Description

MRVC Summary

Note: This is an illiquid micro-cap, so probably only worthwile for PA's. MRV Communications (MRVC) is also effectively a turnaround -- hey, you want value don't you?  Underfollowed, with a colorful past littered with non-accretive acquisitions, exchange de-enlistment, and questionable governance, the company is in the latter stages of a multi-year business model transformation. 

In the last five years, with the assistance of an engaged shareholder base and board, MRVC has simplified its business model and balance sheet and is in the midst of executing its current strategy of expanding its product portfolio and market positioning within a large growth segment. With an aligned and focused management team and board, MRVC is poised to garner investor attention as it achieves profitability within its large addressable market. 

In many ways, MRVC is a private equity-like, public market investment. MRVC has 50% upside from current levels in the next 6-9 months, with further upside as a potential acquisition target.

Background

MRVC is a global supplier of packet and optical solutions that power large networks. MRVC products combine hardware with software to make networks faster and more efficient. MRVC enables service providers, data center operators and large enterprises to cost-effectively evolve their networks to address mission-critical applications, such as high-capacity cloud and data center connectivity, business services, mobile backhaul and the migration to virtualized and programmable networks. The Company was founded in 1988 and is headquartered in Southern California with additional research and development facilities outside of Boston and in Israel.

Despite a history of value destroying acquisitions and poor governance, 2014 was a pivotal year for MRVC as its stock was re-enlisted on the Nasdaq (after being delisted for several years) and underwent a management overhaul. Current CEO, Mark Bonney, took the helm in December 2014 after a brief tenure on the Company's board.  Both Mark Bonney and Chairman, Ken Traub, have executed a successful turnaround and sale effort in the past (sold American Bank Note Holographics to JDS Uniphase in 2008). In 2015 the current management team grew the Company's optical solutions business while divesting its European network integration business (Tecnonet). As a result, MRVC is now a pure play on network equipment.

Thesis

Industry related trends provide a backdrop of support for MRVC networking hardware solutions. Data center, mobile data, and video streaming traffic growth continue to be strong sources for infrastructure reinvestment growth among metro network users. MRVC has seen recent customer wins that are representative of each growth category. Today, the Company has over 1,000 customers, with the top two customers comprising 27% of sales.

MRVC has identified a $2-5 billion addressable market opportunity and is focused on penetrating the tier two and tier three regional service providers and data centers (TeliaSonera, FiberLight, and Coresite etc.). MRVC is positioned and prepared to attract market share in these targeted segments. 

Drivers & Catalysts 

• Engaged shareholder driving capital return - MRVC has distributed cash to shareholders in the form of special dividends three times in the last five years. The firm’s active shareholder base has been a driving force leading to these capital return decisions. Further, the Company has currently authorized a $10mln share buyback, which should reduce the available 4.7mln share float by nearly 15%. At current prices, the reduction in shares will further enhance shareholder value and insulate current shareholders. MRVC's concentrated investor base, led by Raging Capital, is in full control of driving shareholder and enterprise value. Raging Capital has effectively gained strategic control via Independent Chairman of the Board, Ken Traub, CEO Mark Bonney, and Director Brian Bellinger. Both Ken Traub and Mark Bonney possess significant turnaround experience independently, and worked together to execute the turnaround and sale of American Bank Note Holographics to JDS Uniphase in 2008.

• Business model simplicity and go forward profitability - addressable market size for MRVC solutions allow it go forward optionality. This is based on management's ability to execute on its core strategy of gaining market share among Tier 2 and Tier 3 providers and to quickly achieve profitability. Management's focus on reducing G&A costs to allow for R&D reinvestment bode well in maintaining an efficient executing platform. Further, the lack of attention among the investor community and a checkered past allows MRVC management the opportunity to effectively communicate and identify itself as a pure play networking hardware player. Wielding a new categorization will grant MRVC a fresh framework for competitive valuation. 

• Strategic value to acquirer - as a networking hardware pure play, MRVC warehouses potential for strategic interest. Share price support can be driven by the fact that the Company is attractively positioned to competitors looking to take advantage of synergistic efficiencies and gain market share in lower Tier segments. Recently exhibited consolidation trends within the industry, as well as a management team experienced in the turnaround and sale process, further supports this notion.

Valuation

Today, MRVC maintains a strong balance sheet with necessary liquidity ($3/share in cash, no debt) to fund further revenue growth. Current gross margins stand at 51% with further expectations of improvement in 2016 (undergoing a consolidation of outsourced manufacturers). Despite reporting annual operating losses for the last several years, MRVC has eliminated low margin business lines, increased gross margins, minimized SG&A, and increased investment in R&D to ensure viability of its current product mix. 2016 will likely see the fruits of these efforts culminate in revenue growth and operating profitability. 

In a competitive networking hardware space, similar comps trade near 1.7x sales; assuming this as a base case and assuming for revenue volatility (dictated by service provider reinvestment cycle and sales cycle), MRVC has the potential to trade to $17/share in 2016. Using recent private market comps the upside is north of $20/share (inclusive of existing NOLs). 

Risks

Revenue concentration, MRVC's top two customers account for 27% of revenue. The Company is exposed to significant competitive technological trends that could impair MRVC's ability to maintain differentiation and provide a sustainable offering. Lastly, MRVC is also exposed to a slowdown in network hardware spending, should service provider re-investment cycles slow, MRVC will be challenged.

Conclusion

In conclusion, MRVC is a private equity-like, public market investment. MRVC may possess 50% upside from current levels within 6-9 months, irrespective of even further upside in the event of an acquisition.

Catalyst

More special dividends & buybacks, profitability, potential acquisition.