First Security Van Kasper (Chet White 310-443-3406) MRVC
MRVC: Company Update; Raising Price Target; Strong Buy
FIRST SECURITY VAN KASPER CHET WHITE (310) 443-3406 CWHITE@FSCNET.COM
RESEARCH REPORT NETWORKING/COMMUNICATIONS
JUNE 14, 2000
MRV COMMUNICATIONS, INC.
(MRVC - $48 3/8)
Company Update; Increasing Price Target; Maintaining Strong Buy Rating
EPS REVENUES (MM)
Fiscal Year: 99/98 00/99 00/99
December 1998A 1999A Change 2000E Change 1999A 2000E Change
Q1 $0.12 ($0.03) NM $0.01A NM Q1 $70.1 $65.0A (19%)
Q2 $0.15 $0.02 NM $0.03 NM Q2 $73.3 $70.8 (3%)
Q3 $0.02 $0.02 NM $0.04 NM Q3 $71.3 $75.4 6%
Q4 ($0.05) $0.02 NM $0.07 NM Q4 $73.9 $79.2 7%
Year $0.26 $0.03 NM $0.18 NM Year $288.5 $290.5 1%
P/E 186x NM 269x Mkt Cap/Revs 11x 11x
52-Week Range: $97 3/8-2 1/2 Rating: Strong Buy
Market Cap. (MM): $3,057 Price Target: $158
Shares Out. (MM): 63.2 Book Value/Share: $2.82
Estimated Float (MM): 41.85 Current Year ROE: NM
Est. Insider Holdings: 18% Debt to Total Cap. (3/00): 50%
Est. Institutional Holdings: 22% Gross Margin (FY00): 34%
10-Day Average Volume: 1,241,800 Next EPS Report: July 2000
MRV Communications, Inc. is a world class leader in the rapidly expanding area
of optical network components and systems. MRVC designs, manufactures, and
markets leading edge high-speed network switching, routing, remote access, and
fiber optic transmission systems for data, telecommunications and cable TV
networks.
MRV COMMUNICATIONS-NEAR TERM CATALYSTS EXPECTED TO UNLOCK VALUE
Recent discussions with management of MRV Communications, Inc. and its
subsidiaries and investments increase our confidence that MRV represents one of
the most undervalued opportunities in the rapidly growing marketplace of optical
networking. In our opinion, the stand-alone value of MRV's subsidiary Luminent
represents significant upside to MRV's current price of $48 3/8. If we apply an
industry mean 36x sales multiple to Luminent's LTM pro forma revenue of
approximately $100 million (which includes FOCI, Optronics and Quantum Optec),
we derive a current value of $57 and a 12- to 18-month price target of $90.
Given that MRV has committed to filing a deal in late July or early August, we
believe that Luminent's current value of $57 will be realized over the next 30
days. In addition, we expect the filing and IPO of Luminent to increase
investors' confidence in MRV's ability to monetize its 13 other subsidiaries and
investments. Given our confidence in Luminent's prospects and numerous other
pending announcements from MRV's other subsidiaries and investments, we believe
that MRV shares will significantly outperform in the near term. Based on our
sum-of-the-parts valuation, we reiterate our Strong Buy rating with an increased
12- to 18-month price target of $158.
COMMENTARY
As we previously stated, we believe that Luminent's value alone offers
significant upside. Additionally, given the continued progress of MRV's 13 other
subsidiaries and investments, we believe that the collective value of these
companies will eventually be much more significant than Luminent's stand-alone
value. We also believe that MRV can realize the value through an IPO or
acquisition of at least three or four of these subsidiaries and investments over
the next several quarters.
This past week, four of MRV's subsidiaries and investments-Luminent, Zaffire,
Charlott"'s Web and iTouch-had solid showings at the SuperComm in Atlanta. In
our opinion, these four companies and JOLT are the most mature and most likely
to become monetized by 1Q00. Over the next several months, we expect MRV to
release significant news regarding positive developments of these companies.
