Dana: Your response is appreciated. It invites a constructive dialogue, which I am only too happy to enter into - given my severely limited abilities and knowledge in the field of networking technolgy.
Parenthetically I should say that I never doubted your writing ability, only the colorful and flippant language that you sometimes use to provoke. I find it noteworthy that you yourself (apparently) haven't bailed on MRVC, despite your harsh words to Signist, but are only looking for an oppportunity to do so on a spike.
WHAT ATTRACTS ME TO MRVC IS THAT IT IS AN ENIGMA AND A VERY DIFFERENT COMPANY; AND IF IT PROVES OUT (ALWAYS A RISK) IT COULD TURN OUT TO BE THE INVESTMENT OF A LIFETIME
Why is it an enigma?
COMPANY BACKGROUND
First of all its background: it is a proven company with both a technologically gifted management and a cadre of battle-tested networking engineers. Until Q3 results which were announced on 10/29/98 it had an incredible 34 straight quarters of sequentially increasing revenues and earnings. Mr Pink raised questions as to whether some of this was the result of accounting sleight of hand (e.g., write-offs for in-progress R&D) but Sector Investor laboriously went through the math and concluded (to my satisfaction) that with the exception of maybe two quarters the growth was real. (See his post of a couple months ago.) This is why I do not believe (MHO) that MRVC bears comparison with SHIVA and MADGE. Those were flash in the pan companies: companies that burned brightly for a moment with one product or one concept and then were left behind in the technological dustbin. MRVC on the other hand built itself up from scratch focusing at first on "low end" networking products. It succeeded in the past- not with the newest or the latest- but by filling a low cost niche in the marketplace. It was able to do this profitably because its factories and offices were spartan and without frills and its executives who own ~20% of the shares pay themselves a paltry $100,000 a year. Over time the breadth and sophistication of the company's products has advanced to the point (according to reports) that it has been able to supply a customer as large and technologically advanced as BART (Bay Area Rapid Transit in San Francisco Bay) with a complete networking solution. I think that is just awesome. And it is not all! The company announced carrier class networking products whose specifications are now posted on its web site. I personally am not able to judge the merits of this product, but according to Sector and other posters, ASCEND and CISCO have nothing like it. At the last CC Noam said that this carrier class product would not ship until late 1999 with no significant revenue until the following year; but that in "early" l999 there "may be" endorsements and beta testing by two carriers and one entertainment company.
For me, one of the most vexing questions is whether for Q4 MRVC is going to show an operating profit. The date has not been announced but it will be in late January or early February. Benny the Bug (btb) believes that they will show an operating loss (before profit on the convertible bond buyback). He cites converations with Diane (of IR) and others -who he can't name - to the effect that the company "missed a product cycle" and that the company management has been quiding analysts lower. On the other hand Sector Investor recently stated it as his opinion that the only way MRVC will show an operating loss is if the company again dramatically increases R & D and SGA expenses.
IMHO Sector is right. He (Sector) a while ago posted a 5 year spread sheet for the company. Over this entire period MRVC's revenus growth has been slow and predictable. The company's largest customer accounts for no more than 5% of revenue. It has 17-18 sales offices worldwide; in other words it has a broad customer base. At the late August '98 CC (the Monday following the disastrous pre-announcement) Noam said that the expected 10-15% decline in Q3 revenue was due primarily to poor sales in Europe where historically MRVC has gotten >50% of its sales. At this same CC he said that sales from MRVC's fibre component business were strong and he expected it to represent a greater % of company sales in the future; further that they were building new foundries to meet demand. Also, it was said that "low end" networking products represented about 30% of company revenue (as of 8/98) and that this was where the company was seeing strong price competition - including new competition from INTEL.
