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Why Is Mercury Systems (MRCY) Down 3.4% Since Last Earnings Report?

It has been about a month since the last earnings report for Mercury Systems (MRCY). Shares have lost about 3.4% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Mercury Systems due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Mercury Systems Misses Q4 Earnings & Revenue Estimates

Mercury Systems reported 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.

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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -99.43% due to these changes.

VGM Scores

At this time, Mercury Systems has a poor Growth Score of F, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Mercury Systems has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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