Well, the meeting and tour are now over and I have several significant insights and facts to mention. I will give you my impression of the bottom line first, then discuss in more depth. Like the CCs and SEC documents, I could start out with "this document contains forward looking statements, which are subject to the risks …" <g>. In other words, make your own decisions and just use what I say here as additional input to your own decision making processes. Keep in mind that EVERYTHING here is my opinion only. Comments PLEASE.
THE BOTTOM LINE
MRV is alive, and if not fully well, is at least healthy with excellent forward looking prospects. Those who worry about MRV going out of business or being eaten alive by the bigger players, should have their fears allayed a bit. They have a plethora of products, excellent technology (even if they did let Ethernet switch technology catch up to them while they were off fighting other battles) and these products are all in high growth markets - that are also converging, and moving right into MRVC's areas of expertise. MRVC is ideally positioned to benefit from these trends.
However, those (like me) hoping this was a 1-2 quarter problem should be cautioned that although IMO this IS a temporary problem, it will be affecting the stock at least the next 2-3 quarters, during the period that they are "reinventing" themselves from a niche switch vendor into a full service, full product line vendor, and from an "Enterprise specific" company into one that services the Enterprise, the Carriers, Metro and Campus environments and the "last mile" FTTC (fiber to the curb) markets. I am still VERY confident that MRV will be successful - in fact HIGHLY successful, but we are still in the midst of this transformation.
Likewise, to those who are holding or trading on the possibility of MRV being acquired in the near term at anywhere near these price levels - FORGET IT. It is not going to happen, either friendly or hostile, PERIOD. I will explain why later.
If you are a trader, I'm not a TA person, but I think we are probably looking at a $5-$8 trading range for the next quarter - at least that's how I plan on playing it for now. There are better people than me to ask about this. I will look forward to reading their comments. Expectations are now VERY LOW for Q4 (so low, BEST projects a loss) and 1999 (only $0.30), and I think they are still a couple of months away from any other significant news (product announcements, alliances, contract wins).
After one quarter though, I think we will start to see a slow uptrend, as new products get announced, and Q4 does NOT show a loss. Don't count on much, if any, help from management though. I will present my thoughts here in more detail later.
If you are a long term investor, as I now am (as are most people holding MRVC at higher levels), I still see the price recovering to earlier levels and beyond, but slowly, and not for a while yet.
THE MEETING
There were about 40-45 hardy souls present. To my surprise, the meeting was very mild, and went off quickly and without a hitch. There was no angry mob with torches and rope, and most of the questions were routine.
First, they collected the ballots and determined if a quorum was present. They needed 13+ million of the 26,156,121 shares outstanding for a quorum. As over 24 million shares were represented in person or by proxy, the meeting was called to order.
Voting was then announced for the 4 proposals. All passed with either 23+ or 24+ million for and 1 million or less against. Proposals 2 and 3 had the lowest for/against ratios.
After the voting was announced, the meeting was adjourned. A short slide presentation was presented. One slide showed logos of MRV customers and Cisco, Ciena, LU, WCOM, BART, caught my eye before the next slide went up. Noam did single out BART (Bay Area Rapid Transit) as a good customer for whom they are doing a full Optical + Switching solution to help run their commuter service.
The presentation was followed by a Q & A session. I had problems with my tape recorder, so this will be from memory.
Noam says "the next 6 months or so" will be challenging. Noam appeared time constrained (he later said he had a BOD meeting mid-day), so he cut off questions and answers after 8-10 or so. I did get about 5 of my questions asked and answered.
One person, a retired engineer said he thought MRV could market their products better (DUH!) and Noam gave a stock answer. The man persisted to drive in his point (one can hope).
Signist (John) asked about the apparent coordinated effort on the Internet by Mr. Pink and others to spread lies about MRV and drive the stock down by shorting and other activity. To my surprise, Noam said they don't pay any attention to posts on the Internet. He repeated this a few times, and almost appeared unaware of this issue (amazing).
Pre-meeting I had asked him my "why the poor guidance" question, particularly on the SG&A growing 29% after he said 8-10%. I only got a short and unsatisfactory answer as the meeting was about to begin. Noam said they had planned for higher expenditures based on higher revenue assumptions, and those things can't be changed quickly once they realized the revenue would be down. I wanted to do a follow-up question on this, but the Q&A got cut off before I could raise the issue again.
I did get several answers to questions though.
I mentioned that in the CC, Noam said the EdgeBlaster/Edge Guardian was ramping slower than they had expected, and that customers wanted additional features. I asked him what those features were. Noam mentioned ISDN BRI and Network Address Translation.
