Ron,
Xyplex was a company having 80 million revs last year,
and 40 million revs this year, or around $100,000 per
employee (contrast with Cisco, 500,000 per employee and
pre-merger MRVC, which was 400,000 + per employee). That's a big drop of revenues, and clearly a lot of costs have to be slashed.
23 million may look big, but may not be as big as it looks.
(note, I am meaning Xyplex's legacy products - terminal
servers ,etc. )
I believe about 100 people were laid off from Xyplex.
If u look at MRVC's annual report for 1996, it breaks down
the restructuring cost for Fibronics. That gives you an
idea of what kind of accrued restructuring charges Xyplex
might have caused.
------
Clearly, Wall Street is wary of the charges, negative cash
flows etcetera. But here's a case i'd like to point out:
Let's assume the worst. (It's good to always assume the
worst, because, as i said, the good news will take care of
itself and we can test how much margin of safety we have
in the stock price)
Let's assume that all the charges MRVC took for Xyplex were
to pad revenues. All the 53 million dollars. MRVC is on track to
make 265 million and maybe more this year. Taking away 53
million from 265, still gives you 210+ million, still a 30
percent gain from last year's revs of 165 million. Mind you,
that's saying basically assuming all 53 million dollars were
phony charges. (That is, the worth of Edgeblaster is zero,
the Xyplex talent is zero, the Xyplex experience is zero, that
the company Xyplex is non-existent,and other ridiculous assumptions)
Considering the worst, MRVC at these prices will still be fairly valued, if not undervalued.
Now, a stock can go from undervalued to even more undervalued,
when there is no momentum. Clearly, MRVC has no upward momentum.
So, the market does not really care whether MRVC is undervalued
or not. Inevitably, the networking stocks will be in favor,
but who knows when. But it does look to me that there is a considerable margin of safety.
The fact that MRVC is dropping means it might continue to drop on pure momentum. The hard part about buying out-of-favor stocks is that you can't look at the stock price for confirmation of your decision or not.
So, where is the cash going? Well, cash
is being used to buy more inventories, pay down the accounts
payable, pay the accrued restructuring charges and continue to fulfilling orders on 90 day terms, as you wait for the money to come. MRVC's sales seem to be really growing,
unfortunately, it takes an X amount of cash to withstand
the 90 day terms and etcetera. And the fact that it has been
growing means they have to allot more resources now for the
next quarter. So, the business indeed sucks up a lot of cash.
Fortunately, the sales are growing. To the extent that accounting
can use DSO's, and Inventory ratios to judge a company's health,
MRVC's ratios improved last quarter, albeit, I'm sure, Wall Street
would rather wait until cash flows become positive, etcetera.
One thing: sales are harder to manipulate than earnings. the
only way sales can be manipulated, is 1) if in fact company is
shipping to secret warehouses (like Sunbeam did) or 2) if company
is using accrued liabilities to pay for phony orders from its own,
and booking them as revenue. In the first scenario, there's
really no way to figure it out from the financial statements.
In the second scenario, the maximum amount they can fake the
revenues for would be what is in the accrued charges. In
MRVC's case, it's something like 30 million. But in our
worst assumption in the top part of this post, we assumed 53
million charges, and still come up with a 30 percent gain.
Interestingly enough, looking back at the Fibronics acquisition,
MRVC's cash flow became positive around the first quarter of
97, and stock rose from the 20's to the 40's before the offering.
While it is overpresumptous to assume that the positive cash
flow is the sole reason for the stock to move up, it is possible
that this fact, coupled with momentum favoring networking stocks,
made Wall Street buy MRVC.
Now, management has indicated they plan to be cash flow positive
this quarter, so we'll see. Interestingly enough too, the
4th quarter is usually the strongest quarter, so we'll see.
MRVC obviously, aside from designing good products, has to
execute better in terms of support, inventory management.
Nevertheless, I think MRVC has good sales trends and is
moving their products. As Terry pointed out, he wanted to get 2016's, but MRV was having trouble fulfilling product demand
at that time. They also have good technology so those things
cannot be factored in the balance sheets. It doesn't put
valuations to the fact that company mostly hires from CalTech,
and extremely high GPA students and bright students in engineering. I personally had a 3.7 GPA in engineering, but the 4.0's in
engineering schools are really one league above. And the fact
that they come from Caltech is another. (Note: I am not one
of those obsessed with high IQ's, I am just saying there are
a lot of people smarter than us. And this is not measured
in the balance sheet.)
Incidentally, the incentives of the management would seem
very contradictory to the claims that they are cooking the books.
I mean, as i mentioned in one post, if I were a crook running
a company, the first thing I'll do is pay myself a very high
salary. Plus, the candidness of Ravnoy, when I asked him flatly,
what do u plan to do with 100 million. "Oh easy.
we will put half of it in Swiss bank accounts, and another half,
in Cisco," he joked. So, I've worked with science types before,
and I really don't think Ravnoy would have malicious intentions.
Whether they can execute, given their good intentions, is another
thing you have to decide for yourself.
good luck. Again, this is not saying you should buy the
stock. Everyone should make up his own mind, even the shorts.
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