GRUNTAL REPORT: (please excuse the mess)
GRUNTAL & CO., L.L.C.
Investment Research Morning Comments Page 1 of 3
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This report includes information obtained from sources believed to be reliable but no independent verification has been made and we do not guarantee its
accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any
transaction. Gruntal & Co., L.L.C. or its affiliates may take a position or engage in transactions with respect to securities identified herein. ÓGruntal & Co.,
L.L.C. 1999. All Rights Reserved.
Gruntal & Co., L.L.C. · Established 1880 · One Liberty Plaza, New York, NY 10006-1487 · Telephone (212) 820-8000
Member New York Stock Exchange, Inc. and other principal exchanges · Member SIPC · www.gruntal.com
MRV COMMUNICATIONS, INC.* (MRVC)-MAINTAIN HOLD RATING –
LOWERING 1999 ESTIMATES
SOFTWARE, SOFTWARE SERVICES & TECHNOLOGY
Vivek N. J. Rao, Sr. Vice President
Garry I. G. Parton
(212) 820-3624 February 17, 1999
Price: $8.00 52-Wk Rng: $29.25-$5.06 12-Month Target: NA Investor Suitability: Aggressive Growth
Shr. Out/Mk Cap: 27.4/$219.2 Mil Five Year Secular Growth Rate: NA%
Float: 20.5 Mil Institutional Ownership: 27.0%
Avg. Daily Vol.: 557,166 Insider Ownership: 18.0%
Div/Yield: Nil/Nil Net Debt-to-Equity Ratio: 0%
Qrtly --1Q-- --2Q-- --3Q-- --4Q--EPS
Curr Prior Curr Prior Curr Prior Curr Prior
12/00E§NA NA NA NA
12/99E§ ($0.04) $0.03 $0.02 $0.06 $0.05 $0.07 $0.09 $0.13
12/98A§ $0.26 $0.31 $0.06 ($0.09)
FY Ends --EPS@--12/
31 Curr Prior P/E
12/00E $0.51 15.7x
12/99E $0.12 $0.29 66.7x
12/98A $0.53 15.1x
§ Quarters may not total due to rounding. NA-Not Available.
@ Fully-diluted operating EPS.
COMPANY DESCRIPTION
MRV is a rapidly growing designer, manufacturer and marketer of high-speed network switching products (sold under the NBase brand name) and fiber optic
transmission systems (sold under the MRV brand name) that enhance the performance of existing data and telecommunication networks. Within these two
segments, the company concentrates on computer networking products such as Local Area Network (LAN) switches, hubs and related equipment and fiber
optic transmission components for the transmission of voice, video, and data across enterprise, telecommunications and cable TV networks. The company
combines its expertise in advanced switching and proprietary fiber optic technologies to create state-of-the-art products and solutions.
1999 CHALLENGES:
SUCCESSFUL PRODUCT TRANSITION AND RETURN TO PROFITABILITY
Investment Summary
• Quarterly revenue exceeds expectations while EPS were below forecast. After the close of the market yesterday, MRVC
reported 4Q98 revenue of $74.9 million, 15% over our 4Q98 estimate of $65.1 million and 54.7% over 4Q97 revenue of $48.4
million. The reported loss per share for 4Q98 was ($0.09), which exceeded our estimate of ($0.03) and far lower than the
reported 4Q97 EPS of $0.25. The shortfall in 4Q98 EPS was due to continued competitive pricing pressures causing lower
gross margins.
• Pressure on gross margins expected to continue near term. The company is still undergoing the transition to higher-margin
products. Management indicated that competitive pricing pressures and costs associated with new-product ramp-up would
continue to negatively impact gross margins for the first half of 1999. We do not expect a recovery in gross margins to historic
levels of 40% - 45% until 1Q00 at best. New higher-margin products, although impressive from a technology standpoint, will
require significant investments in manufacturing and marketing and are not expected to contribute significantly to revenue until
the second half of 1999. Accordingly, we are adjusting our EPS and revenue estimates for 1999 to $0.12 and $279.2
million from $0.29 and $276.5 million respectively. In addition, we are introducing a 2000 EPS estimate of $0.51 on
revenues of $313.0 million.
GRUNTAL & CO., L.L.C.
Investment Research Morning Comments Page 2 of 3
FAX FLASH – For Immediate Distribution
This report includes information obtained from sources believed to be reliable but no independent verification has been made and we do not guarantee its
accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any
transaction. Gruntal & Co., L.L.C. or its affiliates may take a position or engage in transactions with respect to securities identified herein. ÓGruntal & Co.,
L.L.C. 1999. All Rights Reserved.
