MRV Communications' (MRVC) CEO Mark Bonney on Q2 2016 Results - Earnings Call Transcript

| About: MRV Communications, (MRVC)

MRV Communications, Inc. (NASDAQ:MRVC)

Q2 2016 Earnings Conference Call

August 4, 2016 17:00 ET

Executives

Kirsten Chapman - Investor Relations

Mark Bonney - President and Chief Executive Officer

Steve Krulik - Chief Financial Officer

Scott St. John - Senior Vice President, Global Sales and Service

Operator

Good day, ladies and gentlemen and welcome to today’s MRV Communications Second Quarter 2016 Results Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Kirsten Chapman of LHA. Please go ahead, ma’am.

Kirsten Chapman

Thank you, Greg. Good afternoon and thank you for joining us for the MRV Communications Conference Call and Webcast for the second quarter 2016 results. I would like to remind everyone that certain statements made during this call regarding matters that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the statements. To learn more about such risks and uncertainties, you should read the risk factors set forth in MRV Communications’ most recent annual and quarterly filings with the SEC.

All forward-looking statements made during this call speak only as of the time they are made. MRV undertakes no obligation to update such statements to reflect events that occur or circumstances that exist after they are made. The information provided on this call is contained in today’s financial results press release and the Form 8-K that were posted in the Investor Relations section of the MRV Communications’ website at www.mrv-corporate.com and filed with the SEC.

As a reminder, on the conference call, management provides non-GAAP measures as a mean to enhance the understanding of our operating performance. The company’s non-GAAP financial measures exclude the impact of stock-based compensation expense, severance and related restructuring costs and other nonrecurring costs which the company believes are not indicative of its core operating results.

In addition, as a result of completing the sale of our Network Integration business in December 2015, the Tecnonet S.p.A. business has been reclassified as discontinued operations. On the call today, management will provide non-GAAP results for our continuing operations.

Joining me today are President and CEO, Mark Bonney; CFO, Steve Krulik; and Senior Vice President of Global Sales and Service, Scott St. John.

It’s now my pleasure to turn the call over to Mark. Please go ahead, sir.

Mark Bonney

Thank you, Kirsten and thank you all for joining us today. As Kirsten mentioned, with me today are Steve Krulik, our CFO and Scott St. John, our Senior Vice President of Global Sales and Service.

We appreciate your continued interest in MRV and are proud of the significant improvements we have made in the company over the past few years. In the second quarter, we performed as expected and delivered revenue of $21.6 million, up 14% sequentially, driven by 19% sequential growth in core packet and optical product revenue. Importantly, second quarter bookings were strong, further validating our go-to-market strategy as the company continues through various product transitions. Scott and Steve will provide more color in a moment, but I will review a few highlights first.

We remain focused exclusively on solutions for the Metro, expanding our relationships with Tier 1 customers while at the same time focusing new customer acquisition on regional service providers and carrier-neutral providers in the data center market. As these customers are less well-served by our larger competitors, we are gaining momentum across our entire product portfolio. Bookings increased for the third consecutive quarter in the Americas and reached their highest levels since 2013 for both our Carrier Ethernet and our optical transport solutions globally. Further evidence of our momentum, is be continued growth of the OptiDriver, which both attracts new customers and increases the number of repeat customers every quarter. Scott will give you the details in a moment, but we are pleased that at the end of the second quarter, OptiDriver reached 111 cumulative customers, since its launch a little more than 2 years ago. For all of our customers, we strive to deepen our relationships, increase sales to support their market share growth and cross-sell other solutions. This quarter, we did so meaningfully with two existing Tier 1s that Scott will provide details on later in this call.

As we plan for Q2 requirements, we continue to innovate our core product families. This quarter, we launched the next generation of our flagship Carrier Ethernet network access devices, the OptiSwitch V Series. We’ve already begun shipping these products and early customer reports are very positive. We also extended our OptiDriver line with the compact chassis option that enables customers to scale more easily. Additionally, we are supporting our customers with best-in-class 100-gig solutions. These solutions are being adopted by existing and new customers. Again, Scott will give you more details, but I am pleased to report that revenue generated by 100-gig solutions through the first half of 2016 has already surpassed that of all of 2015.

We also announced significant enhancements to our Pro-Vision service orchestration software, including features to substantially improve its look and ease of operation. One of our strategic differentiators is over agility, particularly in product design and development. We continually test our strategic focus against market requirements and as necessary adjust our priorities as market dynamics change. This was evidenced in the second quarter where the market opportunity for OptiPacket led us to modify our development plans to refine the focus of the product on Carrier Ethernet aggregation and 100-gig applications.

Finally, we continue to refine the business with efficiency, effectiveness and lean principles in mind. We are currently in the process of consolidating our contract manufacturing for our core packet and optical products to 1 facility. This resulted in severance and other transition costs related to unwinding the California facility that impacted our GAAP gross margin. The majority of these costs are behind us now and we expect operations to be fully integrated by the end of the year.

