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

To: signist who wrote (10513)	8/30/1998 5:50:00 PM
From: starpopper	Read Replies (1) \| Respond to of 42804

Signist/thread... Here is the reason for the invasion of our thread by pinko's army! Sorry for the distraction, but the battle has now been taken to the enemy! Message 5623352 Message 5626706 $tar.

To: signist who wrote (10513)	8/31/1998 9:16:00 AM
From: Greg h2o	Read Replies (2) \| Respond to of 42804

Bear Stearns report 8/28/98 MRVC: Weakness In Europe and New Product Delays Causing Earnings Shortfall Bear Stearns & Co. Inc. Bob Lam August 28, 1998 Bob Lam, CFA (212) 272-7670 8/28/98 blam@bear.com Subject: Change of Earnings Forecast Industry: Data Processing BEAR, STEARNS & CO. INC. MRV Communications (MRVC - 14 3/8) - Buy Weakness In Europe And New Product Delays Causing Earnings Shortfall; Lowering Estimates; Maintaining Buy Rating On Long-Term Outlook _________________________________________________________________ *After the market close yesterday (8/27), MRV announced that its Q3 results would come in lower than expected. The company estimated that Q3 revenues would come in at 10-15% below Q2 revenues of $66 million, while both gross margin and operating margin would also be lower than that in Q2. Consequently, we are lowering our Q3 EPS estimate to $0.12 from $0.32, and are reducing our revenue estimate to $57 million from $67 million. Although we are disappointed and surprised by MRV's announcement of earnings shortfall, we still believe if management executes, MRV has a potential to become a leading optical networking company within the next 18-24 months. In the near term, however, we think MRV shares will be under pressure until the company proves to investors that it can weather the current setback and to consistently beat our revised estimates over the next several quarters. Given the company's leading technology in high-speed switching (Gigabit Ethernet), emerging expertise in optical networking (WDM, and fiber-enabled high speed switching), and expanding sales and distribution capabilities in the U.S., we believe the company has a good chance of getting back on track by capitalizing on the growing demand for optical-enabled networking products. After speaking with management at length and doing some customer checks, we believe the negative surprise is a result of the following: 1. Weaker Than Expected Demand In Europe. While Europe has always been seasonally weak in July and August, we believe the anticipated pickup in September might not materialize as we had expected. Over the past week and a half, we are seeing hesitation from some European customers to purchase networking infrastructure equipment for shipment in September. We think this dramatic change is in no small part due to the turmoil in Russia as we are seeing particular weakness in Germany, which has close ties with Russia. With 46% of its business from Europe in Q2 of which 7% came from Germany, MRV is logically one of the first companies to be impacted by any slowdown in the region. We estimate that European slowdown accounts for more than half of MRV's shortfall in the current quarter (Q3, ending in September). We believe Europe will represent a smaller percentage of the company's revenues in Q3, as the weakness in the U.S. is not as significant, which should have a positive implication on DSO. 2. Delays In New Product Shipments. At the beginning of the quarter, we were anticipating that the company would begin volume shipment of its WDM products towards the end of September. It now appears that the WDM products are still at initial beta stage, which will continue over the next two months. We now believe that the company will be shipping its WDM products in volume by the end of Q4. While we did not assume any contribution from the WDM products in Q3, its production and shipment delay could have some "drag-on" impact on other high-end switching products as MRV has been using its WDM optical networking expertise as an "anchor" in marketing its high-speed switching portfolio. Consequently, some of the larger deals might have been lost due to the delay in WDM. Moreover, we were expecting an upgrade to MRV's high-speed switching product line by the end of Q3. It now appears that such upgrade will be delayed for 3 months due to component and manufacturing delays. While we believe the company is likely to reclaim most of the lost sales when new high-end products become available in 3 months, we would not be totally surprised if the company does lose some of its customers to other vendors in this highly competitive marketplace. 3. Lower Margin Implications. Almost all of the delayed products carry gross margins which are higher than the corporate average and were supposed to offset the continued pricing erosion in the older product lines. Consequently, coupled with continued pricing pressure in the U.S., such delays will have negative implications on gross margin over the next two quarters and in 1999. We believe our long-term investment theses on MRVC remain intact : MRV is evolving from a low-end switching company to 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 good price performance, which should drive multiple expansion on MRVC shares. However, given the change in the macro environment and the company's current setback, there are clearly more near- term risks to the story. We are lowering our 1998 EPS estimate to $0.85 from $1.25, and our revenue estimate to $245 million from $270 million. We are reducing our 1999 revenue estimate by approximately 20% to $315 million. Since we believe the company will continue to invest in its R&D and its sales and marketing capabilities, we are trimming our 1999 EPS estimate to $0.90 from $1.75. *We are maintaining our long-term Buy rating on MRVC shares. _________________________________________________________________ _________ MARKET CAPITALIZATION: $ 411 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 16.4x Current 1998 $0.26A $0.31A $0.12E $0.15E $0.85E 16.9x Previous 1998 $0.26E $0.31A $0.32E $0.37E $1.25E 11.5x Current 1999 $0.90E 16.0x Previous 1999 $1.75E 8.2x _________________________________________________________________