Last week, Chatsworth optical networking company MRV Communications Inc. dumped a side business that was crimping its profitability, and now investors see a bright future not too far down the line.
MRV released second-quarter earnings Aug. 10, but the big news came in the subsequent conference call, when Chief Executive Mark Bonney announced that the company had agreed that day to sell its Italian network integration subsidiary, Tecnonet, for about $22 million.
MRV’s primary business is manufacturing hardware and developing software for metro or Ethernet networks, such as those used by corporations with cloud-based systems. That business has better margins than the network integration side, which provides consulting and maintenance-type services for existing networks.
In the week after Bonney’s announcement, MRV’s shares skyrocketed 50 percent to close Aug. 19 at $20.12. In a week when most companies treaded water or worse, that made it easily the biggest gainer on the LABJ Stock Index.
In an email to the Business Journal, Bonney said MRV has been investing in new products, aiming to take advantage of increasing demand for cloud-based services. After selling off the network integration business, MRV will be more streamlined and have a stronger balance sheet.
In the second quarter, the outgoing network integration business brought in $18.2 million in revenue with a 17 percent gross margin. MRV’s network equipment business, on the other hand, brought in $24.5 million in revenue with a more robust gross margin of 35 percent, making it more than twice as profitable as network integration.
In an Aug. 18 report published on investor website SeekingAlpha, New York hedge fund Dane Capital Management – which has a long position in MRV – said dumping Tecnonet makes MRV more of a pure-play company, which means it should trade at higher multiples of revenue.
As examples, Dane pointed out two recent transactions involving similar companies. Earlier this month, Cyan Inc. in Petaluma was acquired by Ciena Corp. in Hanover, Md., for $488 million in cash and stock. In April, Sunnyvale’s Infinera Corp. agreed to buy Swedish optical networking firm Transmode for about $350 million. Both targets were valued at about 2.5 times their projected annual revenue.
Applying that same multiple to MRV would give it a share price of about $42 – more than twice its recent level.
Perhaps also boosting MRV’s fortunes last week is the fact that activist hedge fund Raging Capital Management in Rocky Hill, N.J., has upped its stake in the company from 22 percent to 31 percent, leading some investors to believe a sale of the company is around the corner.
