It has been about a month since the last earnings report for Mercury Systems (MRCY - Free Report) . Shares have added about 3.6% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important drivers.
Mercury Q1 Earnings & Revenues Top Estimates
Mercury reported first-quarter fiscal 2020 (ended Sep 27, 2019) results, wherein both the bottom line and the top line outpaced the Zacks Consensus Estimate.
Non-GAAP earnings per share of 44 cents grew 12.8% year over year and beat the Zacks Consensus Estimate of 41 cents.
Revenues came in at $177.3 million, marking a year-over-year jump of 23%. The metric also surpassed the Zacks Consensus Estimate of $168 million.
Robust organic growth, including the expansion of microelectronics business, drove the company’s performance.
A favorable defense funding and industry growth environment is a tailwind for the company. Recent design wins boosted its organic growth.
Organic revenues (89.2% of total revenues) grew 17% to $158.1 million in the quarter.
The company reported Acquired revenues (10.8%) of $19.3 million, attributable to the buyouts of Germane Systems, GECO Avionics, The Athena Group and Syntonic Microwave.
The company completed the acquisition of American Panel Corporation (“APC”) at the end of the fiscal first quarter.
Sensor and Effector Mission Systems revenues rose 29% year over year to account for 57% of the total revenues.
Revenues from Command, Control, Communications, Computers and Intelligence (C4I) represented 28% of the total revenues and jumped 11% year over year.
Modernization in radar, Electronic Warfare and C4I was high, providing the company with new opportunities in weapon systems, space, avionics processing and mission computing and embedded rugged service.
Mercury's total bookings increased 21% year over year to $215.7 million, driving a 1.22 book-to-bill ratio. Key bookings included a classified radar program, Filthy Buzzard, F-35, Triton and E-2D Hawkeye.
The company ended the quarter with a backlog of $711.8 million, up 40% year over year. Within the next 12 months, $499.2 million of this total backlog of orders is expected to be shipped.
The company’s largest revenue programs were Surface Electronic Warfare Improvement Program, Filthy Buzzard, next-generation missile system, E-2D Hawkeye and CPS.
Gross margin for the fiscal first quarter expanded 140 basis points (bps) to 44.2%.
Adjusted EBITDA grew 16% year over year to $36.7 million. However, adjusted EBITDA margin contracted 120 bps to 20.7%.
Balance Sheet and Cash Flow
Mercury exited the quarter with cash and cash equivalents of $161.3 million, down from $257.9 million at the end of the earlier reported quarter.
The company generated $24.3 million of cash flow from operational activities compared with $26 million in the prior quarter.
Free cash flow was $14.7 million, down from $17.1 million sequentially.
For the second quarter of fiscal 2020, revenues are predicted in the range of $185-$195 million, indicating a rise of 16.4-22.6% from the year-ago reported figure. The acquisition of APC is included in the guidance.
Adjusted EBITDA for the quarter is anticipated in the band of $38.5-$40.5 million. Adjusted earnings are projected within 46-48 cents per share.
Mercury raised guidance for fiscal 2020. The company now expects revenues of $775-$790 million, up from the earlier guided range of $740-$776 million, implying 18-21% growth from the prior-year reported number. The company expects organic revenue growth between 11% and 12%, up from previously expected 10% for the current fiscal year.
Adjusted EBITDA for the full fiscal is expected to be $160.5-$168.5 million.
Adjusted earnings for the full fiscal are now estimated to be $2.03-$2.11, up from $1.97-$2.08 guided earlier, suggesting an improvement of 10-15% from the year-earlier reported figure.
The raised guidance includes operating expenses of about $2 million associated with the expansion of business in Phoenix. Capital expenditures of 6-7% of revenues are expected, reflecting Mercury’s integration activities, ongoing investments and the expansion of the microelectronics business in Phoenix.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
At this time, Mercury Systems has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Mercury Systems has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.