At the 10/29/98 CC announcing the results of Q3, it is a gross understatement to say we had some surprises. The obvious one was that income (EPS) was only $.06/share rather than the .12 projected by analysts. The other surprise was R&D and SGA. At the 7/27/98 CC (announcing the apparently stellar Q2 results) the company had projected an increase in R&D and SGA for Q3 of between 8-10%. Instead, they each increased ~29% sequentially. But for this increase the company would have met analysts' expectations! The final surprise was that revenues, instead of the 10-15% decrease projected in August 98, only decreased 4.7%. Ironically, the disastrous August pre-announcement probably need not have been made. (Parenthetically, this is what makes Signist and others most mad: because we were "sandbagged". On 7/27/98 everything was hunky-dory and the future looked rosy; then just 3 weeks later they pre-announce a 10-15% rvenue shortfall and the sky literally falls in.) To keep revenues up for Q3, management aggressively cut prices. It was this that cut gross margins from the historical 43-44% to the 37-38% range. On 10/29 ,at least, Noam said that cost cutting was over and that margins would improve.
Market conditions in Europe have markedly improved since 10/29; this is one reason I am skeptical of an operating loss. This is buttressed by 3COMS results announced 12/23/98: they cited in particular strong networking sales for the quarter in Europe. MRVC should get their share in a marlet in which they historically have been strong. Another reason is that MRVC's last "official" prediction for Q4 was for a revenue increase. There is still time for a pre-announcement regarding revenue shortfalls for Q4, but until there is something official I am going to take unofficial "whispers" with a grain of salt; for it is my thesis, developed below, that MRVC management- for reasons of their own- are in a "low profile" "poor-mouthing" frame of mind. To use A. Sternberg's phrase, they are as "negatively candid" as they can be about the company's prospects.
MRVC As AN ENIGMA
Most company's managements "puff" their company, its products, and prospects; MRVC's does not, or at least it hasn't since the August fiasco. The most blatant proof of this is the total lack of PR releases of the company's new products. Here you have a company that is dramatically ramping up its R & D expenditures, that DOES have new products(e.g., the new carrier class terabit thingamajiger) and new customers; yet there is not a single PR release. Every other networker - not to mention - every other company - make PR releases on a daily basis for $20,000 sale to every Podunk schoolboard. We neglected stockholders have to stumble across these products on the company's web sites. We never do hear of new sales despite the fact that high dollar sales are increasing dramatically. Web sites? MRVC develops a major new web site for internet sales in the name of an anonymous subsidiary. It is only by happenstance that we learn the subsidiary is wholly owned by MRVC. This whole "blanket of silence" (my phrase) is confirmed inadvertently by Sector who about a month ago was talking with Diane of IR who innocently lets on that the company has decided to take on a "low profile" approach to the world for the time being.
Why a low profile? I'll answer that question with a question: Why not? What has it got MRVC being upfront with the Street? and analysts in particular? Answer: the stock has been savaged and for most of the past 5 months has been priced at under book value. In other words, less than could be realized from cash on hand and the proceeds of a quick sale of the company assets. Nothing for the intellectual capital; nothing for the laboriously gathered , talented and irreplacable cadre of networking engineers who, BTW, from all accounts, to a man are NOT demoralized and ARE sticking with the company; nothing for the company's nearly complete line of networking products which -even if they are not protected by patents- are substantially protected from competitors by way of trade mark and other laws.
MRVC has good reason to be disillusioned with Wall Street. This is why, Benny the Bug, I do not give too much weight to what management may have said to analysts. There is no personal motivation for them to give these analysts a secret, but fair and complete, appraisal of the company's future prospects. I don't doubt that MRVC may have missed a product cycle for one product. I just doubt -given the company's broad customer and product base - that it could have that big an impact Q3 to Q4, especially given that the company has not seen fit to announce it publically.
Long term, the company means everything to these Israelis managers who nursed this company from nothing. I am sure they think of it as "theirs." Despite their protestations to the contrary, I believe -like Sector and Signist - that these managers do not particularly care about the interests of us anonymous shareholders. What they do care about short term is control of the company. For reasons which I, and others, have debated before, I am certain in my own mind that they are not about to sell out. They DO fear a hostile takeover at these ridiculously depressed prices. And it is here that IMO we must look for the explanation of management's excessive "negative candor;" its "low profile" public relations. They're playing possum. As far as they are concerned it is just as well that the Street view them as a "broken" company. They hope thereby to buy some time. As to what they plan to do with that time, I have no idea; maybe they don't either. All IMHO.
Bruce |
