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

To: Sector Investor who wrote (12896)	4/23/1999 10:03:00 PM
From: Sector Investor	Read Replies (5) \| Respond to of 42804

Well, here we are only 1 trading day away from Q1 earnings. Will they be better than expected, right on expectations (- $0.03) or worse than expected? I don't think the number itself is very important - it's how the number was reached that is important. Under the right circumstances, even a worse than expected number can actually be a positive - let me demonstrate. What we expect to see Per Noam, Q4 revenue was stronger than normal, due to revenue from Q3 pushed into Q4. We were told in the Q4 CC to expect lower revenue than Q4, but higher than Q3. Therefore I expect we will see revenue in the high $60s, say $68 million. GMs are also not expected to increase much until Summer, but my guess is we will see a slight improvement here in this quarter. R&D and SG&A growth continuing to outstrip revenue growth. In the 10K Annual report for 1998, we did NOT see any mention of expenses for Kempton Communications or Charlotte's Web, but on February 16th, Noam said MRVC "either owned or have the option to own" a majority interest in them. Therefore, I expect to see some expenses for them embedded in these numbers in Q1. What we hope to see Continued good news on Fiber Driver sales and a good market reception for AcceleraRouter. Strong ramp-ups here could increase their revenue a bit higher. Also news that EdgeBlaster is now selling well. We also hope for a CC where management turns highly optimistic, but I would not expect this just yet. I will settle for "cautiously optimistic" for now. Also, just saying that "the corner has been turned" on Gross Margins, should be enough to send the stock on an uptrend. What we might see This is another "free" quarter for MRVC (2 in a row) in the sense that no one is expecting MRVC to do more than a loss of 3 cents. Everyone is prepped to think of this as another transitional quarter. Roktar's Barney hints at a slightly worse number. Beating this expectation in Q1 may actually NOT be the best thing for them to do - actually just the opposite, if you take a full year view. I can see that they might elect to increase their loss in this quarter by exercising their first set of options and expensing them as R&D expenses (and perhaps both sets) to increase ownership in New Access THIS quarter, rather than in Q2 and/or Q4. Here is what the 10K said on the New Access warrants: "warrants to purchase additional capital stock of New Access, which, if fully exercised for an aggregate of $2,050,000, the Company would own an aggregate of approximately 60% of New Access's capital stock (when the shares purchased upon exercise of the warrants are added to the Company's existing stake in New Access). The warrants are exercisable in two installments (provided the first installment is exercised) by July 1, 1999 and January 4, 2000, respectively." Now, each installment is about $1 million, which, if taken, reduces earnings between 3-4 cents (depending on taxes). Now, if it were my decision, knowing all the good news about New Access's prospects, I would elect to exercise these warrants NOW (at least the first installment), in their "low expectations" quarter, rather than in Q2 when they will be expected to start producing results. I don't know whether the January, 2000 options can be exercised early or not, but if they can they might also consider doing that as well. So they can probably alter Q1 earnings by up to about 6 cents lower, just by accelerating these options, and make the later quarters look better as well. What I don't think we will see Another earnings charge. They took a $3 million charge in Q4 for inventory obsolescence. It was to their advantage to take all such charges in 1998, so I would be highly surprised if this happened. So, if they DO show a worse than expected loss, and the reason is because they DID exercise the New Access options, I don't see this as a negative at all.