Monday will be Round 2 for new and improved Motley Fool Hidden Gems pick Radyne (NASDAQ:RADN). It's the company's second quarter in which it reports earnings in conjunction with its newly acquired Xicom business. Can Radyne pull off a repeat of last quarter's 33% margin-beating estimate? Tune in next week to find out. But in the meantime, ponder a few numbers that may help you make sense of Monday's results.

Wall Street Wisdom:

  • General consensus. Only two analysts follow tiny Radyne (a plus, in our book; a "gem" can't be "hidden" if everyone is watching it). Both analysts rate the stock a buy.
  • Revenues. Thanks largely to Xicom, analysts predict that Radyne will be able to report a 92% improvement in this year's Q4 sales in comparison to last year's. $32.2 million is the target.
  • Earnings. The story is different with earnings, however. Analysts expect the company will report a $0.02 decline from Q4 2004's $0.18 per share. (Then again, these same analysts have been wrong in each of the past quarters, when Radyne beat their targets.)

Margin watch:
Will they be proven wrong again on Monday? I'm not so sure. Radyne has suffered some significant gross margin compression over the past 18 months. Its operating margins also seem headed downward, and its net, which looked so strong a year ago, took a big hit last quarter.

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

50.6

52.4

53.3

53.0

51.5

47.7

Op.

19.0

18.3

16.6

14.6

15.4

15.1

Net

14.6

23.3

23.9

21.4

19.7

11.3
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
The primary factor in the halving of Radyne's net margin, between September 2004 and September 2005, was the tax credit Radyne received in the September quarter, artificially boosting its net (for that quarter and the subsequent three). Q3 2005's 11.3% net margin, therefore, was simply the result of the company's normal operations, sans tax benefits -- it was 2004's 23.3% net margin that was the anomaly.

Still, this leaves the firm with an average 11.3% net at last report, versus its 14.6% net in 2004. That deterioration resulted from a disconnect between sales and the costs of goods sold; the former rose 153% year-over-year, but the latter spiked 208%. On Monday, Fools should pay special attention to the upper lines of Radyne's income statement and seek assurance that these two items are being brought back into balance.

Fool contributor Rich Smith does not own shares of Radyne.