the Zacks Consensus Estimate in the preceding four quarters, the average surprise being 44.3%. Shares of CRWD have plunged 8.1% YTD.

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