Here is the excellent report I mentioned:
Subj: Stockholder meeting
Date: 96-07-11 19:01:24 EDT
From: JMalach
Well, here's a go at describing the stock holders meeting today. The meeting was chaired by Edmund Glazer (Noam Lotan was unable to make the meeting because of back problems, apparently hes tried all treatments with none being very effective, typical of back problems, rest is probably the best cure). The meeting started off with the approval of the board of directors, the stock split, the increase in the stock options plan, and the approval of Arther Anderson as the independent auditors.
Next there was a thirty minute video shown of Noam Lotans presentation at the Bear Sterns conference. Noam was a little shaky at the start but gained confidence rapidly and was really rolling by the end. Learned the following things from the presentation:
1) Fiber Optic (F/O) market is 7.4 billion industry with a 25-30% projected growth rate. MRVC main competitors in the F/O laser diode and LED market are ATT, HP, NEC, AMP, Fujitsu, and Mitsubishi. Growth in MRVC's FO business has been about 50% per year.
2) MRVC supports FDDI, SONET, ATM, Fast Ethernet, Cable TV, and Token Ring transmission standards with the laser diodes and FO transmitters/receivers/transcievers.
3) MRVC has developed a two way simultaneous transmission over one fiber device. The device uses special coatings to perform beam splitting so that the transmitting laser does not interfer with the receiver positioned next to the laser transmitter. This device is being used exclusively by Bell South in one of the largest SONET fiber in the loop projects in the US. Currently these devices are being used to transmit voice/data in the two main FO IR transmission band. MRVC is currently researching attaching a Distributed Feedback Laser (DFB) to this combination so that between 70-120 TV channels can also be trasmitted over the single fiber run. This laser would run at a second wavelength. MRVC competition for this device is currently ATT and Siemens. MRVC believes their product leads in shipment and performance. For the DFB lasers MRVC competitors are Ortel, SDLI, NEC, Fujitsu.
4) Much of MRVC's recent growth has come from popularity of its NBase Switch product. Networking switching market is estimated at 3.7 billion this year. NBase began shipping to Intel in 1st quarter. Intel delivering switch under brand name Intel Express. Intel currently has 45% share of 10/100Mbs adapter cards (This bodes well for MRVC switches which feed these cards). Megaswitch II began shipping in second qtr, should have impact on 3qtr results. Megaswitch II has Autonegotiate/Autosense capability of port type connected to, VLAN capability, and can also have a board installed that performs ATM I/O. MRVC has cut production costs in half while maintaining price sold to customers (I'll get into this further later). Competition in this market includes Cisco, Bay Networks, 3COM, XYLAN and a few other companies. As far as MRVC can tell no company has the Autonegotiate capability yet.
5) Gigabyte Ethernet capability should be available sometime in late 3rd to 4th quarter. Some minor standards issues remain with 1GBs Ethernet and MRVC doesnt want to jump the gun and the be positioned with a technology that doesnt support the standard.
Next the shareholder meeting was turned over to questions from the 30-35 stockholders who attended the meeting.
1) What is the ratio of FO to Switches in terms of revenue? In 95 the ratio was 40% vs 60%, the gap widened in the first quarter of 96. Though FO growth for MRVC has been good the switching end has been extraordinary.
2) Does MRVC need more space to continue operations? Currently no, though at some future time they may need to move some operations to a new buiding (Personnelly MRVC seems to be running efficiently in the space they have. There isn't much spare space left though. During the factory tour it was indicated that when the time came the company would probably expand by moving the fastest growing aspect of their operation to a different building vice moving the whole company and upsetting the operation).
3) How many people does MRVC currently employ worldwide? MRVC has a total of 225 employees of which 43 perform R&D functions.
4) How does MRVC plan to grow their worldwide sales? MRVC's aquistion of North Hills gave them extensive distribution channels in Europe which are now being used to sell all MRVC product lines. Also, MRVC is strategically increasing their own sales force positioned around the world as well as sign up new distributors of their product internationally.
5) A couple of questions were asked regarding MRVC's relationship to Intel? MRVC was not allowed to discuss terms of their agreement with Intel (condition set by Intel). MRVC has also signed several smaller agreements with companies to provide them Ethernet switches.
6) Shlomo Margalit, MRVC's technical officer, took some time during this period to explain why he thinks MRVC is positioned well to support the nations communications infrastructure. During this discussion he explained that MRVC covers the WAN end of the market with their laser/LED diodes, transmitter, receivers. This is especially the case with their two way simultaneous laser trancievers. These devices came be installed in fiber to the curb application via SONNET transmission medium. These devices are especially valuable because they support the return path for data transmission of application such as internet. MRVC is furthering this via R&D into adding a second laser to this package that would allow for the transmission of up to 120 cable TV channels. From the LAN end MRVC is a leader in the 100MBs Ethernet product. They are just beginning to support ATM with their switches. And will soon be coming out with Gigabyte Ethernet products. MRVC is constantly evaluating new transmission technologies for possible incorporation into their switching products.
The next two hours of the day was spent on tours of the MRVC and NBase facilities.
