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

To: Saul Feinberg Jr. who wrote (9741)	7/30/1998 9:45:00 AM
From: Greg h2o	Respond to of 42804

Bear Stearns 7/28 report. Hope it's helpful. BEAR, STEARNS & CO. INC. EQUITY RESEARCH MRV Communications (MRVC - 19 15/16) - BUY It's A Perception Thing; Maintaining Estimates; Reiterating BUY Rating ----------------------------------------------------------------- *We are reiterating our BUY rating on MRVC shares after the company, as expected, delivered a solid Q2. MRV stock was weak yesterday (down 8.6%) on worries over earnings and a generally volatile tech market. As the numbers showed, the sell-off was totally unjustified and investors, in our view, should be aggressive buyers of the stock at this level. In our view, it is becoming a perception thing - MRV has been incorrectly perceived as a low-end switching company, and as we mentioned in our First Call note on July 22 with which we repositioned our investment thesis on MRV, MRV has become a full-service, end-to-end networking vendor with strong product differentiation - optical networking (WDM), Gigabit Ethernet switching which supports long- distance transmission, and as always, good price performance (Please see our note dated July 22 on details). We believe the company is putting renewed focus on investor relations and enhancing shareholders' value. As this message gradually gets out to the investment community, we believe multiple will expand significantly from the current 16 times 1998 and 11.4 times 1999 EPS estimates. MRV reported Q2 EPS of $0.31 vs. $0.21, up 17% sequentially and 46% year over year, $0.01 ahead of our and the consensus estimate of $0.30. The company reported revenues of $65.7 million, up 8% sequentially and 66% year over year, exceeding our forecast of $64.2 million, thanks to better than expected growth in the U.S. Deferred revenues increased by $560,000 to $4.88 million in Q2, showing a growing service and support organization and a more conservative accounting policy. Gross margin was in line with expectation at 44.1%, unchanged from Q1, while operating margin was slightly (20 basis points) below expectation at 17.6%, as the company continued to invest in Selling and Marketing. We think the company's most impressive achievement in the quarter was its better than expected growth in the U.S. - domestic revenues grew 17% sequentially and accounted for 40% of business in Q2 (up from 37% in Q1) - which showed the progress of the cross-selling efforts by Xyplex's U.S. sales force. (MRV added more than 30 U.S. sales people from its acquisition of Xyplex). While Europe (45.5% of revenues, compared to 44.5% in Q1) continued to be strong with 10% sequential growth, the rest of the world (ROW) was down slightly in absolute terms from Q1 although Asia was up slightly in absolute terms. International revenues accounted for 60% of business and grew 3% sequentially from Q1. Networking products grew 8% sequentially and accounted for 82% of revenues while fiber optics components products (transmitters, receivers, and repeaters) also grew 8% sequentially and represented 18% of revenues in Q2. For the first time, the company broke out its optical-enabled networking products (switches with optical/fiber interface) which accounted for 22% of revenues in Q2, demonstrating the company's strength in optical networking. In addition, average deal size appeared to have increased in the quarter and the company reported that it had a number of $1 million-dollar deals in Q2, showing that the company is "moving up the chain". The company is also adding a more impressive customer list including Icon, Florida Power and Light, Nextel, and a number of large Canadian and European companies and service providers. As we had expected, MRV was able to improve its balance sheet items. Day Sales Outstanding (DSO) decreased to 84 days from 88 days, as the mix of U.S. business increased in Q2. In addition, Days Inventory decreased to 113 days from 118 days, while inventory turns improved to 3.24 from 3.05 in Q1 and 2.67 in Q4. We believe the company will continue to improve its DSO and inventory turns going forward as the company increases its mix of domestic revenues and exercises better inventory management. The integration of Xyplex appears to be on schedule and the company seems to be benefiting from the cross-selling opportunities especially in the U.S. The company indicated in the conference call that it is developing a terabit routing switch (similar to those being developed by hot start-ups Juniper and Avici) which would be available for beta trial in mid-1999. We think high-end carrier- class products like this, along with the company's WDM products (See our note on July 22), should improve MRVC's mind share in the service provider space (now representing 18% of revenues), and should help improve MRVC shares' multiple over time. We are taking a conservative stance and maintain our estimates for the balance of 1998 and for 1999. *We are reiterating our Buy rating on MRV stock. ----------------------------------------------------------------- MARKET CAPITALIZATION: $ 572 million SHARE COUNT: 28.6 million shares EARNINGS Q1 Q2 Q3 Q4 Mar Jun Sep Dec Year P/E Current 1997 $0.19A $0.21A $0.23A $0.25A $0.88A 22.7x Current 1998 $0.26A $0.31A $0.32E $0.37E $1.25E 16.0x Previous 1998 $0.26E $0.30E $0.32E $0.37E $1.25E 16.0x Current 1999 $1.75E 11.4x --------------------------------