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Why Is Mercury Systems (MRCY) Down 5.1% Since Last Earnings Report?

It has been about a month since the last earnings report for Mercury Systems (MRCY). Shares have lost about 5.1% in that time frame, underperforming 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 Lags Q2 Earnings & Revenue Estimates

Mercury Systems reported lower-than-expected results in the second quarter, wherein both the top line and bottom line missed the Zacks Consensus Estimates.

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The aerospace and defense tech firm reported non-GAAP earnings of 26 cents per share, missed the Zacks Consensus Estimate of 33 cents and came in below the company’s guidance range of 31-36 cents. The bottom line declined 33.3% year over year, mainly due to increased costs and higher interest expenses.

Mercury Systems’ second-quarter non-GAAP revenues increased 4.2% to $229.6 million from the $220.4 million reported in the year-ago quarter. The top line missed the consensus mark of $233.3 million but came in within the guided range of $225-$240 million.

Q2 in Details

Mercury Systems’ acquired businesses (5.8% of the total revenues) — Avalex Technologies and Atlanta Micro — cumulatively contributed $13.3 million to second-quarter revenues. Organic revenues (94.2% of the total revenues) increased 0.9% year over year and contributed $216.3 million to second-quarter sales.

Mercury Systems’ total bookings were $270.3 million, resulting in a 1.18 book-to-bill ratio.

The company ended the quarter with a backlog of $1.12 billion, up $164 million on a year-over-year basis. Within the next 12 months, products worth $765.5 million from this order backlog are expected to be shipped.

Operating Details

Mercury Systems’ gross profit was $81 million, down 7.2% year over year. Moreover, its gross margin contracted by 430 basis points (bps) to 35.3%.

Total operating expenses increased 1% to $88.5 million. As a percentage of revenues, operating expenses declined 120 bps to 38.6% from 39.8% in the year-ago quarter.

Adjusted EBITDA plunged by 6.3% year over year to $35.7 million. The margin decreased by 180 bps to 15.5%, mainly due to a lower gross margin, partially offset by the reduction in operating expenses as a percentage of revenues.

Balance Sheet & Cash Flow

As of Dec 30, 2022, MRCY’s cash and cash equivalents were $76.9 million compared with $52 million as of Sep 30, 2022. The long-term debt as of Dec 30, 2022 was $511.5 million.

The company generated $35.4 million in cash for operational activities in the second quarter while it used $30.6 million cash for operational activities in the first half of fiscal 2023. Mercury’s free cash flow was $22.2 million in the reported quarter. It generated a negative cash flow of $51.2 million in the first six months of fiscal 2023.

Revised Guidance

For the third quarter of fiscal 2023, Mercury Systems projects revenues between $255 million and $260 million. Adjusted EBITDA is anticipated between $40 million and $47 million. Adjusted earnings are projected in the range of 32-42 cents per share.

For fiscal 2023, Mercury Systems expects revenues between $1.01 billion and 1.05 billion. It estimates adjusted EBITDA in the range of $202.5-$215 million.

Mercury lowered the forecast for fiscal 2023 adjusted earnings to the $1.90-$2.08 per share band from the earlier range of $1.93-$2.10 per share.

How Have Estimates Been Moving Since Then?

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

The consensus estimate has shifted -61.15% due to these changes.

VGM Scores

Currently, Mercury Systems has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the bottom 20% 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. Notably, Mercury Systems has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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