MRVC doesn't come up on our radar screen very often, but perhaps it should. Here's a good article outlining the company which is not only an optical player but also an optical incubator. From the MRVC thread.
Julie
(COMTEX) B: A Compelling Optical Opportunity
New York, Jun 26, 2000 (123Jump via COMTEX) -- Investment opportunities in
today's communications and networking technologies typically come at a high
price. Even after a sustained retreat in the tech sector, areas of the market
are still inflated. Now, though, there's not just one big bubble - it's a few
smaller ones. The photonics and optical-networking sector appears to be one of
those sub-sectors that's retained sky-scrapingly high prices, and investors are
hard pressed to find areas of attractive value there.
One look at the performance of a company like SDL Inc. (NASDAQ:SDLI), for
example, would elicit exclamations of "what correction?" from many an investor.
Corning (NYSE:GLW) is another prime illustration of equity exuberance. Investors
have accepted that infrastructure and networking are "where it's at" on the
stock markets. The realization has struck that demand for online pet supplies or
gardening products is limited. When it comes to bandwidth, however, demand is
enormous and virtually limitless. The photonics monoliths and optical networkers
are supplying the technological framework necessary to keep pace with the
ever-expanding need for increased bandwidth.
So we're sold on fiber and backbone, but what can we buy that doesn't appear
frighteningly overvalued? Compared to JDS Uniphase (NASDAQ:JDSU), with a
price/sales ratio of 82.45, and SDL Inc., with a p/s of 93.81, MRV
Communications (NASDAQ:MRVC) looks attractive at a p/s of just 11.77. (But
ratios are not as indicative as they used to be - on a p/e basis, all of the
above are disquieting.) MRV, with its compelling portfolio, could be rightly
dubbed "a baby JDSU" or an "optical CMGI (NASDAQ:CMGI)." Furthermore, as an
investment in technology, it makes for a pleasingly diversified communications
play.
The Optical "Incubator"
Though the incubator model has its critics, MRV has an astounding portfolio
under its umbrella. Many of the company's ventures are100%-owned subsidiaries,
and the cash flows of the parent are directly representative of those of the
invested companies. Thus, the wealth and value of MRV are not contingent upon
the dividend pay-out schedules or appreciation in stock price of the companies
it owns. Current opportunities and growth potential of the agile small ventures
in which the company has interests are what is determining MRV's value.
During the first quarter 2000, MRV made clear to the investment community that
it is capable of achieving its goal of becoming the leading Internet incubator.
Unlike VerticalNet (NASDAQ:VERT) or Internet Capital Group (NASDAQ:ICGE), whose
investment strategies may encompass broader e-commerce opportunities, MRV's
focus is strictly optical-networking companies. In other words, the company is
betting its future on the precept that companies whose performances will be
contingent upon the demand for bandwidth and network capacity will emerge
victorious from the speculative realm of Internet start-ups. The demand side of
the equation simply cannot be contested when Ryan Hankin Kent Inc. (RHK), a
telecommunications consultancy, predicts that by 2003, 16-million terabytes of
data will cross the Internet per month, up from 350,000 terabytes per month
today.
The main reason for MRV's powerful position is its footholds in each of the key
areas of optical-networking technologies. MRV is not simply a venture play. It
also manufactures optical components through several acquired companies that it
has now consolidated.
MRV didn't just appear out of the blue. The company's reputation has been
building for some time. Its business model has been somewhat misunderstood
because few analysts currently cover the company - a state of affairs that will
most likely be rectified in the months to come. Regardless of coverage or
investor perception, the company has earned itself a reputation for foresight
and a pioneering attitude. MRV was the first company in remote access to deploy
wavelength division multiplexing (WDM) in residential networks and the first to
introduce a 10/100 dual speed LAN switch.
The cutting-edge mentality is still very much alive in MRV, and tomorrow's
exciting and crucial technologies can be identified simply by looking at the
company's portfolio. In fact, it's not just optical components and processors,
MRV has a foothold in each of the crucial networks: carrier backbone, optical
transport, and access. In 1997-98, as service providers began installing
high-speed Internet access over traditional analog lines, MRV Communications
foresaw the disadvantages to both cable and DSL (both are based on existing
copper wires - limiting capacity and distance potential). It was and is clear
that deploying cable TV, telephony and broadband Internet through fiber is what
guarantees the best long-term solution for both customers and service providers.
Since then, the vision of all-optical systems has propelled MRV toward achieving
one of the most impressive umbrellas of subsidiaries and investments.
The Luminent subsidiary, just about ripe for IPO, designs and manufactures
optical components and subsystems. The recent acquisition of the Chinese passive
component manufacturer Fiber Optic Communications Inc. (FOCI - not public), has
enabled MRV to join the ranks of SDL Inc. and JDS Uniphase in having a foothold
in both the active and passive component arenas. This is key - the network
build-outs will continue to incorporate both concepts to a large degree for the
next few years, as fiber networks are deployed around the world. The most
forward-looking analysts see completely passive optical networks - as the number
of wavelengths achievable increases, and as the efficiency of each is enhanced.
FOCI provides MRV with critical manufacturing capacity, which is king in these
times. In optical componentry, the rule of thumb for today seems to be: whatever
is for sale will be bought. As crude as that sounds, there is a certain amount
of truth to it, as companies like Bookham (NASDAQ:BKHM), SDL Inc., Corning
(NYSE:GLW) and Lucent (NYSE:LU), scramble to innovate new manufacturing
procedures to the greatest extent possible. In the case of the first two,
applying technology borrowed from the semiconductor industry to both develop
components and integrate systems on chips.
