What Mr Pink is trying to point out is that
company is transfering pricing and costs using
one-time restructuring charges and write-offs,
which were announced in Q1.
The point is, without knowing what the accrued
liabilities were specifically for, you can make an
argument on how it is used to fake earnings. But
on the other hand, you can also make a case that company
is being conservative, and took the pain in Q1.
The point is, the market has already known about the
charges and the stock is still not 12 dollars, as the
shorties would like MRV to be.
Unless company is delivering products to fake warehouses,
revenue increases would be hard to fake. And announcement
of new clients and million dollar deals make it even
harder to fake. And as I examined the 8K/A
submitted by MRV for its Xyplex acquisition, I am favoring
that company is NOT crooked.
The 30 percent sequential increase in domestic sales is
another good sign that the xyplex acquisition is good.
The analysts in the CC were stupid and kept treating Xyplex
as a separate entity. But Xyplex is not a separate entity.
The Edgeblaster/Edgeguardian products came about as a result
of the Xyplex acquisition. But full credit does not go to
Xyplex alone, because MRV had a contribution to creating that
product. Xyplex really had declining and ebbing
sales prior to the acquisition. But the Edgeblaster/Edge guardian
are new products that could not have been introduced without the
Xyplex technology. That is what is meant by "acquired technology
in progress", a thing used by Cisco in acquisitions to get as
big as they are now. So, it does not make sense to me when
people say that the Xyplex acquisition did not do well, just
by looking at the revenue breakdown of Xyplex legacy products,
versus MRV's products. The restructing charges were taken so
that legacy products do not have to be sold anymore, so clearly
Xyplex legacy products will have minimal contribution to the
Revs. But these legacy products have low margins and are going
to become obselescent, so why manufacture them? To see the
value of Xyplex, look at the customer service, the increase
revenues from service contracts, the 30 percent sequential increase
of U.S. sales versus prior quarter, and the remote-access-server
product lines at MRV.
BTW, if you are a salesman and you go to a customer. And customer
says, "Nice switches ... but you dont offer Remote access products".
In the past, MRV had no leverage to gain this new customer. Now,
MRV can say, "No, but we do have such and such." What valuation
do you add to this benefit? Do you think this "opening of doors"
to new clients is distinguishable in the balance sheet?
People kept saying the charges are too high and masking company's
troubles. The fact is, Lucent paid hundreds of millions for
Livingston, a company that had no client and no sales whatsoever.
Even taking into account the 23 million charge and the warrants
issued to Whittaker, MRV spent no more than 60 million. Now,
don't get confused by adding the 30 milion dollar purchased
technology . That was included in the purchase price of 35 Million.
BTW, as an example of MRV's conservative accounting. They
wiped the value of client relationships in Xyplex asset
section of the balance sheet and assigned it zero. I think
this is conservative. Any CPA's beg to differ?
In summary, as outsiders, we will NEVER know what is going on
inside the box for the next year or so. I have to concede
that while most of my decision was objectivity, part of it was
subjective. My discussions with the management and all have
made me feel good about holding the stock.
But I just want to point out that using 10K,8K in
MRV's case, you cannot flatly conclude that shit is happening in
the company just as you cannot conclude things are going well.
Realize though, that as a shortie, you can make money just
by capitalizing on the longs' fears. Until after a year
has passed, and all the reserves created by restructuring
charges are used up so that company can't use it to fake
earnings(at such time, shorties will have no seemingly logical
excluse to claim MRV is falsifying), shorties can capitalize on
arguments like "huge writeoffs, negative operating cash flow, etc"
to scare longs and make money.
Unfortunately, you have to make some subjective opinions along
the way.
Furthermore, i believe that in 1997 10-K, company had a small
footnote that said it expected negative operating cash flows
for a few quarters in 1998. This makes me feel comfortable that
company knew what they were doing. Certainly, negative operating
cash flows present risks. But at the same time, a lot of high
growth companies consume cash during the high growth period.
Again, I am not saying that based on the 10K,8K, company is
doing well. My decision to hold stock has a subjective
component. Coupled with the new clients announced, the
technology behind the WDM products described, my general feel
of the personality of management, the high insider ownership,
I think the incentives are aligned for the company to do well
for the shareholders. But that's me, and I can be wrong too.
You have to make your own decision, but please don't get
easily scared away.
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