Hint of a Fiber Optic Rebound Breathes Life Into MRV Shares

Staff Reporter

Projections of resumed spending on fiber optic networks have brought some optimism on Wall Street about MRV Communications Inc.

Chatsworth-based MRV, a holding company for a number of businesses that supply telecommunications equipment, has lost $689 million since the beginning of 2000. But sharp investing has kept MRV afloat. It spun off its Luminent Inc. subsidiary while the market was still hungry for fiber optic shares, and later reeled Luminent back in at a much lower price gaining access to $93 million in cash on the unit's books. Later, MRV sold off most of Luminent's passive components division for $29 million in cash and assumed debt.

Now prospects for what remains of Luminent are figuring into a recent comeback in MRV's stock.

Luminent's main product, an optical transceiver, plugs into a fiber network and handles the routing of voice, data and cable television signals.

The product is central to MRV's plans to shift away from reselling other companies' telecom equipment. The goal is increased sales of its own fiber optic components, mostly Luminent's transceivers, to telecom carriers building fiber networks for homes and businesses.

"That's our backbone strategy. Margin is incurred through the whole process," said Chief Executive Noam Lotan.

This year, MRV has continued to operate at a loss. However, its stock has nearly tripled in price, to $2.94 a share as of Sept. 24, and trading volume during the previous three weeks has been among the highest of L.A.-based companies. Its 52-week low of 60 cents a share was hit on Oct. 8, 2002.

"Their plans are strategically correct. It will be interesting to see if they can penetrate what appears to be an improving environment," said Shaul Eyal, an analyst covering MRV at CIBC World Markets Inc. He has a "sector underperformer" rating on the stock.

In a July report, he cited concerns over the reliance on MRV's European business, a need for continued cost cutting and a still weak telecom spending environment.

Impact of FCC decision

Lotan said MRV expects to receive increased orders for Luminent's transceivers due to a regulation issued by the Federal Communications Commission in February that gives local exchange carriers exclusive ownership of the fiber connections they build at businesses and residences. Previously, the FCC required phone companies like BellSouth Corp. and Verizon Communications to share their fiber networks with other service providers, limiting the incentive to build them, Lotan said.

The regulation is expected to drive investment in fiber, though MRV doesn't expect to begin selling Luminent's transceivers to these phone companies until next year at the earliest. The company will use its distribution relationships with larger communications product vendors, such as Interlink Communication Systems Inc. and Marconi Corp., to sell its fiber optic components.

"We make several components central to this. It's going to be a very slow development," said Lotan.

Meantime, MRV has been cutting costs, improving its balance sheet and delivering better-than-expected revenues from its other operations, mainly in European markets.

The company uses Galcom Networking Ltd., an Israel-based network equipment company that it acquired in 1995, and branch offices across Europe to resell routers, switches and other telecom equipment made by other manufacturers. An $8 million order from an unspecified European telecom carrier comprised the biggest sale of the year so far for MRV.

The company has cut its losses significantly over the previous two years, reporting a loss of $9.7 million for the second quarter ended June 30, compared with a $21.1 million loss in the like year-earlier period. Second quarter revenues were $62 million, vs. $61.6 million in the year-ago quarter.

Analysts said moves such as the closing of factories in China and Taiwan and the continued investment in Luminent's technology are encouraging signs that the company is positioning itself to capture some of the expected growth in fiber network deployment.

Worldwide sales of transceivers are expected to surge to $3.7 billion by 2005, up from $2.2 billion in 2002, according to iSuppli Corp., a market research firm. The growth is expected to break several years of steep declines, as demand for transceivers shrunk by 21 percent in 2002 from 2001.

MRV's shares hit an all-time high of $97.44 on March 7, 2000.

Luminent went public in November 2000 with a $115 million offering priced at $12 a share. The shares peaked at $21.69 on Feb. 9, 2001.

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