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Why Is Mercury Systems (MRCY) Up 1.6% Since Last Earnings Report?

A month has gone by since the last earnings report for Mercury Systems (MRCY). Shares have added about 1.6% in that time frame, underperforming the S&P 500.

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

Mercury Systems Beats on Q1 Earnings & Revenue Estimates

Mercury Systems kick-started fiscal 2023 on a strong note by reporting better-than-expected results in the first quarter.

The aerospace and defense tech firm reported non-GAAP earnings of 24 cents per share, which surpassed the Zacks Consensus Estimate of 20 cents and its guidance range of 19-23 cents. The bottom line also came ahead of our estimates of 21 cents per share.

However, non-GAAP earnings declined 41.5% year over year, mainly due to increased costs and higher interest expenses.

Revenue Details

Mercury Systems’ first-quarter non-GAAP revenues increased marginally to $227.6 million from the $225 million reported in the year-ago quarter. The top line came ahead of the consensus mark of $218.4 million and its guidance range of $215-$225 million.

Mercury Systems’ acquired businesses (5% of the total revenues) — Avalex Technologies and Atlanta Micro — cumulatively contributed $11.8 million to first-quarter revenues. Organic revenues (95% of the total revenues) increased 4.1% year over year and contributed $215.8 million to first-quarter sales.

Mercury Systems’ total bookings were $266.9 million, resulting in a 1.17 book-to-bill ratio.

The company ended the quarter with a backlog of $1.08 billion, up $193.1 million on a year-over-year basis. Within the next 12 months, products worth $694.6 million from this order backlog are expected to be shipped.

Operating Details

Mercury Systems’ gross profit was $78.1 million, down 11.7% year over year. Moreover, its gross margin contracted by 500 basis points (bps) to 34.3%.

Adjusted EBITDA plunged by 19% year over year to $31.2 million. The margin decreased by 330 bps to 13.7%, mainly due to a lower gross margin, partially offset by the reduction in operating expenses as a percentage of revenues.

Total operating expenses decreased 9% to $85.3 million. As a percentage of revenues, operating expenses declined 430 bps to 31.8% from 37.5% in the year-ago quarter.

Balance Sheet & Other Details

As of Sep 30, 2022, MRCY’s cash and cash equivalents were $52 million compared with $65.7 million as of Jul 1, 2022. The long-term debt as of Sep 30, 2022 was $511.5 million.

The company used $66 million in cash for operational activities in the first quarter. It generated negative free cash flow of $73.4 million in the first quarter.

Second-Quarter & Fiscal 2023 Guidance

For the second quarter of fiscal 2023, Mercury Systems projects revenues between $225 million and $240 million. Adjusted EBITDA is anticipated between $38 million and $42 million. Adjusted earnings are projected in the range of 31 cents-36 cents per share.

For fiscal 2023, Mercury Systems now expects revenues between $1.01 billion and 1.05 billion instead of the earlier guidance range of $1-$1.05 billion. It also raised the lower end of the guidance range for adjusted EBITDA to $202.5-$215 million from the previous range of $200-$215 million.

However, MRCY lowered the forecast for adjusted earnings to the $1.93-$2.10 per share band from the earlier range of $1.96- $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 -17.07% due to these changes.

VGM Scores

At this time, Mercury Systems has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of F on the value side, putting it in the fifth 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 looks promising. Notably, Mercury Systems has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

Performance of an Industry Player

Mercury Systems is part of the Zacks Computer - Peripheral Equipment industry. Over the past month, Logitech (LOGI), a stock from the same industry, has gained 22.7%. The company reported its results for the quarter ended September 2022 more than a month ago.

Logitech reported revenues of $1.15 billion in the last reported quarter, representing a year-over-year change of -12%. EPS of $0.84 for the same period compares with $1.05 a year ago.

Logitech is expected to post earnings of $1.19 per share for the current quarter, representing a year-over-year change of -23.2%. Over the last 30 days, the Zacks Consensus Estimate has changed -4.3%.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Logitech. Also, the stock has a VGM Score of F.

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