MRVC: Company Update; Reiterating Strong Buy Rating
FIRST SECURITY VAN KASPER CHET WHITE (310) 443-3406
RESEARCH REPORT Cwhite@fscnet.com
SEPTEMBER 18, 2000 NETWORKING/COMMUNICATIONS
MRV COMMUNICATIONS, INC.
(MRVC - $54 1/8)
Company Update; Reiterating Strong Buy Rating
EPS REVENUES (MM)
Fiscal Year: 99/98 00/99 00/99
December 1998A 1999A Change 2000E Change 1999A 2000E Change
Q1 $0.12 ($0.03) NM $0.01A NM Q1 $70.1 $65.0A (19%)
Q2 $0.15 $0.02 NM $0.02A NM Q2 $73.3 $73.9A (3%)
Q3 $0.02 $0.02 NM UR NM Q3 $71.3 UR NM
Q4 ($0.05) $0.02 NM UR NM Q4 $73.9 UR NM
Year $0.26 $0.03 NM UR NM Year $288.5 UR NM
P/E 186x NM NM Mkt Cap/Revs 15.3x NM
52-Week Range: $97 3/8-2 1/2 Rating: Strong Buy
Market Cap. (MM): $3,893 Price Target: $158
Shares Out. (MM): 68.9 Book Value/Share: $2.82
Estimated Float (MM): 41.85 Current Year ROE: NM
Est. Insider Holdings: 18% Debt to Total Cap. (3/00): 50%
Est. Institutional Holdings: 22% Gross Margin (FY00): 34%
10-Day Average Volume: 1,241,800 Next EPS Report: Oct. 2000
MRV Communications, Inc. is a world class leader in the rapidly expanding area
of optical network components and systems. MRVC designs, manufactures, and
markets leading edge high-speed network switching, routing, remote access, and
fiber optic transmission systems for data, telecommunications and cable TV
networks.
MRV COMMUNICATIONS-VALUE BEYOND LUMINENT AND OPTICAL ACCESS
Recent discussions with the management of MRV Communications, Inc. and its
subsidiaries and investments increase our confidence that MRV represents one of
the most undervalued opportunities in the rapidly growing marketplace of optical
networking. Management noted that its business net of Luminent, Inc. (optical
components) and Optical Access (wireless optics) has excellent visibility for
the next several quarters, and the company expects to report strong quarterly
results. We believe that, within the next 30 days, MRV Communications should
drive significant value for its shareholders as it delivers incremental news on
its portfolio of investments and subsidiaries. Due to quiet period restrictions,
we are limited in our commentary regarding Luminent and Optical Access, but
would encourage investors to refer to our prior reports and recent S-1 filings.
We had previously estimated that the value of Luminent alone would net MRV
shareholders approximately $57 per share, close to the value of the whole
company today. It is also worth noting that several other top-tier underwriters,
including CS First Boston, Oppenheimer, Bank of America, Robertson Stephens,
and Piper Jaffray, believe that Luminent is a worthy underwriting candidate.
Management also reiterated its commitment to filing its second IPO, Optical
Access, within 90 days from July 26. We expect the company to work diligently in
filing Optical Access on the early side of this October 26 deadline. Given our
confidence in Luminent's prospects and numerous other pending announcements from
MRV Communications' other subsidiaries and investments, we believe that MRV
Communications' shares should significantly outperform in the near term. Based
on our sum-of-the-parts valuation, we reiterate our Strong Buy rating with a 12-
to 18-month price target of $158.
COMMENTARY
As we previously stated, we believe that Luminent's value alone is potentially
worth the value of the stock today. Additionally, we expect the company to
deliver to Wall Street its first glimpse of a wireless optics pureplay, Optical
Access. We also believe that MRV Communications' 12 other subsidiaries and
investments should attain a collective value that is more significant than
Luminent and Optical Access's combined value. Our most recent valuation of MRV
Communications' net excluding Luminent and Optical Access is $114 (refer to
Table III). We also believe that MRV Communications may realize the value
through an IPO or acquisition of three or four of its subsidiaries and
investments over the next several quarters. We have updated below the status of
MRV Communications' most visible investments:
Luminent Subsidiary: Optical Components and Subsystems (Expected IPO
September/October)
ú Quiet period.
