The resignation last week of MRV Communications Inc.’s chief executive is the latest sign of trouble at the Chatsworth communications equipment provider, which has been dealing with shareholder unrest, falling revenue and a sliding stock price.
The departure of Chief Executive Dilip Singh follows the resignation in October of Chairman Ken Shubin Stein, as well as threats in recent months by shareholders to replace most of the company’s board.
Times have been tumultuous for MRV, which competes against giants such as San Jose’s Cisco Systems Inc. to sell services and networking equipment, including switchers and routers, to telecommunications companies and other clients. Shares on the Pink Sheets have dropped about 40 percent in the month since its last quarterly report, closing at 82 cents Dec. 7.
Unhappy with the company’s direction, shareholders, including hedge fund managers Boston Avenue Capital LLC and Prescott Group Capital Management LLC, pressed for a change in board leadership. Several threatened to launch a proxy war to replace the directors unless the company divested from some lines of business, returned money to shareholders and took steps to get relisted on Nasdaq. They also want management to begin holding regular earnings calls, which were suspended after Singh became chief executive in June 2010.
Amid this politicking, Singh and Stein stepped down from the board in October, replaced by directors thought to be more shareholder-friendly. An interim chairman, Philippe Tartavull, replaced Stein. Now, Singh has left the company altogether, even though Boston Avenue and Prescott had said they were satisfied with him remaining as chief executive.
Newly named Interim Chief Executive Chris King said that Singh, who had been in negotiations for a contract extension, left to pursue other interests. He added that the resignation was unrelated to financial performance, which King argued has been largely positive. He said he didn’t know whether Singhs’ departure was related to the issues with shareholders.
Jayson Noland, an analyst at Robert W. Baird & Co. Inc. in San Francisco who follows several MRV competitors, said the company is facing a fundamental problem: the increasing difficulty of smaller makers of networking equipment to compete against larger companies. For example, the U.S. mobile phone industry is dominated by a few carriers such as AT&T Inc. and Verizon Communications Inc., which often contract out to similarly large companies.
“It’s really hard because you don’t have the scale to invest as much in R&D, don’t have the resources to service the customers,” he said. “The outcomes in this market tend to be kind of binary, where the winners get bigger and win more often, and those that are struggling tend to continue to struggle.”
Declining numbers
MRV is not a newcomer to the industry. It has been making networking equipment since 1988 and it has some larger clients, including France’s Hub Telecom, a telecommunication services provider based in Paris, and Atlanta’s FiberLight LLC, which operates a fiber-optic network in the United States.
However, it’s feeling the effect of the growing European debt crisis, with its subsidiaries in France and Italy getting hit especially hard. MRV reported third quarter revenue of $62.5 million, compared with $66.1 million in the third quarter of last year. It also posted a slight net loss through the first nine months of the year, compared with net income of $11 million during the same period last year. (By comparison, Cisco reported revenue of $11.3 billion in its fiscal first quarter ended Oct. 29, as well as a profit of $1.78 billion.)
Interim CEO King denied that MRV was in any sort of trouble. He said that one-time expenses contributed to a year-over-year drop in profitability.
“I think we’re in great shape,” he said.
But declining numbers have been just part of its recent up-and-down history. In 2009, the company was delisted from Nasdaq for repeated violations that included failing to file quarterly reports and to hold annual meetings on time. When Singh came on board as chief executive last year, it was to replace Noam Lotan, who stepped down after serving as chief executive for 20 years.
Then there was this year’s public shareholder unrest, which appeared to be appeased somewhat after the election of two new board members, Robert Pons, a mobile phone media company chairman, and consultant Kenneth Traub. A $75 million shareholder dividend in October also was welcome.
Under pressure to divest, the company has been selling off divisions, announcing in September that it was “exploring strategic alternatives” for several business units. Last week, the company announced it planned to sell a Swiss subsidiary that makes networking equipment for aerospace and defense companies in a deal worth $24.6 million. Last year, it sold a larger division, Source Photonics Inc., which makes fiber-optic components, in a deal worth $146 million.
The new management team plans to continue exploring possible divestments, King said, and the return of regular earnings calls is likely.
“The plan is to continue focusing on the health and long term outlook of our business units, and their prosperity and profitability,” he said.
