Mercury's (MRCY) Q3 Earnings Ride On Organic Revenue Growth

Mercury Systems (NASDAQ:MRCY) has outperformed the industry in the past year on the back of its growing portfolio. Robust organic growth supplemented with strategic acquisitions is helping the company witness a stellar performance.

Mercury is benefiting from a substantial combined investment of its own internally funded R&D (IRAD) and customer funded research and development (CRAD).

A strong defense procurement environment is a tailwind for the company. The company’s standing in radio frequency (RF), electronic warfare (EW), radar systems and other critical next-generation defense technology investment areas is accelerating market expansion.

The company’s recently released third-quarter fiscal 2019 results bear testimony to this fact.

Better-than-expected earnings coupled with a full-year bullish guidance by the management are expected to buoy investor confidence in the stock.

Shares of Mercury have returned 125.3% in the past year, significantly outperforming the industry’s growth of 3.9%.

Analysis of Q3 Results

In the quarter, non-GAAP earnings per share surged 66.7% year over year to 50 cents and also beat the Zacks Consensus Estimate of 45 cents.

Revenues in the reported quarter came in at $174.6 million, marking a year-over-year jump of 50%. The metric also surpassed the Zacks Consensus Estimate of $166 million. This upside is driven by speedy new program starts and increased CRAD revenues.

Organic revenues (80% of total) grew 31% to $139.2 million in the quarter under review. The company reported Acquired revenues (20%) of nearly $34.8 million, attributable to the acquisitions of Themis Computer, Germane Systems and GECO Avionics.

Sensor and Effector Mission Systems (SEMS) revenues rose 48% year over year to 60% of the total revenues.

Revenues from Command, Control, Communications, Computers and Intelligence (C4I) accounted for 26% of the total revenue stream and soared 74% year over year. Opportunities around rugged servers and avionics are a positive.

Mercury's total bookings in the quarter augmented 26% year over year to $189.7 million, driving a 1.09 book-to-bill ratio. Key bookings included advanced weapons applications, Surface Electronic Warfare Improvement Program (SEWIP), AIDEWS, Filthy Buzzard and Reaper.

The company ended the quarter with a backlog of $558.2 million, up 30% year over year.

Management expects the recent completion of Syntonic Microwave and The Athena Group buyouts to expand the acquirer’s capabilities in electronic warfare and embedded security.

Margins

Gross margin for the third quarter contracted 310 basis points (bps) to 42.3%. This is due to the inclusion of Germane Systems, program mix and higher CRAD.

Adjusted EBITDA in the quarter ascended 55% year over year to $38.8 million. Adjusted EBITDA margin expanded 60 bps to 22.2% in the quarter under consideration.

Balance Sheet and Cash Flow

Mercury exited the quarter with cash and cash equivalents of $112.5 million, up from $93.9 million at the end of the earlier reported quarter.

The company generated $26.2 million of cash flow from operational activities compared with $25.3 million in the sequential quarter.

Free cash flow in the period under discussion was $19.2 million, up from $18.2 million sequentially.

Guidance

For the fourth quarter of fiscal 2019, inclusive of the acquisitions of Syntonic Microwave and The Athena Group, revenues are forecast in the range of $164.2-$173.2 million.

Gross margins are expected to be 43.6-44.5%. The year-over-year decline might be primarily caused by lower margin revenues from Germane and GECO acquisitions.

Adjusted EBITDA for the quarter is anticipated in the band of $34.1-$37.1 million. Adjusted earnings are projected within 42-47 cents per share.

For fiscal 2019, the company envisions revenues of $642-$651 million, representing year-over-year growth of 30-32% compared with $636-$646 million, predicted earlier. This increase from the previous guidance is indicative of the company’s outlook for 10-11% organic growth.

Adjusted EBITDA for the full fiscal is assumed to be $141.5-$144.5 million compared with $138.6-$143.5 million, anticipated in the past. However, gross margins are likely to be impacted by a rise in CRAD revenues, which has a soft margin, higher R&D expenses and the Germane and GECO integrations.

Adjusted EPS for the full fiscal is estimated to be $1.79-$1.83 per share compared with the former forecast of $1.72-$1.80.

Zacks Rank and Other Stocks to Consider

Mercury currently carries a Zacks Rank #2 (Buy). A few other top-ranked stocks in the broader Computer and Technology sector are Cadence Design Systems (NASDAQ:CDNS) , ACI Worldwide, Inc. (NASDAQ:ACIW) and Avid Technology, Inc. (NASDAQ:AVID) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Cadence, ACI Worldwide and Avid is projected at 12%, 12% and 10%, respectively.

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