ú Underwriters include CIBC World Markets, Robertson Stephens, and U.S. Bancorp
Piper Jaffray.
Optical Access: Wireless Optical Systems (IPO 4Q00)
ú Quiet period. Management committed to filing an S-1 90 days from July 26.
ú Underwriters: to be announced.
iTouch Subsidiary: Broadband Access (IPO 1Q01)
ú Incremental news: management reported that it has won several orders from blue
chip wireless Internet companies. We estimate that iTouch's wireless Internet
system could grow from approximately $5 million in 2000 to more than $50 million
in 2001. The In-reach offering could also contribute an additional revenue of
$25 million in 2001.
ú iTouch is a broadband access company that has two offerings: the In-reach
network management solution and the recently introduced transaction management
solution for the wireless Internet. iTouch's transaction management solution
takes the next step in broadband access by offering self-provisioning and new
levels of integrated Cost of Service and Quality of Service.
ú Going forward, we expect iTouch to announce additional customer orders from
several major ISPs, CLECs, and numerous smaller ISPs. We also speculate that the
company may commit to an IPO filing timeline shortly after Optical Access's
filing.
Zaffire, Inc. Investment: Multi-layer Optical Switch (IPO 1Q01/2Q01)
ú Incremental news: we expect Zaffire, Inc. to announce its first major order
for its Z3000 solution within the very near-term.
ú Financing: Zaffire recently closed an $85 million third round, which we
believe was completed at an $850 pre-IPO valuation. In addition to the solid
valuation, the financing was backed by an outstanding list of new financial and
strategic investors. With new names such as Morgan Stanley Dean Witter and Co.,
Bank of America Securities, and Oppenheimer on board, we believe that there is
no question about Zaffire's ability to go public. Zaffire's management also
chose to allow ten strategic investors, such as Vitesse Semiconductor
Corporation and ETEK, to participate in order to ensure component supply. MRV
Communications also participated in the round and retained more than 20%
ownership.
ú Valuation: we believe that Zaffire's unique wavelength fractionalization and
proprietary amplifier technologies offer superior price performance to even the
most recent offerings from firms like ONI Systems Corporation. Given ONI
Systems' $10.3 billion dollar valuation, we believe that our most recent
valuation of $8 to $10 billion for Zaffire is very realistic.
Charlotte's Web Networks Subsidiary: Terabit Router (IPO 2Q01)
ú Incremental news: Charlotte's Web Networks recently added three new beta
sites, which brings the total to four-two with major carriers and two with
equipment vendors. Management has not disclosed the names of these betas, but we
speculate that these are world-class companies. Management noted exceptionally
positive performance reports from its betas. Charlotte's Web Networks also
recently closed a second round of funding. Investors included Sycamore Networks,
Williams Communications, CS First Boston, and MRV Communications. MRV
Communications retained its 53% majority stake.
ú Charlotte's Web Networks had a working version of its Aranea 1 at SuperComm,
and all of the software has now been completed. We believe that the company is
on schedule to ship the initial version of the Aranea by the fourth quarter of
2000 and the voice/data version in the first half of 2001. This schedule would
keep Charlotte's Web Networks on track for an IPO sometime in the next
six-to-nine months.
ú Valuation: we believe that Charlotte's Web Networks' unique protocol
independent processing (TDM, IP, ATM, Frame Relay), scalability, and price
performance are superior to even the most recent offerings from firms like Avici
Systems, Inc. Given Avici Systems' $5.6 billion dollar valuation, we believe
that our most recent valuation of $3-5 billion for Charlotte's Web Networks is
achievable.
CONCLUSION
In summary, we believe that the business fundamentals are exceptionally positive
and that MRV Communications' world-class portfolio of optical networking
startups and subsidiaries is poised to capture the full potential of this
explosive opportunity. We reiterate our Strong Buy rating with a 12- to 18-month
price target of $158. |
