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

To: Bruce L who wrote (11612)	1/9/1999 8:56:00 PM
From: Sector Investor	Read Replies (1) \| Respond to of 42804

Bruce, that was as excellent a summary as I have ever seen posted for MRVC. I too, have been struggling with why MRVC might (according to rumors, roktar's Barney, etc.) report an Operating Loss in Q4, which has historically been strong for them while Q3, being a Summer quarter is weaker due to traditional weakness in Europe - not just for MRVC, but for many companies. The four factors that have the most impact on Earnings are Revenue, Gross Margins, Operating Expenses (mainly SG&A and R&D), and of course one-time-charges. Let's examine these for Q4. Revenue: By all reports I have seen conditions in Europe have improved over the Summer period. MRVC indicated that some potential Q3 revenue was pushed into Q4 (not lost) by the slow European Summer where people take extended vacations, etc. Then we have Fiber Driver, which is a unique product in the industry at the moment and appears to be well received. It was announced in October, so it's positive impact begins with this quarter. Counter balancing Fiber Driver, we have a slower than expected ramp up of EdgeBlaster/EdgeGuardian sales due to some desired missing features like ISND BRI support. MRVC said these will be corrected in Q1 - too late to help Q4. But Q4 was only supposed to be the first quarter of significant revenue impact anyway, so it is not a major portion of expected revenue. The main source of revenue is their switching products, which MRVC indicated in the Q3 warning CC and the Q3 CC as now being less leading edge compared to competitor's products and was affected by heavy cost cutting in Q3. They also said they would not do this in Q4 - but their new products are not announced yet (this week?), so we could well see some decline in revenue contribution there - but I don't think if it occurs, it will be major. Then we have their Fiber Optic products, which has always been and should continue to be a very steady grower. Management indicated in the Q3 warning CC that they were looking at all ways to increase revenue - looking at the Infrastucture spending in Q3 we now see why. One obvious way to increase revenue is to grow their Fiber products business faster - and indeed I saw evidence of this when I toured their facilities, including their Foundry, where there are planning for up to an 8 fold increase in capacity. Noam said that MRV (the fiber subsidiary) will experience positive impacts from RelTec's contract with a major carrier (Sprint I think). Noam also hinted during the tour that by this Summer MRV could have a major new contract on the Optical products area. I chided him a bit, by laughingly asking him if he would issue a Press release if they got the contract, and I think he said "maybe" or something like that. Then we have Noam's own words at the annual meeting that Q4 revenues would be up 4-5% over Q3. But this was just after Fiber Driver was introduced and I don't think strong sales there were factored in. All in all, Revenue should not be the major factor in low earnings or the predicted loss in Q4. Margins: Gross Margins took a major tumble in Q3 to 38%, which is right at or close to MRVC's historic lows. They indicated the drop in Q3 was due to aggressive cost cutting, which they said they would not continue into Q4. In my spreadsheet (will I will provide another link to below) you will see that Margins have normally fluctuated significantly from quarter to quarter, and that the Margins in Q1 and Q2 were among the highest they had had. It is hard for me to see Margins going much lower in Q4 - we shall see. Operating Expenses: This is where I expect the big anchor on earnings will continue to be. The move from a niche vendor of commodity products to a full fledged Networking vendor of leading edge products and networking solutions (not the same thing) takes a lot to accomplish. It requires significant strengthening of R&D, Sales and Engineering and Customer Support. The Xyplex acquisition helped them tremendously in this regard. This is where I completely disagree with roktar on the Fool thread, who views the Xyplex acquisition as failed, because it has not been immediately accretive. The Xyplex acquisition WAS ABSOLUTELY NECESSARY for this transition. They acquired significant help in all 4 areas, plus acquired the ABSOLUTELY VITAL software for routers and other networking products. The new Carrier class router for example will require slow software based routing to be integrated into ASICs to gain full wire speed at monster capacities. How can you integrate code that you don't have? If not for Xyplex, MRVC would still be missing essential pieces to their transition plan. They are also trying to do this technical transition during the period all small companies must go thru to become large ones - the $200M - $1B period, where they can no longer operate as lean and mean as they did when they were small. Suddenly their fast growth exposes problems in Marketing, Investor Relations, Executive Information Systems, etc. that were there before, but much more manageable. Now they have to fix them - by hiring more and more qualified staff and by diverting some resources that would have gone into technical projects before into new infrastructure related internal projects. Then there is the Foundry expansion I mentioned earlier. Increasing their capacity by a factor of 8 requires them to purchase new and expensive lithography and photo masking equipment. The technician I talked to during my tour indicated they expected at least one major piece of equipment to come online in February. Well guess what? That means the equipment probably came in in December and will show up as expenses in Q4. Look at it this way. 1998 is a year of Operating loss due to the Xyplex acquisition. 1999 has the potential to be much improved. Now if you had some major infrastructure equipment purchases to make, which quarter and year would YOU want to put the expenses into? I expect to see all components of Operating expenses higher than for Q3 - and if there is a loss, this will probably be why. One-time-charges: MRVC took a whopping $53M charge in Q2. If there are any additional charges they need to take (who knows?) they will take them in Q4 rather than next year. I have the feeling 1999 will be a showcase year for MRVC - new products, new solutions, new customers, new alliances, new image (?) and few charges. So Q4 could be strong - or they could use it to clear the decks for 1999. I think it will be both. The link to my spreadsheet that I mentioned above: Message 6422551

