Q4 1998 Conference Call Synopsis
Hi everyone sorry this is so late.
Disclaimer: I had no recording device and Noam was sometimes hard to understand in the conference call. He also spoke faster than I could write, so most comments will only be approximations of the actual comments. Not all comments are recorded here either. Single quotes represent snipets of actual words, as I wrote them down in my notes.
I tried to record accurately, but I could have mis-interpretted some things. Make your own conclusions please.
Noam's opening comments:
His opening comment was one we have heard before. Delays in New Product introductions - a missed product cycle, has led to continued pressure on margins. The next statement was something like 'price per port and brand recognition are the most important items'
3 new products were introduced in Q4: a 10/100 workgroup switch, a 10 MB Desktop switch and a new Gigabit Ethernet switch. These have better price points and higher functionality, but will still experience GM pressure.
Demand in Q4 improved considerably. Revenues were higher than the original guidelines for 'modest' sequential growth, partly due to some Q3 orders delayed into Q4. They are holding to the original guidance, and therefore expect Q1 revenue to be higher than Q3 but lower than Q4 - between $64-65M and $74M.
Fiber Driver 'met' their expectations, with close to $2 million in revenue in Q4. They have several new modules in design (which later in the calls they mentioned as SONET, ATM and access server modules), and they are seeing new applications 'almost every day'. Other comments. Fiber Driver supports Ethernet, Fast Ethernet, Gigabit Ethernet, ATM, FDDI' etc. It is a 'managed optical infrastructure'. And an 'enhancer for existing networks'.
Wireless Fiber Driver was demonstrated at ComNet at over 1Gigabit speed for SONET and IP over SONET. Noam said CLECs and ISPs could use this as 'Virtual Fiber', connecting 2 points by line of sight. Later in the CC, Noam added that they see 'many more opportunities'. This product line will 'continue to evolve'. Noam called it a "great enabler" for networks. CLECs and ISPs can deploy at a 'fraction of the cost of fiber'. Can be used for SONET, IP over SONET, Cable TV, cellular telephony, and wireless local loop. Shipping for wireless will be 'June-July'.
AcceleRouter . Noam mentioned that there are about half a million software based routers, many of them from CSCO that have a speed of up to 100K to 200K Packets Per Second (pps). By connecting MRVC's plug and play AcceleraRouter this can grow to 'several million' pps, with 'full adherence to Network security'. MRVC will ship a 'modest quantity' in Q1. Other comments. AcceleRouter automatically learns the customer's 'Network Topology.' Customer reactions are positive, 'even enthusiastic'. However market acceptance is 'not assured'
NewAccess. At ComNet they were the first to do a live demo which combined 'commercial' level DWDM plus Data switching of multi-gigabit data in a Metro ring. Best of show. The NewAccess investment, an 'undisclosed amount' was 'expensed as R&D'.
In 1998 MRVC invested in 3 startups:
Kempton Communications in Europe for Network Resellers. E-Commerce tools and Internet Security systems. 'wide choice of design services and publications' over the Internet - a 'Virtual Network Security store'.
NewAccess in Santa Barbara (MetroFusion)
Charlotte's Web Networks in Israel (Aranea terabit router). The new product will be demonstrated at SuperComm in June.
In all 3 they 'either own a majority' or have an option to own a majority. Note: they used this identical statement many times. It seems to me that if they were all less than a majority they would have chosen different words, so they own a majority in either Kempton or Charlotte's web, or both.
Sales and Marketing were integrated and 'unified' in Q4. 'Better focus' 'Aggressive programs for training, Account Development, Business Development'. Later Noam added this included Global support (ISO9001 certified support) and training.. Noam mentioned a new Managing Direction for the U.K. was formerly from COMS. Noam said customers now have 7 or 8 different product support options, ranging from telephone support to 'on site'.
A large 'New Product Validation Lab' is 'under construction' in Littleton Mass. They named it 'PISTOL', for "Product Integration System Test Operability Lab".
Noam said the 'most exciting' development in Q4 was in their Lightwave transmission components. Q4 saw a 20+% increase in revenue. Due to 'seasonality' Q1 revenue won't be as high. Their 'backlog' continues to show 'strong demand'. They have 'increased penetration' of existing accounts and also have developed 'several new customers'.
They are investing in a new Foundry in Chatsworth with 'up to date wafer processing capability' which will increase their capacity and lower their unit production costs. They 'were not able to capitalize on this in Q4, leading to higher production costs (and lower margins) in Q4.
In Q4 Networking was 80.8% of revenue and MRV was 19.2%. This compared to 81.5% and 18.5% respectively for the full year.
