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

To: mahler_one who wrote (42012)	4/29/2004 10:53:03 PM
From: mahler_one	Read Replies (1) \| Respond to of 42804

FYI... 04:19pm EST 29-Apr-04 CIBC World Markets Corp. (Shaul Eyal) MRVC BLS SBC VZ VZ. MRVC: Reports Solid 1Q04; Margin Upside ( Part 1 of 3 ) April 29, 2004 Shaul Eyal Ittai Kidron 1 (212) 667-8411 1 (212) 667-6292 Shaul.Eyal@us.cibc.com Ittai.Kidron@us.cibc.com Earnings Update Market Weight Sector Underperformer MRV Communications Inc. Reports Solid 1Q04; Margin Upside Israeli Technology MRVC-OTC (4/29/04) $2.35 Key Indices: NASDAQ, Russ 2000 12-18 mo. Price Target None EPS Gr. Rate (E) NM Shares Outstanding 105.5M 52-week Range $5.01 - $1.23 Float 80.0M Avg. Daily Trading Vol. NM Shrs Dividend Nil Div Yield Nil Book Value $1.29 per Shr Fiscal Year Ends December LT Debt $23.1M 2004 ROE (E) NM Preferred Nil Common Equity $136.4M Market Capitalization $247.9M Convertible Available Yes Company Description MRV is a manufacturer and provider of optical components and network infrastructure equipment. www.mrv.com Earnings per Share P/E 2003 ($0.26 2003 NM A) 2004 ($0.17E ($0.16E 2004 NM NM ) ) 2005 ($0.03E ($0.03E 2005 NM NM ) ) All Figures in US dollars, unless otherwise stated. - 1Q04 revenue of $59.6 million exceeded our $59.1 million estimate, reflecting solid demand for remote access and networking gear. Although gross margin was high at 34.3%, loss per share of $0.05 was in line with our estimates due to higher operating expenses. - For 2Q04, guidance is for revenue of $64-$68 million, representing a 3%-10% year-over-year improvement. Bottom-line guidance is for continued improvement. We believe MRV should work to reduce costs by addressing Charlotte's Web and low gross margins at the optical business. - Our 2Q04 estimates are in line with guidance, and for 2004, we are raising our revenue estimate to $262.7 million from $260.4 million, based on signs that new connectivity products are selling well. We are revising 2004 LPS estimate to $0.16 from $0.17. - MRV's business continues to show stability with solid traction in several product lines. We believe the optical unit still remains a hangover on gross margins. We will revisit our rating upon signs of more consistently positive revenue trends and further progress on cost cutting. CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision. See "Legal Disclaimer" and "Important Disclosure Footnotes" sections at the end of this report for important disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable. S o l i d 1 Q 0 4 ; M a r g i n U p s i d e On April 22, MRV reported 1Q04 revenue of $59.6 million, above our $59.1 million estimate, down sequentially 16.0% due to seasonality from $69.0 million, and up 16.6% year-over-year (YOY). The key drivers for the solid revenue were increased demand for remote device management equipment and a strong showing for physical network infrastructure equipment. Switches and routers were weak due to high seasonal exposure to the European market (~70% of revenue). With solid traction in remote device and networking equipment, gross margin moved up to 34.3% from 30.7%, ahead of our 32.0% estimate. We expect gross margin to bounce back to the 32% range going forward as the company continues to introduce new networking products. Despite revenue that beat guidance and our estimates, loss per share of $0.05 was in line with our estimates. The lack of bottom line upside was due to higher than expected operating expenses. From a geographic standpoint, Europe contributed 70% of MRV's total sales, versus 73% in 4Q03. The U.S. was 24% of total sales versus 21% in 4Q03, while Asia remained low at 6% versus 6% in 4Q03, and ROW was unchanged at less than 1%. R e m o t e D e v i c e a n d N e t w o r k S t r o n g ; O p t i c a l A H a n g o v e r O n M a r g i n s During the quarter, MRV was successful in developing its federal government business selling remote access management products. These products are not only attractive to government type customers but also to carriers who can manage components of their network remotely lowering support costs. We believe the progress with these products was somewhat of a positive surprise to management and we expect MRV to capitalize on this positive development to generate further sales. At the same time, MRV's multiple projects in Europe with several carriers has led to solid showing in network physical infrastructure equipment. The weakness came from switches and routers, which are typically weak in 1Q due to high exposure to the European market. MRV's optical business continues to show stability but remains a drag on gross margins. In our opinion, while products such as remote access and networking generate gross margins north of 50%, the optical business generates low gross margins of 10%-20%. Although management believes that a consolidation wave in the optical space and a rollout of fiber to the home/curb could lift margins, we see only little potential for margin improvement, especially considering the slow pace nature of deploying fiber. To date, only Verizon (VZ- Sector Outperformer) has committed efforts to this point and SBC (SBC-Sector Outperformer) and BellSouth (BLS-Sector Outperformer) have only limited rollouts. While Europe is more open to such deployments, we are not convinced it hold much potential for margin expansion over the next 3-5 years. B a l a n c e S h e e t a n d L i q u i d i t y C o n t i n u e T o I m p r o v e The company completed the quarter with a cash balance of $89.8 million and debt of $25.5 million, making for a $64.3 million net cash position, versus $69.2 million after 4Q03. While MRV managed to reduce the cash burn associated with its investment in Charlotte's Web to $0.6 million per quarter, we still view this cash spend as unproductive. We don't believe MRV could realize any value in Charlotte and would rather see management make a final decision in the near term. We expect MRV to make additional attempts to raise incremental funds and improve its liquidity. I n L i n e G u i d a n c e ; T w e a k i n g E s t i m a t e s Management's 2Q04 guidance calls for revenue of $64-$68 million, representing a 3%-10% increase over 2Q03, and a sequential increase of 7%-14%. Bottom line guidance remains ambiguous and calls for continued improvement. We estimate 2Q04 revenue of $66.7 million, and a loss per share of $0.04. We are lifting FY04 revenue estimates to $262.7 million from $260.4 million, based on signs of traction from new products, and our loss per share estimate improves modestly to $0.16 from $0.17, due to higher SG&A. We are slightly raising our FY05 revenue estimates to $288.9 million from $286.5 million, our loss per share remains at $0.03. C o n c l u s i o n The company continues to target cost cutting and a return to profitability, but we believe more aggressive action is necessary, more specifically with respect to Charlotte's Web and the low gross margin optical business. We would like to see a firmer trend of sequential revenue growth and a consistent move towards profitability before becoming more aggressive. Nothing much has changed in our opinion of MRV. We could reconsider our rating upon continued improvement in revenue levels and more cost containment that will put profitability on the horizon. We believe profitability could be achieved only at a quarterly revenue run rate of ~$80 million. We continue to rate the shares Sector Underperformer based on the considerable top line accomplishment during 4Q03, but remain cautious on the timing and level of future profitability, expecting breakeven during late FY05. Exhibit 1.Hidden Format Adjustment (A graphical object has been removed from this text version of the original document.) Exhibit 2.Hidden Format Adjustment (A graphical object has been removed from this text version of the original document.) Exhibit 3.Hidden Format Adjustment (A graphical object has been removed from this text version of the original document.) Source: Company reports and CIBC World Markets Corp. Exhibit 4.Hidden Format Adjustment (A graphical object has been removed from this text version of the original document.) Our EPS estimates are shown below: EON