I asked if the new upgraded Ethernet products still used proprietary technology or if they used the new Galileo GE chip. He said proprietary only.
I asked about the scalability of their Dynamic DWDM. Noam started to quote distance figures, but I said I wanted to know the number of wavelengths. Noam said they are working on a 16 channel at OC-48 (2.5 Gbits/sec) solution.
This is the first I had heard of 16 wavelengths. At the Q2 CC they mentioned they had 4 wavelengths and were working on 8. Apparently they see the need to get to higher levels quickly.
Later I asked Dr. Rav-Noy if this represented a limit to their technology. He said No, this was just what they were working on now.
As I walked up front to talk to Noam after the Q&A was over, I caught the tail end of an answer he was giving to someone else about "they were pursuing multiple patents". Hopefully, this is for their DWDM and Fiber Driver products.
While I was waiting my turn to talk to him, someone else asked about the possibility of a hostile takeover, and Noam said this was exactly why they were placing an emphasis on "preserving cash" right now, (as mentioned in the CC as well) to ward off any hostile takeovers with the price so low. This is why Noam responded to a question on the share buyback with "Yes the price is low and a good value for a buy back, but we also have an emphasis on preserving cash right now."
At first I was confused by this, but then the lightbulb went on. A stock buyback merely reduces the outstanding float of shares. The shares bought are cancelled. This use of money for buyback would help increase EPS in the future, but does nothing to increase their control of the company, and this IS NOT WHAT THEY ARE THINKING OF RIGHT NOW, IMO.
MRVC is conserving their cash right now mainly to fight any possible hostile takeovers!
How? If a hostile starting buying up shares in a bid to acquire MRVC, MRVC would also use their cash to buy up shares. These shares ARE NOT CANCELLED, but are held as treasury shares without reducing the float, I believe. In other words, they could use that money if they had to, to buy up enough shares to maintain a 51% controlling interest if they needed to. Even at say a $14 average (pleasant thought right now), MRVC could buy over 10 million shares, which coupled with the 5 million or so management now holds would allow them to retain control of the company!
This of course would be bullish for us as, with BOTH a hostile bidder AND MRVC buying shares, the price would rise quite nicely.
Consequently I now believe that MRVC will NOT buy anyone else until the stock price moves back up on its own. Before I thought they would make a move before year end, but I think I see now why this won't happen.
The 80 million authorized level will, IMO NOT be used in the near future, but was done now to give them flexibility for the future.
Someone asked about a stock split (to general laughter in the room), and Noam said something close to "in the future, why not?" with a big smile.
I asked Noam if he was planning on pursuing both big and small Carriers with their new technology, mentioning that I thought ASND had most of the BIG carriers locked up. Noam said "Both Big AND Small". Noam said they have a "good" (I forget the word exactly, it might even have been "close") relationship with ASND, saying that he admires them and that they "talk back and forth" - I think he meant on technical issues. I was VERY glad to hear this as this means ASND will be aware of MRVC's DWDM, carrier class router and Fiber Driver technology. Since IMO, ASND could use MRVC's new technology to further cement their lead with carriers over CSCO and NT, and since if something DID happen here with ASND it would be BIG, BIG, BIG for MRVC - not only in vastly increased sales, but it would VALIDATE their technology in the market place. I can only hope Noam pursues this with them.
I mentioned to Noam that MRVC did not show up in Dell'Oro reports on Ethernet ( especially GE) port or vendor sales market share. I mentioned that apparently only DOMESTIC GE ports were being counted. Noam said he thought that was OK, as they do sizable domestic sales too, but I said that Nbase/Xyplex is NOT showing up. Noam seemed very surprised by this, and said something about he could show me something, but we didn't finish as others were coming up front. I promised to follow-up further with him on this issue. He said he would be receptive to this and would follow up with Dell'Oro if there WAS a problem.
THE TOUR
Having no car, I rode with Signist and his wife, and R(on)Stange. We then proceeded to get lost getting to MRV, making several U turns and ultimately calling MRV on his cell phone for directions. Many thanks to the lady at the front desk who stayed on the phone as we called out street signs, indicating turns until we were right out front.
This caused us to be late to the tour, so we missed the foundry (initially) and caught up with the others. Diana was good enough to offer to take us through the part of the tour we missed after the official tour was over, As Signist said in his notes of the last meeting, MRV runs a very austere company. No unnecessary expenses here, and everyone was hard at work. Everything appears to be assembled and tested by hand.
