Mercury shares surge after Q1 results
Strong profit bucks trend of warnings in software sector
By Michael Baron, CBS.MarketWatch.com
Last Update: 2:04 PM ET April 12, 2002
NEW YORK (CBS.MW) - Shares of Mercury Interactive jumped more than 21 percent Friday after the company reported first-quarter earnings that topped Wall Street's consensus estimate by 4 cents.
The stock (MERQ: news, chart, profile) gained $6.74, or 22.9 percent, to $36.18, in afternoon action. Volume was a heavy 13.1 million shares, more than three times its daily average churn of 3.9 million.
In a press release issued after Thursday's closing bell, the Sunnyvale, Calif., provider of software testing applications reported pro forma earnings of $12.1 million, or 14 cents a share, down from its year-ago equivalent profit of $16.1 million, or 18 cents a share. Both performances exclude items.
The latest quarter, however, included amortization of $1 million related to its acquisition of Freshwater Software, a reversal of $500,000 in restructuring charges, and a gain of $3 million related to the early retirement of debt. Including these items, the company earned $15.2 million, or 17 cents a share, in the quarter.
Revenue slipped in the latest three months to $90.5 million from $90.7 million in the same period a year earlier.
Analysts polled by Thomson Financial/First Call were looking for earnings of 10 cents a share on revenue of $86.1 million in the March quarter, on average.
"Mercury Interactive's business during the first quarter was very strong across all products and geographies," said Amnon Landan, the company's chairman, CEO and president, in a release. "In a challenging spending environment, customers are turning to Mercury Interactive to reduce costs and improve effectiveness of IT operations and business processes."
Credit Suisse First Boston was encouraged by the results, saying it's a strong buyer of the stock, especially since its $43 price target implies a price-to-earnings multiple of 50, still well below the software sector's multiple of 55, and Mercury's historic premium of 21 percent. The firm noted that the company's management was bullish on the second quarter with "visibility stronger than what it had seen in Q1," an expanded pipeline, and growth in backlog, including several plus $1 million deals.
"We expect that Mercury will command a larger piece of the IT budget dollar, driven by increased emphasis on reducing costs and maximizing infrastructure utilization," said CSFB in a note. "In addition, we believe that ActiveTune (Mercury's infrastructure optimization application) represents a larger opportunity than its core $1 billion testing market, and we expect Mercury to dominate the industry."
The stock also received praise from Merrill Lynch, which dubbed it "one of our top picks over the next 12 to 18 months" and said that it thinks the shares could appreciate into the low $40 range in a more constructive IT spending environment.
The firm agreed with CSFB that ActiveTune could be a catalyst for growth in the coming year, a scenario that could "further accelerate Mercury's value proposition higher into the enterprise." Merrill's note struck an almost giddy tone when discussing the outlook for the company.
"Mercury's performance this quarter has all the hallmarks of an emerging market gorilla," it said. "We believe that with the dominant share in the testing space, Mercury is in a favorable position to leverage its installed base to sell incremental APM and production tuning solutions."
However, Merrill did sound a note of caution about competitive pressures the company may face as it expands. "MERQ is moving into BMC (BMC Software) (BMC: news, chart, profile), CA (Computer Associates) (CA: news, chart, profile), and IBM's (IBM: news, chart, profile) neighborhood, and while we like MERQ's chances, unseating entrenched incumbents is no small challenge," it said.
Jolson Merchant Partners raised its rating on Mercury shares to "strong buy" from "long-term buy," saying it thinks upside following these "outstanding" results "could surpass $45 per share."