Mercury Systems reports Q4 miss & disappointing guidance, analysts react

Mercury Systems (NASDAQ:) reported its yesterday, with EPS of $0.11 coming in worse than the consensus estimate of $0.52. Revenue was $252.3 million, missing the consensus estimate of $278.81M.

Following the announcement, shares dropped more than 10% after-hours yesterday. However, they recovered throughout the day and closed with a gain of more than 6%.

“Our core business is performing well and predictably with solid margins. However, despite strong demand, a small number of our programs are facing short-term execution challenges, which have obscured the underlying strength of our core business. We believe these challenges are resolvable,” said CEO Bill Ballhaus.

For fiscal 2024, the company expects EPS in the range of $1.14-$1.48, compared to the consensus of $1.74, and revenue in the range of $950M-1B, compared to the consensus of $1.05B.

The company also appointed Mr. Ballhaus as President and CEO, effective immediately. He had been serving in these roles on an interim basis since June 24, 2023.

Following the results announcement, JPMorgan lowered its price target on Mercury Systems to $35.00 from $37.00, while maintaining a Neutral rating.

The firm noted that Mercury Systems’ guidance for flat sales in fiscal 2024 is surprising, given the prevailing trend of sales growth and increasing estimates within the defense industry, especially considering that Mercury’s major customers are the biggest players in the sector.

“Mgmt sees another outflow in Q1 and presumably this reflects continued upward pressure on working capital. Over the course of the year, however, Mercury sees potential to reduce both unbilled receivables and inventory, which should result in positive FCF for the full year,” mentioned JPMorgan.

Goldman Sachs, which reiterated its Neutral rating and $39 price target on the company, emphasized that several programs within the company’s portfolio are underperforming, causing substantial lag in the business. There is relatively limited visibility regarding when these issues might improve.

“MRCY has surprised to the downside fundamentally despite appearing to provide valuable products to a growing end market. The path to better growth, margins and cash flow is unclear,” noted Goldman.

Another Wall Street firm, BofA Securities, highlighted the appointment of new CEO and the announced execution plan identifying four priority areas, such as (1) delivering predictable results, (2) building a thriving organic growth engine, (3) expanding margins, and (4) driving improved Free Cash Flow conversion and release.

“We are intrigued to hear further details from management regarding the CEO transition and the results of the strategic alternative review the company has undergone the past few quarters. We have a No Rating on MRCY,” added BofA.