Tiny telecom equipment maker and Motley Fool Hidden Gems pick Radyne (NASDAQ:RADN) is scheduled to report Q2 2006 earnings on Monday. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Nothing has changed here since last quarter. Still 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 to its acquisition of Xicom last year, Radyne's quarterly sales are expected to leap once again. This quarter, the target is a 50% increase to $31 million.
  • Earnings. The lower margins that came with Xicom, however, may be starting to bite. Profits are expected to rise, but only by 8%. $0.13 per share is the new target.

What management says:
Last quarter, Radyne added to its string of "earnings beats" by more than doubling its sales and growing profits per diluted share by 62%. CEO Bob Fitting, master of the understatement, opined, "The year is off to a good start." And as for the future, he advised that Radyne continues "to see strength with our established customers along with some key wins in new programs and products across all of our markets." At last report, the company's combined backlog stood at more than three times its Q1 2005 level.

Breaking that number down, it appears that Radyne's pre-acquisition backlog grew 58% year over year. Xicom's Q1 2005 backlog was not stated, but at last report, its lower-margin products made up $18.9 million of the $33.8 million total, or about 79% of all expected sales.

What management does:
The results of all these complex mathematics are as shown below. Ignoring the anomalous net numbers in the first three quarters shown (which benefited from a September 2004 tax credit), we can still see that as the new and improved Radyne's sales skyrocket, the profitability of those sales continues to wane.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

54.3

54.1

51.5

47.7

45.7

43.9

Op.

17.6

15.7

15.4

15.1

16.1

15.6

Net

23.9

21.4

19.7

11.3

10.3

9.6

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

One Fool says:
And that's basically what I'd expect to see in tomorrow's news, and all future news, until we get to the point of comparing like fruit to like fruit -- post-Xicom-acquisition numbers to the same. The low-margin Xicom business makes up the bulk of Radyne's sales growth and constitutes the bulk of Radyne's order backlog. So, what the future appears to hold is continued strong sales growth, coupled with continued margin erosion on each of the gross, operating, and net levels.

The good news? The company's beating earnings estimates left and right, regardless, which can mean good things for shareholders -- at least over the short term.

Competitors:

  • Comtech (NASDAQ:CMTL)
  • ViaSat (NASDAQ:VSAT)
  • Scopus Video (NASDAQ:SCOP)

Customers:

  • Reuters (NASDAQ:RTRSY)

Suppliers:

  • EndWave (NASDAQ:ENWV)
  • Mission West (AMEX:MSW)

Read up on Radyne's pre- and post-Xicom past in:

Radyne is a recommendation of the Motley Fool Hidden Gems newsletter. It has returned almost 44% to subscribers since being picked, helping the newsletter as a whole beat the market by 15 percentage points. Click here to get free access to all of Tom Gardner's picks for the newsletter. There's no obligation to subscribe.

Fool contributor Rich Smith does not own shares of any company named above.