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The Hidden Gems article below is from Oct. 2006. I'm a newbie and don't understand much of it, but I sense that it isn't positive news. If so, why is MF recommending the stock? If I'd read this article before my purchase I probably would've refrained. Fortunately, I only have 200 shares and will HOLD because that's what most analysts are suggesting.

We saw several firsts from Radyne's (Nasdaq: RADN) third-quarter results. It was the first fully comparable year-over-year quarter after the Xicom acquisition in the second quarter of 2005, and it also marked the first conference call ob the watch of new CEO Myron Wagner. Unfortunately, a couple of bad habits reared their heads, and the results themselves weren't pleasing for investors (and the stock got kneecapped 16% in early trading).

Q3 '06
Q3 '05


Earnings Per Diluted Share

Gross Margin

Operating Margin

Net Margin

Effective Tax Rate

Bookings in Quarter

Backlog at Quarter's End

Dollar amounts in millions except earnings per share.

I've always had qualms about the management team's generosity to themselves, and I think we saw two fine examples in the quarterly results. A flat top line, improved margins, and a lower effective tax rate translated to lower diluted earnings per share. And the operating margin would have been nearly 3 percentage points higher, exceeding last year, were it not for the insidious effects of "equity compensation" that must now be expensed.

Plateauing sales were blamed on an order loss and the deferral of two others into the fourth quarter. Management characterized this as "traditional lumpiness." The improved margin is not expected to hold, with 42% to 44% gross margin the expected range going forward. The minimal debt that Radyne carries will be repaid this month.

The new CEO continued the company's positive spin, a habit that grates on those (okay, me) who are fans of "just the facts" reporting. A "record month of sales in September" is curious wording for a flat quarter; announcing that "for the first nine months of 2006, Radyne's cash balance increased 70%" is puzzling. Cash may increase for many reasons unrelated to sustainable operating cash generation: increased debt, cash from exercised options, cash retained from option tax benefits, income tax refunds, selling assets, and more. Why not provide a cash flow statement with the quarterly press release instead? (The answer is that the company can't -- the controller was on the call and couldn't even offer what cash flow from operations had been.)

Many words were spent saying that the company still expects to hit the top end of its revenue guidance for the year ($135 million). Year-to-date, it's hit $98 million, meaning the upper end for the fourth quarter is expected to be $37 million. Last year's fourth quarter saw revenue of $36.8 million. In effect, it's predicting a second straight flat quarter, at best (though management would like us to focus on the historical lumpiness of the business and its 12% to 15% range for organic growth since 1995). I think back to the controller's curious behavior last quarter, repeatedly exercising and selling barely in-the-money options with significant remaining life, and I wonder if we shouldn't have taken that as a more emphatic signal of things to come.

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