The first phase of the tour was through MRVC laser diode and LED fabrication facility. It was explained to us that MRVC doesn't use the latest and greatest technologies in their diode product because the output improvements compared to the capital expenditures required was negligible. The technologies MRVC uses are inexpensive, reliable and flexible enough to meet their customers needs. They also are so simple that it requires very few people to monitor the manufacturing processes. If fact MRVC uses about 8 personnel to fabricate, test and inspect between 15-20,000 diodes a month. MRVC has set up a system of specifications such that 95% of their orders are met by the standard MRVC produces in mass. MRVC takes its production lot and divides it into batches dependent on the performance characteristics of the particular diode. These characteristics are then matched with customer requirements when orders are made. They keep a running inventory of all diodes such that the fabrication lab personnel don't have to worry about last minute orders from the production side of the operation. This allows them to spend their time working on the special 5% of orders as well as new technologies. In this are learned that for the two way simultaneous transciever MRVC is producing they manufacture the transmitter and buy the receiver from an outside source. They also have specialized optics/optical coatings within these devices that allow them to operate the way they do. These coatings are also performed by a separate company.
Next we were given a tour of the FO transmitter, receiver, and transciever production facility. MRVC currently sells about 60% of their diodes as discrete components which are then packaged with the external electronics by such companies as Cisco. The other 40% or the diodes are packaged as complete FO transmitter/reciever/or transciever combinations. All the major networking standards are supported by MRVC. The space in this facility was well organized. MRVC Israel facility produces simaler devices for the token ring market.
To close we were given a tour of the NBase production facility. Here we were informed that MRVC's switches uses a proprietary chip (patent protected) that is produced by a local fabrication company in LA and in Israel. This chip is such that MRVC board weighs 1/3 of that of Bays and Ciscos and is significantly smaller. I believe that because of this MRVC has a competitive edge over their competitors and are currently making excellent margins on their switches. They will also be able to meet any price cuts by their competition when they occur without effecting their bottom line as much as the competition. We also learned that these chips are then sent to a circuit board manufacturer where the NBase switches are built. This manufacturer performs some initial tests and then sends the boards back to MRVC to be packaged by NBase and the final tests conducted. The NBase housings are produced by an outside source also. The circuit board manufacturer has also been certified by NBase and Intel to produce the switches whenever MRVC can not meet their production needs.
Mr. Hanoch Eldar who provided the tour indicated that MRVC would be looking to incorporate Fiber Channel into their switching products. He also indicated that today MRVC was at an IEEE Ethernet Standards meeting in Holand presenting a propriatary technique that could double the distance that 1Gbs Ethernet data can travel over (either 200meters or 2 kilometers, I can't remember which). I asked Mr. Eldar how things were going with their suppliers for the NBase switches. He stated that they had been able to support their needs so far and anticipated this would remain the case. I also asked about the deal with Intel. He couldn't give any specifics but said that so far they had had no complaints (I took it as a good sign that Intel went with MRVC to certify the circuit board manufacturer to al
(I took it as a good sign that Intel went with MRVC to certify the circuit board manufacturer to also produce the switch). Mr. Eldar indicated that Intel would also be reselling the MegaSwitch II.
Some personnel observations:
All the personnel providing the plant tour were very forth coming in answering questions. The gentleman that gave the tour of the laser diode fabrication area and Mr. Eldar seemed genuinely excited about their jobs and MRVC's position in the industry. You could tell Mr. Eldar knew that his company was riding at the top of the networking switch world (he exuded that much self confidence in his and the companies capabilities). In talking with several employees I got the impression they were all happy working at MRVC and from what I could tell none of the founding fathers have left the company and many have known each other for at least 1-2 decades and worked together at other companies. The facilities are not fancy (no mahogony row for the exectives that I could tell). All the engineers, sales and accounting personnel work in the same area. There isn't any fancy office furniture. The company seems to be truely focused on making the most of their cash in the R&D, production, and sales areas. When in the production area we were informed that almost all employees in the production area are trained by MRVC and that they are allowed to rotate jobs somewhat to increase their knowledge as well as break up the routine of repetitive work.
Though Mr Glazer could make no statement on 2nd quarter earnings, he did state that what was stated at the Bear Sterns conference still held (no big down turn in sales from what I could tell in the last two weeks). The production and test areas for the NBase switch and two way FO transcievers seemed to be maxed out with quantities still waiting to be tested (there wasn't and idel soul to be seen on the production floors).
It was indicated to us that earnings should be out probably late in the week of 7/22. No firm date on when the split will be executed. The question about the stocks spread was raised. MRVC has no control over that. They hope the split will add stability to the stock and hopefully narrow the spread (we need to find the market maker and hang him/her).
Overall I was greatly impressed with MRVC current standing as well as their position for the future. I can truthfully say I'm one happy shareholder. You may have noticed the strength of the stock today during the tech route. This is probably just another indication of the strenth of the company and peoples faith in their earnings. Myself and Sheilee 1 informed personnel of MRVC about this board and encourage them to make contributions when they have time.
I'd like to thank Mr. Glazer, Ms. Griffith, Mr. Eldar and the several other employees who answered all of our questions today. I, for one, won't be parting with my shares any time soon.
Joe Malach |
