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Technology Stocks : MRV Communications (MRVC) opinions? -- Ignore unavailable to you. Want to Upgrade?

To: Greg h2o who wrote (41282)	7/1/2003 4:44:15 PM
From: mahler_one	Read Replies (1) \| Respond to of 42804

Greg and others...a friend of mine forwarded the information below to me. I don't know how MRV is effected of course except to note that Marconi must sell product for MRV to make money. Hopefully Marconi's business is improving as evidenced by one of the previous posts. m1 Marconi – May 30, 2003 it hard to see how this fits with Marconi’s earlier guidance to reduce opex to 21-24% of sales. Even on Marconi’s earlier revenue guidance of £1.7 billion — and management is no longer giving full year guidance for revenues — that suggested opex would most likely need to be £400 million or lower. Gross margin — limited visibility for now. Marconi’s core gross margin was 24.4% in F4Q04, ahead of our forecast 23.7%, and management has raised its guidance for the current year’s annualised run rate from 24-27% to at least 27%. The FY4Q03 margin was helped by a significant sale of software licences in the US. We can see that the Network Services margin for the FYQ403 was 25.6%, compared with what we think was about a 22% margin in FY3Q03; Network Equipment’s gross margin was 23.7%. We think that without the software licence sales, the core margin would have been about a 1 percentage point lower. In its outlook comments, management warned that the sequential drop in revenues for FY1Q04 to ‘below £400 million’ will have ‘an adverse impact’ on gross margins. We have dropped our forecast from 23.9% to 22.5%. Though our FY4Q04 forecast of 27.5% is in line with management’s forecast of a run rate of at least 27%, the revenue uncertainty obviously makes gross margins difficult to predict. Targets for further working capital reduction look ambitious to us. Marconi made further good progress in reducing working capital in FY4Q03, and still sees this as key driver in further improving cash flow. But we feel Marconi is already now close to industry norms. During its annual results analysts meeting, management outlined its medium term working capital targets of 10x for stock turns, low 80s for trade debtor days and creditor days in the 60s. We see scope for creditor days expand from the very low level of 40 of FY 4Q03 as Marconi had paid down any overdue credits ahead of its financial restructuring. We think it looks challenging for Marconi to achieve net trade debtor days much below 90; it already reported 94 in FY4Q03. Net stock turns of 7.1x are already high compared with the peer group. Lower pension deficit helps valuation Marconi’s pension deficit according to FRS17 dropped from £439 million in September to £353 million at the end of March. This was due to certain revisions in underlying actuarial assumptions and reduced experience losses; one reason could be the different corporate bond rates used. Because we treat this as debt this has an impact on valuation. If the pension deficit had remained unchanged, our fair value using EV/sales would have been 44p (compared with 53p). Deferred tax assets still unclear. Marconi’s unrecognised deferred tax assets have dropped from £796 million on September 31 to £594 million at March 31; £96 million of this relates to FRS17 pension scheme deficits. Marconi has forfeited its US tax loss carry forwards as a result of the financial restructuring. It is still unclear what tax losses may be forfeited or restricted in areas such as the UK and Germany. Our model has assumed Marconi is able to utilise about £270 million over time; we have left that unchanged for now. Exhibit 2 Marconi: Key changes to guidance Core Metric Before After Revenue FY04 down up to 5% from £1.8bn Not reiterated F1Q04 NA below £400m Gross Margin Run-rate in FY04 24-27% at least 27% Restructuring Break-even sales under £1.7bn approx £1.5bn Annualised opex run-rate <£450m <£425m Headcount approx 14,000 approx 13,000 Source: Company data, Morgan Stanley Research NA = Not available