|Shares Out. (in M):||7||P/E||0||0|
|Market Cap (in $M):||78||P/FCF||0||0|
|Net Debt (in $M):||-27||EBIT||0||0|
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.
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.
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
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).
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.
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.
More special dividends & buybacks, profitability, potential acquisition.