Mrv/dt1st/mark2nd

By CHRISTOPHER WOODARD

Staff Reporter

Last month, Deloitte & Touche LLP lauded MRV Communications Inc. as the third fastest-growing high-tech company in L.A. County, after it posted a blistering revenue growth rate of 2,136 percent between 1993 and 1997.

It was an ironic honor, considering that just a month earlier, the bottom had dropped out from under the Chatsworth-based computer networking company.

That’s when Chief Executive Noam Lotan told shareholders that third-quarter revenue would fall 10 percent to 15 percent below the previous quarter’s figure, prompting a Wall Street stampede. The company’s stock lost half its value in a single day. It’s now trading at around $7, down from a 52-week high of about $36.

MRV’s case is only one of many that has turned up in recent months as investors have begun putting increased scrutiny on the numbers reported by public companies.

No one has accused MRV of accounting irregularities; in fact, it hasn’t done anything that many other fast-growing, acquisitive companies have done in accentuating their financial results. But its situation is a reminder that there is more than one way to look at a financial statement.

When dealing with technology companies, investors tend to take an approach similar to that of Deloitte & Touche in its “Fast 50” awards they look at a company’s revenue growth without probing too deeply into its balance sheet. And from a revenue standpoint, MRV is clearly on a tear; until the August announcement, it had posted revenue growth for 35 consecutive quarters.

But much of that growth was the result of acquisitions purchases whose impact on the company was written off as one-time charges of the sort that investors tend to forgive or ignore.

Mark Roberts, director of research for Off Wall Street Consulting Group Inc., a Cambridge, Mass. firm that identifies short-sale targets, said the company was able to show big revenue growth because it went on a buying binge, acquiring three companies since 1995 that added millions to MRV’s revenue stream.

But rather than count the purchases as part of the company’s operating expenses, which would have brought down its quarterly earnings, MRV took millions of dollars in one-time charges.

“I looked at the accounting and it was terribly misleading,” said Roberts, who recommended a short sale on the stock when it was trading at $28 last November and closed his position when it dropped to $6 in August.

MRV officials respond that Roberts’ motivations, as a short seller, are obvious. He wants to drive down the company’s share price so he can profit.

Lotan said that MRV followed Securities and Exchange Commission guidelines and generally accepted accounting practices in writing off certain charges for various mergers with other companies.

“We’ve actually been quite conservative,” he said. “I challenge anyone to show me we’re doing anything different than any other firm.”

But that’s precisely what’s wrong with the corporate world’s accounting system, Roberts counters. Large one-time write-offs may be generally accepted, but they don’t give investors a realistic view of a firm’s bottom line.

“If investors don’t pay attention, companies will continue to buy companies that they can write off immediately and bring those revenues in. And hopefully people aren’t paying attention to the costs,” he said.

MRV makes electronic components that allow computers to talk to one another, either through local area networks (systems contained in one office) or wide area networks (computers in more than one office that communicate via modem).

In naming MRV one of its fastest-growing companies, Deloitte & Touche considered only the company’s revenue growth from 1993 through 1997, based on company filings, said Charles Brower, Deloitte’s marketing manager.

“It’s just a recognition program for fast growing, high-tech businesses,” he said. “You’re going to have companies that are growing through mergers.”

MRV’s revenues skyrocketed from $7.4 million in 1993 to $165.5 million in 1997, fueling a surge in its stock price from the $6 range in the fall of 1995 to a high of about $38. Part of that revenue surge, the company acknowledged in its financial statements, was the result of its acquisitions.

MRV bought two Israel-based companies in 1995 for a total of $7.2 million in cash and assumed liabilities; it wrote off $6.2 million for R & D; charges on the deals, according to financial statements. In 1996 it made a $22.8 million acquisition resulting in $17.8 million in R & D; charges, and this past January it bought Simi Valley-based Xyplex Inc. for $35 million and wrote off $30.6 million for R & D.;

The practice of writing off R & D; expenditures at one fell swoop, though a common one for high-tech companies, has come under increasing fire in recent months. R & D; write-offs represent the estimated value of research and development at an acquired company at some future date and as such they are highly subjective figures.

Further, R & D; charges avoid paying a premium for “goodwill” the premium paid for a business that is above its value recorded on the books. Goodwill normally has to be written off as an expense over many years, but by calling an expense R & D; rather than goodwill, it can be written off immediately.

Despite the revenue slide and ensuing stock drop, MRV officials and at least one analyst who follows the company say the stock is undervalued. They believe the company will more than merit its status on Deloitte & Touche’s “Fast 50” list as the demand for telecommunications gear increases.

“I think they’ve been unfairly hammered,” said Fredrik Tjernstrom, an analyst for Horizon Asset Management Inc. out of New York City. “I definitely see earnings and revenue accelerating.”

Mannix O’Connor, vice president in charge of sales, said the company, with its January acquisition of Xyplex Inc., is well positioned to take advantage of the growing demand for data and voice communication.

The company cut costs at Xyplex, and now has that company’s nationwide sales force selling MRV equipment in addition to Xyplex gear, said O’Connor.

Lotan said that although the company has been hard hit by economic turmoil in places like Asia, and Europe, overall he believes the company is weathering the storm.

“Actually, we’re very, very bullish on our prospects,” he said.