This broke down to 56.4% international and 43.6% domestic in Q4, compared to 59.3% and 40.7% for the full year.
DSOs went from 84 to 67 days. They expect Q1 to hold about the same.
SG&A was $16.978 million or 22.7% of sales.
I think they took a reduction of their restructuring charges partly due to a renegotiated lease of 100,000 sq ft in Littleton.
Their SEC comments were a net positive, IMO
They said:
1) They have NOT been contacted by the SEC.
2) The SEC issued new guidelines late in 1998.
3) 50 companies, including NT and AOL have restated earnings based on this guidance.
4) Although the Xyplex acquisition occurred before these new guidelines, MRVC is voluntarilly electing to follow them and will restate earnings for Q1, Q2, Q3, which will each be reduced about $200K per quarter or -$0.01.
Q&A session
Vivek Rao - Gruntal
Q. Wondering when GMs will return to historic norms.
A. Don't expect much improvement the next 2 qtrs. Higher trend starting to take effect around mid-year.
GMs on Lightwave products 'initially 48-50& now 43% and expected to continue in low '40s'
GMs on Networking products 'low 30s' initially, which moved to 'low 40s' then to mid 30s last quarter, and now 'well below' 30% in Q4.
Q. Is Vertical Integration still smart, given higher sales now? Leads to lower GMs.
A. "This is our strength". Noam tried to explain the Synergy of Vertical Integration, citing the Fiber Driver, as a key example of a product using both passive and active components and networking technology.
Note: Vivek clearly does not understand this. It seemed to me he didn't comprehend what Noam was trying to say. Let me help. Vivek, The future of Networking will be Optically based. Their MRV division is right across the street from the networking division. Decisions can get made quickly - answers to questions also. An engineer can discuss a problem with an Optical scientist over lunch. New product concepts can be scribbled on Napkins, SYNERGY SYNERGY Speed to market is much faster.
Q. Re: NewAccess: How will marketing and revenue sharing be handled?
A. NewAccess is an 'independent company', free to make their own marketing decisions. They will have access to MRVC facilities, products and staff, but their revenue, being less than 50% will not be consolidated with MRVC's.
Andy Skopek - Nutmeg Securities (our former SI participant as 'MR. GREEN')
Q. Was the $3.1 million charge due to product lines being discontinued?
A. Yes.
Q. Were GM overly depressed by this?
A. Yes, we were 'especially competitive' on these products to get them out the door.
Q. Can you be more specific as to your investment for R&D for these three companies? Can you give a range, say $1-3 million, 3-5 million, etc.?
A. The amount was 'less than $3 million'
NOTE: I listened to this several times and I'm still not sure if the 'less than 3 million' represents their "total investment" or just their R&D expensed amounts. Andy definitely said both in his question. Edmund could have meant either one in his answer.
Q. Can you provide updated Q1, Q2, Q3 1998 statements so I have accurate P&L?
A. We'll get it to you tomorrow. All 3 qtrs will be reduced about $200K/qtr or 1 cent for each quarter.
NOTE: I asked Noam if he would make these generally available to the public. Diana replied to me saying:
"The restated #'s will be filed with the SEC, in conjunction with the fact that Edmund Glazer, CFO, had disclosed those #'s yesterday. All information will be properly disseminated."
Andrew Martin - Capital Management
Q. Good move on those bonds. If a similar situation arose in the future would you sell more?
A. We are always open on this.
Q. What is the $100 million on the "other" line?
A. U.S. Treasuries with greater than 1 year maturity
John L??? from DLJ
Q. What % of revs in Q4 came from discontinued products?
A 6-7%
? Lansky W. J. Nolan
Q. In the 'Optics segment' do you expect pricing pressures to continue in Q1?
A. Margins and revs in Q1 should be flattish.
Q. Is Fiber Driver likely to help on increased margins?
A. Yes. Noam added comment here about 'tremendous opportunities' and other comments already mentioned above.
Q. Can you get back to 40% GMs by the end of the year?
A. 40% by EOY is aggressive. We are 'hopeful'.
? from L. H. Friend? (My notes are not clear here)
Q. Is the Series 8000 Router still on track? Also NewAccess and Aranea?
A. Yes. It will be shown in Las Vegas in May at Netware+Interop. Shipping late Q3-early Q3 'midyear'.
NewAccess - pilot programs in the field in the Summer
Aranea will be shipping 'by year end'
? Norris Hedgehog Corp.
Q. Do previous estimates for Q1 still hold?
A. Not ready to readjust, but they may be higher than we will likely achieve.
Noam closed by saying that regarding future network capacity and bandwidth demands, he felt the ' only viable technology' to deliver it is Optical Transmission.
|