Dr. Rav-Noy conducted us through the MRV portion of the tour. I see now why MRV maintains the multiple personalities. MRV seems to run as an independent operation, selling its products to Nbase (and Xyplex?) as well as to outside customers. He said that delays from one of MRV's vendors was part of the cause that they had to delay the new Nbase products. He said Nbase has to wait "just like everyone else" when delays occur. He also said that of MRV's approximately 19% contribution to MRVC's total revenue, about 14% total was to other companies, leaving the other 5% (or about $3 million) as MRV's internal sales to Nbase. Viewed another way, it appears that Nbase is about a 25% customer of MRV!
Confused? I am too.
Dr. Rav-Noy did say that these sales were of many low-priced components, and that the business was very steady and they are looking to add new customers and increase sales. Later in the tour, Noam mentioned that prospects for the MRV products were even stronger than usual. He mentioned RELTEC and RELTEC's connection with WCOM and others. He also mentioned the possibility of a large European contract in this area by mid-Summer (giving no details of course), but he is definitely enthusiastic about the MRV product area.
We did see the Fiber Driver (316) product and testing. It surprised me to learn that for new products like the 316 , MRV tests 100% of the boxes before shipping. This seemed quite unusual to me, being used to higher volume production and random spot testing of products. This should lead to very high quality on shipped products.
Good news. In a sidebar conversation I overheard between one of the tour members and a MRV VP, it seems the Fiber Driver has had a strong initial reception and boxes shipped are already in the "hundreds". Not bad for only a few weeks. As this could mean new customers as well that may then buy other Nbase products, I was very happy to hear this.
After the official tour was over, we went back to see the new foundry, which is really now going to be an expansion of the old building, rather than a new facility as originally planned (cost cutting?). One of the techs mentioned a new photo masking piece of equipment arriving in February, that will increase their capacity and throughput by a factor of EIGHT. I gathered that this piece of equipment is expensive, so this is an example of where MRVC is spending their dollars. They are not "burning cash" as accused in the market place, but rather are re-investing heavily right now in their future.
WHY I DON'T THINK WE WILL SEE A LOSS IN Q4
BEST, having estimated too high (based on MRVC guidance) in Q3, is IMO going to MAKE SURE they are guiding low now by moving to a $0.05 loss.
As you know I mentioned my disappointment in the guidance for Q3, especially on the R&D and SG&A which came in much higher, 29% as opposed to the 8-10% guidance received, and on GM which came in at 38.8% - much lower than the "43% or just under" guidance.
Noam did say they are planning to hold the line at these levels for Q4 and that they were actively looking to see what costs could be cut. But, IMO MRVC is making a major commitment now in their future. I feel that for every dollar they save with the left hand, they will not hesitate to spend on any good engineer or R&D person that becomes available, as competition is intense, so for crystal ball purposes let's kick this up another 5% in Q4.
Noam's current comments indicate they expect a sequential increase in revenue of about 4% in Q4 over Q3. The comment about good initial Fiber Driver sales that I over heard, the fact that Q3 was better than Noam guided, and the fact that Summer is over in Europe lends credibility to this, so let's assume this as accurate.
Gross Margins were a shocker. Noam did say that this was because they intensely cut prices to compete in Q3, but that they would not continue doing this in Q4. Therefore, possibly we have just seen a bottom on GM, especially since MRVC's 3 new upgraded Ethernet switches (with higher margins?) will be available later this quarter. However, let's assume the same 38.8% level for Q4.
I see now how they handled interest income versus interest expense, and the net of these 2 was actually lower than in Q2, so let's assume the lower Q3 number.
Now let's run these numbers, using the new share count as of Q3
I will post the table separately in fixed font format.
(See next post for the table that was here)
I have to say that if EPS estimates were being scaled down because of declining revenues, we would have a much more pessimistic situation here. But EPS is declining because MRVC is investing heavily in it's future. Grow those revenues, Noam.
Lastly, the carrier class router that MRVC is developing simply boggles the mind.
The Q3 CC says a backplane capacity of 256 GB and a routing speed of 200 Million packets per second. Let's see - 100 OC-192 (10 GB/s) connections via DWDM (or any form) would be less than half the capacity of this beast, if I read that right. Absolutely incredible!
Gee, Noam, ASND could stop development on their GRF if they used your future product., and ASND could open the door for MRVC for BIG, BIG, BIG future sales of this router. I wonder if you've thought of that?
Well, this about covers it for now. I'm tired. Flying back tomorrow. I gained a lot of insight (I think) from this one event. I will be able to sleep easier now. GO MRVC!
CC: Noam Lotan
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