Gruntal & Co., L.L.C. · Established 1880 · One Liberty Plaza, New York, NY 10006-1487 · Telephone (212) 820-8000
Member New York Stock Exchange, Inc. and other principal exchanges · Member SIPC · www.gruntal.com
• Competitive environment puts pressure on smaller networking companies. Market dynamics, the technological landscape
and competitive forces in the networking space are changing very rapidly. The change places increased pressure on small
companies, such as MRVC, to execute flawlessly. In our opinion, the company clearly needs to form additional strategic
partnerships to leverage its high-end networking and optical component technology and increase market penetration among the
telecommunication carriers, Competitive Local Exchange Carriers (CLECs) and Internet Service Providers (ISPs).
Quarterly Highlights
• Revenue and earnings results for 4Q98 and 1998. MRVC reported 4Q98 revenue of $74.9 million, 15% over our 4Q98
estimate of $65.1 million and 54.7% over 4Q97 revenue of $48.4 million. The company also reported full-year revenue of
$264.1 million, 3.8% over our estimate of $254.3 million and 59.6% better than the full-year 1997 revenue of $165.5 million.
The improvement in top-line results was not matched by the bottom-line performance. The company reported a loss for 4Q98
of ($0.09) per share, below our estimate of ($0.03) and versus the 4Q97 EPS of $0.25. For the full-year, the company reported
EPS of $0.53, down 39.8% from the 1997 EPS of $0.88. Gross margins during 4Q98 decreased to 29.0%, down sequentially
from 38.8% in 3Q98 and 44.1% in 2Q98.
• Revenue breakout by product line and geography. For the quarter, networking products accounted for 80.8% of total
revenue, in line with the 81% in 3Q98 results, and optical components the remaining 19.2%. For the full-year 1998,
networking products accounted for 81.5% of revenues and optical components the remaining 18.5%. The U.S. accounted for
43.6% of total revenue, up from 41.5% in 3Q98, and the remaining 56.4% was international, primarily Europe. For the full-year
1998, the revenue split between U.S and international was 40.7% and 59.3%, respectively.
• Solid balance sheet with improving working capital management. Combined cash, cash equivalents, and investments at
the end of 4Q98 were approximately $151 million, down from $157 million at the end of 3Q98. Some of the cash was used to
retire a portion of the outstanding convertible debt and fund equity investments in new startup companies. Receivable days
sales outstanding (DSOs) decreased sequentially to 67.1 days, down from 84 days at the end of 3Q98. Inventory days
outstanding also decreased sequentially to 82.1, down from 119 in 3Q98. Going forward, the company expects to maintain
DSOs in the range of 65 - 70 days. During 4Q98, the company took a charge of $3.1 million for discontinuing certain low-end
products.
• Prize winning new products announced. The company launched several new products that have generated strong interest.
The new products announced include: the Gigabit Switch Router (expected to ship during October), the AcceleRouter (expected
to ship in March), the Wireless Fiber Driver (shipment expected sometime during June or July), and the Dense Wave Division
Multiplexing (DWDM) MetroFusion product line, developed at New Access Communications, Inc., (expected to ship late
September). The MetroFusion product line and Wireless Fiber Driver products received awards at the ComNet 99 trade show
held in Washington D.C. In addition, the company realized approximately $2 million in revenues from the Fiber Driver
product that was introduced early in 4Q98. These new products should revitalize the revenue growth rate once they attain
critical mass.
• Equity investment made in three small companies. The management of MRVC also announced that an equity investment
totaling less than $3 million had been made in three companies: 1) New Access Communications, Inc. (working on optical
networking technology) in the United States; 2) Kempton Communications in Europe (working on E-commerce and Internet
network security); and, 3) and Charlotte's Web in Israel (working on Terabit router). The agreement between MRVC and the
other companies gives MRVC the option to acquire a majority ownership position in each company, if MRVC does not already
have a majority position. The company's strategy behind these investments is to maintain the aggressive pace of innovation and
also retain the possibility of cashing out at a future date via an IPO.
VALUATION
Although we expect the company to achieve annual revenue growth in 1999, the bottom line is expected to show a year-over-year
decline. Without a return to profitability and signs that margins, both gross and operating margins, have begun the process
GRUNTAL & CO., L.L.C.
Investment Research Morning Comments Page 3 of 3
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of recovery, we don't expect meaningful enthusiasm within the institutional investment community. We are maintaining our
HOLD rating on the stock and expect it to trade in a range of $6.00 to $12.00 over the near term.
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