Following is a brief review of some of the factors that can drive upside stock
performance:
Luminent Subsidiary: Optical Components and Subsystems (Expected IPO 3Q00)
£ We believe that the FTTC project can offer major upside as several other major
service providers, such as Bell Atlantic and Tele-Communications Inc., are
considering deployment. Additionally, we expect to hear news regarding FTTC
projects in Europe.
£ We expect to hear about a manager for Luminent prior to an S-1 filing in late
July/August. Given the exciting prospects of Luminent, we believe that
Luminent's management team will be equally exciting. We also expect the
acquisitions of Quantum Optec and Optronics to close prior to the offering.
£ Additionally, we believe that our forecast for 40% growth may be conservative
given the continued strong demand for optical components and the potential for a
more focused management team to drive sales at an accelerated pace.
Zaffire Investment: Multilayer Optical Switch (IPO Q4/Q1)
£ Zaffire recently closed an $85 million third round, which we believe was
completed at an $850 pre-IPO valuation. In addition to the solid valuation, the
financing was backed by an outstanding list of new financial and strategic
investors. With new names such as Morgan Stanley Dean Witter, Bank of America
Securities and Oppenheimer on board, there is no question about Zaffire's
ability to go public. Zaffire's management also chose to allow ten strategic
investors, such as Vitesse and ETEK, to participate in order to ensure component
supply. MRV also participated in the round and retained more than 20%
ownership.
£ Over the next several months, we expect Zaffire to announce its first orders
for the initial version of its Z3000.
£ Given the acquisitions of Sirracco Systems and Chromatis, we would not be
surprised if Zaffire were also acquired prior to its IPO. As we have previously
stated, we believe that Zaffire's unique wavelength fractionalization and
proprietary amplifier technologies offer superior price performance to even the
most recent offerings from firms like ONI Systems. Given ONI's $10.5 billion
dollar valuation, we believe that our most recent valuation of $6.6 billion for
Zaffire is relatively conservative. Additionally, we also believe that 2001
revenue has the potential to be double our estimate of $75 million.
JOLT Ltd. Subsidiary: Wireless Optical Systems (IPO Q3/Q4)
£ In order to speed time-to-market ahead of competitive solutions such as
AirFiber and Terabeam, we expect MRV's JOLT subsidiary to file within the next
several months. We believe that Jolt's unique RF/laser technology, combined with
MRV's opti-switch and fiber driver lines, could cause 2001 revenue to
significantly surpass (by three to fourfold) our estimate of $25 million.
iTouch Subsidiary: Broadband Access (IPO Q3/Q4 2000)
£ iTouch made its debut at the Supercomm this past week. iTouch is a broadband
access company that has two offerings: the In-reach network management solution
and the recently introduced transaction management solution. iTouch's
transaction management solution takes the next step in broadband access by
offering self provisioning and new levels of integrated Cos and QoS.
£ Over the next several weeks, we expect iTouch to announce customer orders from
several major ISPs, CLECs, and numerous smaller ISPs.
£ We also expect the company to announce new partnerships with leading Radius
equipment vendors.
£ Additionally, we expect numerous other features to be announced throughout the
summer and fall.
Charlott"'s Web Networks Subsidiary: Terabit Router (IPO 1Q01)
£ We believe that Charlott"'s Web will make several positive announcements
regarding the addition of two new beta sites and the close of its second round
of financing. We understand that this round will be funded solely by strategic
investors that are likely to become betas.
£ Charlott"'s Web had a working version of its Aranea 1 at the Supercomm, and
all of the software has now been completed. We believe that the company is on
schedule to ship the initial version of the Aranea by 4Q00 and the voice/data
version in the first half of 2001.
CONCLUSION
In summary, we believe that the business fundamentals are exceptionally positive
and that MRV's world class portfolio of optical networking startups and
subsidiaries is poised to capture the full potential of this explosive
opportunity. We reiterate our Strong Buy rating with an increased 12- to
18-month price target of $158. |