FOCI (MRV's optical access division), Optronics International and Quantum Optech
will constitute the subdivisions of Luminent, which MRV is currently a 100%
owner. FOCI designs and manufactures DWDM systems. Optronics produces active
optical components, including DFB lasers and LED's. Quantum Optech produces
passive components for DWDM systems. The combined strength, therefore, can be
summarized as a cutting-edge source of componentry for today's and tomorrow's
systems, a 850-person-strong operation, and a forerunner in optical modular
design. Trailing 12-month revenues are estimated, for Luminant alone, at $106
million.
The unique constituents of MRV's portfolio are more exciting and comprehensive
than simply optical components used in the broad network backbone. The real
opportunity for growth in MRV's top line will be in attacking the metropolitan
and access layers. The network core has been just about built, and the next
level to be developed will be metro-layer optical networks. Most optical
analysts will confirm that this represents one of the biggest market
opportunities in the space. Zaffire, an investment in which MRV has a 23% stake,
has developed the Z3000, which cheaply resolves bottlenecks and intelligently
manages fiber lines between the long haul and last mile access. Capacity of this
optical service platform can currently be stretched to 2.5 tbps, keeping ahead
of current bandwidth demands.
The second exciting MRV investment is Charlotte's Web (53% owned) - which has
developed a terabit router with unique and aggressive characteristics. Its
Arenea router handles both IP data and traditional TDM traffic. The idea is that
the elimination of cross-connects, and allowing voice and data traffic to travel
over the same lines, will enable systems providers to offer an IP backbone that
handles voice as well.
The recent acquisition of Jolt, an Isreali company innovating in the fiberless
optics arena, constitutes the third huge opportunity to capitalize on the
development of the outer rims of networks. Fiberless optics is much toted as the
solution to last-mile traffic jams and strains on capacity because digging
trenches to lay fiber - in place of the copper wires that currently restrict
bandwidth - is expensive, time consuming and impractical in densely populated
cities. The three companies leading the way in this space are Jolt, Terabeam and
Air Fiber. The solution introduced by Jolt uses a unique meshed architecture and
as of the first quarter of this year had 3,000 installed units. The fact that
the solution has already been deployed to end subscribers gives Jolt a
significant advantage to the other two players in the space.
Another move in the metro and regional space was announced last March, when MRV
announced it would begin manufacturing Coarse Wave Division Multiplexing (CWDM)
transceivers. The module that MRV developed was the first in the industry to use
CWDM technology, with 10Gbps capacity and a distance capability of 50km. Extreme
Networks (NASDAQ:EXTR) has incorporated MRV's CWDM modules into its family of
advanced modular switching solutions.
olving one of the most harrowing problems in optical networking, MRV announced
in April of this year the formation of start-up Optical Crossing. Attenuation is
a direct result of signal switching in limited networks. Companies that are able
to develop solutions to this will enable systems providers to counter optical
power loss and achieve much greater efficiency. Optical Crossing, 60% owned by
MRV, occupies this space and plans to deliver an extremely low-loss photonic
switch. If it is able to do so, an IPO is likely in 2001.
The next foothold of MRV's is Red-C Optical Networks, a 35%-owned operation that
has developed an impressive line of optical modules used for operating and
monitoring optical networks. Along with Avanex's (NASDAQ:AVNX) Powermux and
Sycamore (NASDAQ:SCMR) SN16000, Red-C plans to introduce an Optical Cross
Connect. The company seems to be moving into the subscriber management space,
which is currently at the mercy of Redback (NASDAQ:RBAK). The possession of an
optical cross connect will be significant for the company as the need for
opto-electronic switches gives way. The main players to introduce all-optical
cross connects were Lucent (NYSE:LU), Xros, Nortel (NYSE:NT), Astarte and
Agilent (NYSE:A). A cross connect is simply a big switch that can serve as a
major intersection - switching many lines simultaneously. The moves into
all-optical by the readiest players renders some of the electronic switches
still being developed by Cisco's Monterey (NASDAQ:CSCO) and Ciena (NASDAQ:CIEN)
curiously outdated. The key lies in the fact that mirrors are infinitely more
patient with higher bit rates than their predecessors because they do no
processing, demuxing or remuxing. Speed has also become a critical factor and
incorporating a cross connect into Red-C's optical monitoring and protection for
DWDM will place it in the heart of a space that's growing at a rampant pace. MRV
also owns 90% of Zuma Networks, which is building the next generation Extreme or
Foundry (NASDAQ:FDRY) product.
Because of low visibility and lack of coverage, MRV's stock momentum was
sacrificed in March's technology correction. This should change as spin-out IPOs
surface, and investors' curiosity regarding MRV grows. Luminent Technologies is
clearly the barometer for MRV's spin-out schedule, and if all goes well, then
look for more throughout the next two years. The Luminent story is particularly
attractive because the company already books hefty revenues and is scaling
business to head off booming demand for optical components.
At the Supercomm convention in Atlanta earlier this month, Zaffire stole the
show with its focused management team. ONI Systems (NASDAQ:ONIS), which operates
in the metro space as well, earned itself a market capitalization of $10 billion
through its recent IPO. The company exists in a sector that is rapidly being
consolidated, and in which activity and momentum will only build in coming
years.
There are many conclusions that can be drawn from MRV's story, most of which are
extremely positive. Even if the IPO market sours, MRV's underlying companies
will continue to evolve because activity in the optical build-out is
accelerating. The company has a solid presence in today's optical world, and
demonstrates extraordinary powers of actualization for tomorrow's. From an
investment standpoint, you are buying into a speculative play that is realizing
half of its goals in the present tense. Also, it is in a sector that has become
wildly popular with investors. The stock price has tripled since late May, and
may seem reminiscent of February exuberance. However, the entire sector has been
rising. True momentum will build when the analysts arrive on the scene, and
start showing the investment community what a compelling story MRV makes.
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