To: Bruce L who wrote (11612)	1/9/1999 9:33:00 PM
From: Dennis R. Duke	Read Replies (2) \| Respond to of 42804

While it does not cover the full periods take a look at this chart: techstocks.com RDRT missed numbers and had a bounce off its book value. Within the last 100 days the gain has been 115% for its investors. Positive earnings are yet to be achieved. An earnings announcement later this month might maybe have RDRT into positive numbers. Hard Drives are coming back into favor as demand increases for PC's. Our sector is also in high demand, and similar recovery is very possible in my opinion. ASND up 52% within the last 100 days and at $71 is up 223% from its low in fall of 1997. That is when ASND did similar presentation errors on its profit picture and working with the street. They too did not warn and gave assurances that they were going to in fact make the numbers from analyst. The first real notice of the miss was when they announced, and wam, the stock took a header. But they recovered, why should not MRVC recover, too. Finally for the long here who have held through this fall, a drop of 60+% is not pleasant. But with the warrants priced at $24 and debentures converting at nearly the same numbers ($27 as I recall), it is clear to me that some investors have faith that this is a turnaround capable of a better then ASND's and RDRT's investment results. Bruce, I appreciate your summary of past events. It confirms my holding of this stock and I will continue to do so. Later, (-8 Dennis 8-)

To: Bruce L who wrote (11612)	1/10/1999 9:37:00 PM
From: rascalbythesea	Read Replies (1) \| Respond to of 42804

Bruce.. in the interest of accuracy. As long as you are bringing up my name and what I said, at least check post #11527 and post #11535 one of which I have re-printed here. Frankly I didn't expect to get a third degree when I joined this board, all I tried to do was bring forth some information that might be useful to someone. The last thing I would do to someone is to put them in a position that might prevent further info from reaching the board. I don't agree with everything you say and I don't expect you to agree with everything I say. But lighten up, I can keep whatever I learn to myself and still read whatever is posted here. BTW, I was told earnings would be released the week of February 12. To: George Dawson (11525 ) From: bennythebug Thursday, Dec 24 1998 1:33PM ET Reply # of 11620 George, I am the first one to tell you I am not a techie so if you want to chastise me for that, that's fine. I wish I was more technologically knowledgeable. After conversations with Dr. Rav-noy, Noam and the IR, Dianne. The words were that the company missed a sales cycle. To me that can only mean the parade passed them by. New products are not ready on time. The Q2 CC Noam spoke about a very exciting q4, as I am sure you are aware by now, Q4 is going to show an operating loss. Once again new products at higher margins would have made the outlook better. Have you heard the phrase "we are re-inventing ourselves". That also tells you the parade has passed them by. I would like to point out that I have a substantial position in MRVC and a substantial loss to go with that.(my problem not yours). My hope is as I have said in a previous message, That Noam and Co. will get MRVC heading in the right direction and I can only hope it starts as of January 2. To show my ignorance, can you tell me what SOA stands for.