How quickly things change. A little over a year ago MRV Communications (MRV) hoped to get a multi-billion dollar Chromatis-like valuation for its Yokneam-based affiliated start-up Charlotte's Web Networks. Today some short sellers are betting that MRV itself will experience only a Chromatis-like ignominious dissolution.
However, those who would count MRV out have very short memories and underestimate both MRV's resilience and broad-based technological expertise.
In the early 1990s MRV was one of the first to combine Israeli management, US operations and Israeli R&D. Seizing every opportunity, MRV grew internally and through acquisition. In the mid-90s MRV acquired Israel-based Galcom, Ace North Hills and Fibronics, merging them into its Israeli NBase division. Expanding into Europe with other acquisitions, by 1998 MRV had become a truly international networking powerhouse with a market capitalization to match. Then MRV hit the wall.
A variety of factors conspired against the company, but the most significant were increased competition in the low-end switching market, and the slowdown in demand from both Asia and Europe. If this weren't bad enough, MRV's internal product development was delayed, and revenues suffered accordingly. Short sellers piled on, and MRV's share price sank like a stone.
In early 1999 a curious thing happened. MRV fashionably reinvented itself as a fiber-optics company with affiliated startups and its stock rocketed from $3 to $88 (split adjusted) in less than a year.
Today, with the near collapse of the telecom market, MRV's share price is once again hovering around $3, but, to paraphrase Mark Twain, the reports of MRV's demise have been greatly exaggerated.
MRV is once again changing business plans. The incubator model is out, replaced by a simpler back-to-the-basics plan organized around product categories: active and passive optical components, network physical infrastructure, switches and routers, remote device management and services.
MRV's stated goals are to cut costs, increase profitability and better serve its customers. At the same time, MRV hopes to reestablish credibility, focus, and financial flexibility. Judging from MRV's recent conference call and the analyst and money manager response, MRV is off to a good start.
MRV reported consolidated revenues of $73.5M for Q4 compared to $69.7M for Q3, an increase of over 5% in a very tough market. MRV also made progress in other key financial metrics including gross margins, earnings per share, generation of cash (approximately $8M) , reduction of inventories and improvement of DSOs. After Q4 ended MRV repaid $50M of long term debt.
Two areas of MRV activity to keep an eye on in 2002 are optical components and free-space optics.
Optical Components
MRV's optical component division, known as Luminent, is thriving. With expertise in both active and passive components it is nicely positioned in the marketplace. Organized as an independent business division within MRV, it is all but gift wrapped, should the right suitor come along.
Luminent's Q4 over Q3 revenue grew 13% to nearly $21M. In these difficult economic times this is especially impressive considering that virtually all of Luminent's optical component competitors are posting declining results and are lowering their guidance.
MRV's optical component expertise and leadership in CWDM is most promising. CWDM, or Coarse Wavelength Division Multiplexing, exploits the advantages of recent advances in fiber and accordingly is gaining momentum as a cost-effective WDM solution particularly appealing to customers looking to supply bandwidth without breaking the bank.
Not surprisingly, this makes MRV a desirable partner for fiber manufacturers interested in pushing CWDM. Partnerships are expected to be announced next month. Sources close to the company feel confident a deal has already been inked with Corning.
An acknowledged and unquantified offer was recently made for Luminent by an unnamed company. The interested company is rumored to be none other than Intel. The offer is rumored to have been 33% more than MRV's current market cap. The offer was not accepted.
Free-Space Optics (FSO)
By acquiring Jerusalem-based Jolt and San Diego-based Astroterra and folding in portions of its Yokneam-based Nbase division, MRV has become a leader in FSOs. Heretofore known as Optical Access (OA), this division of MRV provides the complete FSO package: laser transmission devices, related switches, routers and Wave Division Multiplexing (WDM) systems.
FSOs provides a wireless, cost-effective, easy to deploy alternative to fiber. These characteristics are positioning FSO as a very attractive next-generation alternative particularly attractive to countries which lack infrastructure, but are faced with rising bandwidth demands.
One such country is China, where MRV has a tremendous opportunity. MRV has established a strategic cooperative partner relationship with Shanghai Posts and Telecom Equipment Company, one of China's largest communication enterprises. This strategic relationship aims to expand the "digital network, high-speed internet interlinkage, the connection of GSM base station, campus network, enterprise's special network interlinkage, communication for emergency, broadcasting and TV broadband communication, etc."
Shanghai Posts and Telecom Equipment Company sells directly to China Netcom, which is providing broadband access into major Chinese cities. It is rumored that OA is already providing FSO products to China Unicom and China Mobile for links to their GSM base stations.
While MRV's ongoing top line growth is impressive and pro forma earnings are looking up, the challenge for 2002 will be to show significant improvements in GAAP earnings per share. It won't be easy for MRV to reach its stated goal of being cash flow positive by Q1 2003.
While the momentum investors have jumped ship, institutional value investors are discovering MRV. Wellington Management, US Trust Corp and Merrill Lynch have all taken sizable stakes in MRV. These high-tech value investors are betting that MRV's new back-to-the-basics plan is just what the doctor ordered.