As you'll recall from last week's Foolish Forecast, our aim here is to determine how Radyne, a small telecom equipment maker and a Motley Fool Hidden Gems pick, is doing now that it has worked through four quarters with its Xicom acquisition under its belt. For four happy quarters, the company had been reporting monstrous growth in revenues thanks to the addition of Xicom's business, even as margins tumbled (also thanks to Xicom and its lower-margin amplifier wares). What we want to look at now is how well Radyne's quarterly sales compare with the cost of the raw materials that go into the goods sold, and also the cost of running the business per se.
Sales for the quarter fell less than 0.3% year over year. Radyne moved $32.1 million worth of products in Q3 2005, and pretty much the same amount in Q3 2006.
Cost of goods sold (COGS)
Here's where we see a bit of improvement. In Q3 2006, overall COGS declined by nearly 5% against the company's flat sales (boosting gross margins two percentage points). Even more interesting, though, are the dynamics within the firm's two business segments. In Q3, sales of the Xicom unit's supposedly lower-margin wares rose 15%, even as sales of pre-Xicom Radyne declined 11%. If Xicom's products are making up a bigger proportion of Radyne's sales, yet gross margins are still rising, this suggests that they're commanding higher prices today, or their raw materials costs are declining, or both.
Radyne's operating costs can be broken down into two parts: selling, general, and administrative expenses (SG&A), and research and development. In the latter category, spending rose 6% -- a respectable amount, given the quarter's stagnant sales. It's in SG&A that Radyne's problems arose -- "arose" 20%, in fact. Seeing an extra $1.3 million spent on salaries and marketing, and seeing it yield no increase whatsoever in sales, was not at all what we had hoped to see. It's also the reason that Radyne's operating margin declined two percentage points despite the firm's improved gross margin.
All of this left Radyne with its net margin largely intact, however, down just 30 basis points year over year. So why did profits per share decline? Two words: stock dilution. Over the last year, Radyne has diluted outside shareholders by a whopping 5.6%, and as we all know, the more shares outstanding, the fewer profits accruing to you, the outside shareholder. Result: Profits per diluted share fell to just $0.15 -- a 6% year-over-year decline, and a far cry from what most investors were expecting.
Catch up on the rest of Radyne's story with:
- Foolish Forecast: Radyne Sending
- Foolish Forecast: Radyne Rings In
- Foolish Forecast: Radyne Rising
- Foolish Forecast: Reading Radyne
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Fool contributor Rich Smith does not own shares of any company named above.