GRUNTAL & CO., L.L.C.
Investment Research Morning Comments Page 1 of 2
FAX FLASH - For Immediate Distribution
This report includes information obtained from sources believed to be reliable but no independent verification has been made and we do not guarantee its accuracy
or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction. Gruntal &
Co., L.L.C. or its affiliates may take a position or engage in transactions with respect to securities identified herein. OGruntal & Co., L.L.C. 1998. All Rights
Reserved.
Gruntal & Co., L.L.C. ú Established 1880 ú 14 Wall Street, New York, NY 10005-2176 ú Telephone (212) 267-8800
Member New York Stock Exchange, Inc. and other principal exchanges ú Member SIPC
MRV Communications, Inc.*+ (MRVC/NASDAQ/$27 7/8)
Rated: Strong Buy
Inv. Suitability: Aggressive Growth
12-Month Price Target: $43
52-Wk Range: $39 1/4 - $20 1/4
Market Capitalization: $797 MM
Institutional Ownership: 45.3%
Dividend/Yield: Nil/Nil
Avg. Daily Volume: 578,577
L.T. Debt: N/A
5-Yr. CAGR: 40%
Fiscal Year Ends: 12/31
EPS**: Q1 Q2 Q3 Q4 FY
1999E . . . . $1.73
1998E $0.26A $0.29 $0.31 $0.37 $1.24#
1997A $0.19 $0.21 $0.23 $0.25 $0.88
1996A $0.09 $0.11 $0.12 $0.16 $0.46#
**EPS on operations
* Gruntal & Company L.L.C. makes a market in
this security
#Quarterly estimates may not total due to rounding.
Summary: We are reiterating our Strong Buy investment rating on the
shares of MRV Communications ("MRV" or "the company"). We are
modestly increasing our EPS estimate for 1998 to $1.24 from $1.23 and
for 1999 to $1.73 from $1.72. We are increasing our revenue estimate for
1998 to $264.8 million from $256.9 million and for 1999 to $376.7 million
from $370.1 million. Reported results for 1Q98 showed sequential
improvements over 4Q97 in gross margin, operating margin, receivables day
sales outstanding ("DSOs") and inventory days outstanding. This was a solid
quarter for the company, with management delivering strong top-line growth
and the promised improvements in the balance sheet measures. The
company incurred non-recurring charges of $30.6 million for in-process
technology in connection with the acquisition of Xyplex. In addition, the
company recorded one-time charges of $23.2 million associated with post-acquisition
restructuring.
Description: MRV is a rapidly growing designer, manufacturer and
marketer of high-speed network switching products (sold under the NBase
brand name) and fiber optic transmission systems (sold under the MRV
brand name) that enhance the performance of existing data and
telecommunication networks. Within these two segments, the company
concentrates on computer networking products such as LAN (Local Area
Networks) switches, hubs and related equipment and fiber optic
transmission components for the transmission of voice, video, and data
across enterprise, telecommunications and cable TV networks. The
company combines its expertise in advanced switching and proprietary fiber
optic technologies to create state-of-the-art products and solutions.
Key Points:
ú Reported record revenue exceeds estimate. MRV reported results for the first quarter ended March 31, 1998 on
April 27, 1998. Sales in 1Q98 increased to a record $60.8 million, an increase of 71% over the prior year period and a
26% sequential increase over the prior quarter, and were substantially higher than our estimate of $55.9 million. The
Xyplex acquisition (accounted under the purchase method) contibuted approximately $5 million in revenues for
1Q98.This is the 32 nd consecutive quarter with sequential quarterly revenue growth. Net income for 1Q98 was $7.5
million (prior to non-recurring charges) or $0.26 per fully diluted share as compared to $4.7 million (prior to one-time
charges) or $0.19 per share in the year ago period. Networking products accounted for 82% of revenues and
fiber optic components the remaining 18%. The geographical split of revenues was United States 36.8% and
International 63.2% (Europe 49.8%, Asia 10.2%, Rest of World 3.1%). Revenue growth in 1Q98 was driven by
continued strong growth in international markets particularly Europe where the company enjoys a better pricing
environment for its products as compared to the highly competitive US market, significant new account wins in the
US market, a positive reception given by customers to the plethora of new products introduced in late 4Q97 and early
1Q98 and continued strong demand for high-end switching products as customers upgraded their networks to
alleviate bandwidth congestion.
