10:47am EDT 26-Oct-99 First Security Van Kasper (Chet White (310) 443-3406) MRV MRVC: Quarterly Update; Rated Strong Buy
[KF · Rcvd: Oct 26, 11:00 AM EDT ]
OCTOBER 26, 1999
MRV COMMUNICATIONS, INC.
(MRVC - $22 1/16)
Quarterly Update; Rated Strong Buy.
EPS REVENUES (MM)
Fiscal Year: 99/98 00/99 00/99
December 1998A 1999E Change 2000E Change 1999E 2000E Change
Q1 $0.25 $(0.03)A NM $0.03 NM Q1 $70.1A $79.7 14%
Q2 $0.30 $0.02A NM $0.05 NM Q2 $73.3A $85.3 16%
Q3 $0.05 $0.02A NM $0.07 NM Q3 $71.3A $87.9 23%
Q4 $(0.09) $0.02 NM $0.12 NM Q4 $75.9 $97.6 29%
Year $0.53 $0.03 NM $0.26 NM Year $290.5 350.5 21%
P/E 41x NM 85x Mkt Cap/Revs 2.3x 1.9x
52-Week Range: $26 1/4 - 5 1/2 Rating: Strong Buy
Market Cap. (MM): 663.6 Price Target: $40
Shares Out. (MM): 30.08 Book Value/Share: $5.80
Estimated Float (MM): 21.85 Current Year ROE: (-1%)
Est. Insider Holdings: 8% Debt to Total Cap. (9/99): 51%
Est. Institutional Holdings: 24% Gross Margin (FY99): 36%
10-Day Average Volume: 304,190 Next EPS Report: TBA
Investment Conclusion: Given MRV Communications' strong fiber optic performance,
new strategic partners, progress on high-end networking product development and
the many near-term catalysts, we expect to see increasing investors' confidence
in MRV Communications' ability to deliver higher revenue and margins over the
next several months. We are reiterating our Strong Buy rating on MRV
Communications, Inc. (MRVC). Our 12- to 18-month price target of $40 (+82%), is
based on 3x FY 2000 sales of $350 million.
MRVC reports Q3 results in-line with expectations. MRVC reported EPS for the
third quarter of $0.02 compared to our estimate of $0.01 and consensus estimates
of $0.02. As expected, seasonally weak European demand for MRVC's networking
products produced sequentially lower revenues from its networking division of
$53.8 million versus $57.5 (-6%) and moderate year-over-year growth of +6%.
MRVC's optical components division, Optical Access, continued its strong growth
pattern, reporting revenue of $17.5 million, up +11% sequentially and +48%
year-over-year. Gross margins also continued to improve from 35% in Q2 to 37%
as the Company's revenue mix shifted towards higher margin optical business from
21.5% in Q2 to 24.5% this quarter. Going forward we expect gross margins to
show further improvement as the Company's optical components division becomes a
larger percentage of sales and as MRVC begins to achieve sell-through of its
higher-margin (50%+) networking products (Red-C solution, Linux switch router,
Zuma enterprise switch router, Opti-switch family).
MRVC delivers strategic partners, beta sites and new management for its next
generation networking solutions. This quarter, MRVC began the first of several
steps in executing its strategy of maximizing shareholder value through building
pureplays focused on the highest growth segments of the networking market.
ú New Access Subsidiary: During the conference call, management confirmed that
both Juniper Networks (NASDAQ -JNPR) and Kleiner Perkins Caufield and Byers
participated in a second round of financing for New Access. Additionally, the
company strengthened New Access' management with the addition of Juniper's CTO
officer, Pradeep Sindhu. Management estimates that New Access' fiber optic
networking solution is expected to be significantly more powerful than both
Cerent and Sycamore Networks (NASDAQ- SCMR) solutions. Although management has
offered limited disclosure regarding the more powerful direction of New Access,
based on the track record of its new partners, success is highly probable.
ú Zuma Subsidiary: At the Atlanta Interop, MRVC introduced a new subsidiary,
Zuma. Zuma is currently in alpha with an enterprise switch router that has the
potential to offer more power, survivability and scalability than those of its
peers Foundry Networks (NASDAQ - FDRY) and Extreme Networks (NASDAQ - EXTR).
Zuma's Z16 "supercomputer" is expected to beta in Q1 2000 and ship by Q2 2000.
Our discussions with FDRY networks product development indicate that Zuma could
be a contender in this space.
Additionally, the Company is making progress with several other major projects:
ú The Company's Red-C subscriber management solution recently went into beta
with 2nd Century Communications, a CLEC in Boca Raton, Florida. We expect this
solution to begin to roll out into multiple betas within the next 30 days and
start to ramp by year-end.
ú MRVC's Charlottes Web subsidiary is currently looking for a beta site putting
them slightly ahead of schedule with its terabit router, the Aranea.
ú With the Co-founder, Zev Ravnoy's recent departure, MRVC's management is
aggressively pursuing a President and CEO for the Optical Access subsidiary in
preparation for an IPO.
ú In an effort to take advantage of customer and developers demand for the
openness of Linux, MRVC is planning to begin a free distribution of up to 100
units of its Linux software and hardware in the next two weeks throughout the
university systems and more aggressive service providers.
ú Charlottes Web and Hyperchannel.com are also expected to close on second round
financing from strategic investors in near-term.
ú Optical Access is maximizing the investment used to double the capacity of its
Chatsworth fiber optics fabrication facility and to increase in headcount by
25%. Management noted that it is achieving great success with some of its
innovative Fiber to the Curb and Fiber to the desktop solutions (OC48/192
Transceivers, Fiber Driver, Optiswitch family, Single FTTC Triplexer) and
believes that there is major upside potential to achieve revenue growth well
beyond the 40% level reflected in our model.
Reiterate our Strong Buy Rating:
Given MRVC's strong fiber optic performance, new strategic partners, progress on
high-end networking product development and the many near-term catalysts, we
expect to see increasing investors' confidence in MRVC's ability to deliver
higher revenue and margins over the next several months. We are reiterating our
Strong Buy rating on MRV Communications, Inc. Our 12- to 18-month price target
of $40 (+82%), is based on 3x FY 2000 sales of $350 million.
Other Public Companies mentioned in this report include:
Extreme Networks (NASDAQ: EXTR $79 1/4 , Not Rated)
Juniper Networks (NASDAQ: JNPR $257 _, Not Rated)
Foundry Networks (NASDAQ: FDRY $171 , Not Rated)
Sycamore Networks (NASDAQ: SCMR $177 1/16, Not Rated) |