GRUNTAL & CO., L.L.C.
Investment Research Morning Comments Page 2 of 2
FAX FLASH - For Immediate Distribution
ú Improvement in gross margins bodes well for long-term profitability. Gross margins improved in 1Q98 to 44.1%
from 43.3% in 1Q97 and 42.5% in 4Q97. This improvement was primarily driven by MRV's ability to sell more
chassis based switching products with higher average per port prices and improved manufacturing efficiencies.
Management has indicated that they expect gross margins to be between 43%-45% for the foreseeable future. With
the introduction of higher margin maintenance contract revenues (from the strong customer support organization of
Xyplex) into the revenue mix we expect that in the long-term the potential exists for gross margins to improve
beyond the current guideline of management.
ú Non-recurring acquisition and post-acquisition restructuring charges. The company incurred $30.6 million in
one-time charges for writing off purchased technology in progress as a result of the Xyplex acquisition. This was
approximately the amount that Xyplex had spent in the development of the Edge Blaster product. In addition, during
the quarter the company incurred $23.2 million in one-time charges related to a post acquisition restructuring. This
restructuring involved employee layoffs, relocation of people, closing of duplicate facilities, elimination of product
lines and training of the combined sales force. MRV has a demonstrated track record of assimilating acquisitions
quickly and seamlessly and we expect this to continue. We expect the Xyplex sales force and product lines to start
contributing in a meaningful fashion in the second half of 1998.
ú Significant new customer wins during 1Q98. The company is clearly gaining momentum in the high-end
networking arena as reflected by increased mind-share, market share and new customer wins. Some of the new end-customers
added to the roster during the quarter included General Services Administration (GSA), City of Des
Moines (Iowa), National Institute of Standards and Technology, University of California (Irvine), University of South
Florida, University of Washington (Seattle), Stanford Research Institute, Time Warner and Worldcom.
ú Improvements in inventory days outstanding and receivable DSOs. During 1Q98 the company achieved
significant improvement in inventory turns. Inventory days outstanding declined to 118 days at quarter end as
compared to 138 days at year-end 1997. Management indicated that further improvement in this measure should be
expected over the course of the year. Receivable DSOs declined to 88 days from 90 days at year-end 1997. With the
gradual increase in contributions from the US in the geographical revenue mix, we expect over the rest of the year, to
see a gradual improvement in receivable DSOs. On balance, we were pleased to see this improvement and we believe
that this removes a potential negative in the eyes of investors.
ú Modestly increasing revenue and earnings estimates. Based on the stellar results posted for 1Q98 we are modestly
revising our earnings model upwards. For 1998, we are increasing revenues to $264.8 million from $256.9 million
and EPS (fully diluted) to $1.24 from $1.23. For 1999, we are increasing revenue estimates to $376.7 million from
$370.1 million and EPS to $1.73 from $1.72. We continue to believe that MRV is one of the few companies in our
networking industry universe that is currently delivering on investor expectations with solid top-line growth.
ú We believe that MRV shares continue to be very attractive from a valuation standpoint. MRV's shares
continue to trade at a modest P/E multiple (22.5 times 1998 and 16.1 times 1999 EPS estimates) and a discount to the
long-term earnings growth rate of 40%. The company continues to trade at a discount to its peers on a P/E basis, 22.7
times 1998 earnings for MRVC versus 39.3 times 1998 for the peer composite. The high-end networking marketplace
in which MRV participates continues to exhibit robust growth driven by strong end customer demand to upgrade the
corporate network infrastructure. We are continuing to maintain our 12-month price target of $43, for a 54% return at
current share prices, and our STRONG BUY rating on the stock.
DATA COMMUNICATIONS-NETWORKING
Vivek N. J. Rao, Sr. V.P.
Garry I. G. Parton, Associate
(212) 547-1607
April 28, 1998 |