Steve will now take us through the financial report. Steve?

Steve Krulik

Thank you, Mark. As noted, the following figures are non-GAAP results. A reconciliation can be found in our press release. Revenue in the quarter was $21.6 million compared to $24.5 million in the second quarter last year. The reduction reflects the impact of certain significant network project installations completed in the second quarter of 2015, as well as reduction of sales of our legacy infrastructure management products. Sequentially, revenue grew 14% from $18.9 million in the first quarter of 2016, driven by 19% growth in packet and optical products. Our legacy infrastructure management revenue was flat sequentially and the percentage of legacy revenue contribution declined to 11% from 12% in Q1 of 2016.

The second quarter gross margins were 48.3% compared to 48.9% in the second quarter of 2015. This variance was driven by the impact of product mix, including reduced contribution from our legacy infrastructure management products and the impact of increased revenue of 100-gig products that have higher average costs in current quantities. We are employing introductory pricing and we are purchasing supplies in less than full scale quantities. As our volume of 100-gig components increases, we expect to lower our cost of goods and expand margins.

Operating expenses decreased to $11.8 million from $12.3 million in the second quarter of 2015. This reduction was due to lower commissions and was also achieved through our continued focus on managing expenses. The second quarter loss from continuing operations was $1.3 million or $0.19 per share. In the second quarter of 2015, the loss from continuing operations was $759,000 or $0.11 per share. The year-over-year decline reflects the impact of lower revenues partially offset by the expense control mentioned earlier.

Year-to-date, revenue was $40.5 million, gross margin was 50.1% and net loss from continuing operations was $4.8 million as compared to $46.7 million, 50.4% and $1.7 million, respectively, in the year-ago period. The year-over-year variances were primarily due to reduced sales of legacy infrastructure management products and fewer network expansion products.

Now, I would like to review our balance sheet at June 30, 2016, as compared to the year-end 2015 balance sheet. Our balance sheet remained very strong. We remained debt-free, and cash and investments were $30 million compared to $31.4 million. Working capital totaled $33.2 million compared to $39.5 million. Inventory amounted to $8.4 million compared to $10.2 million. This decrease is primarily due to inventory reductions in legacy and end-of-life products along with the timing of shipments of certain core products. Accounts receivable totaled $15.9 million compared to $14.8 million. The increase was primarily due to the timing of cash receipts. CapEx requirements remained modest at $153,000 due to our outsourced manufacturing model. As you know, in March 2016, we signaled our confidence in the business and authorized the purchase of up to $10 million of our shares. During Q2, we used $1.8 million to repurchase approximately 180,000 shares. Since the adoption of this program in March, we have repurchased approximately 189,000 shares for a cost of approximately $1.9 million. Now, over to Scott.

Scott St. John

Thanks, Steve. In the first half of 2016, we achieved growth by executing on our focus go-to-market strategy. Across the portfolio, we are winning new customers and an increased level of repeat business. We were pleased that our largest contributing region, the Americas, grew bookings for the third consecutive quarter with a strong quarter from our top existing customers there. In EMEA, the business is steady but remains a highly competitive environment with relatively greater price pressure versus the Americas, particularly with the growth of 100-gig offerings.

Globally, we continue to deepen relationships with our existing Tier 1 customers. In Q2, we broadened our position with the North American Tier 1 service provider that has been deploying our Carrier Ethernet solutions for a number of years by securing orders for optical components. This engagement leverages our substantial expertise in validating sophisticated and new optical components to ensure their interoperability with third-party systems. In a second case, we increased our sales and deepened our position with the Tier 1 customer by continuing to support the expansion of its networks with both hardware and Pro-Vision software enhancements, and by working closely with their engineers on a solution to a new and challenging network operations requirement.

With respect to our focus on regional service providers and data center operators, we had two recent announcements that highlight our progress in these areas. First, the Markley Group, which owns and operates one of the largest mission-critical data centers and cloud computing facilities in New England is a recent repeat OptiDriver customer. Based on their experience with MRV, the Markley Group once again chose our optical transport solutions to support their continued growth, connecting a new location to create further redundancy and address their disaster recovery initiatives.

Additionally, we announced yesterday that Cross River Fiber, an existing MRV regional service provider customer, selected MRV to help transform from a dark fiber provider to a managed network provider. The selection of OptiDriver and OptiSwitch, along with Pro-Vision, is enabling Cross River Fiber to both expand its footprint in the New Jersey and metropolitan New York City areas and enhance its managed connectivity offerings to its enterprise and carrier customers.

From a product perspective, our OptiDriver platform is ideally suited to support the growing demand for high-bandwidth connectivity, cloud services and virtualization for data centers and their customers. In Q2, we continued our momentum growing the OptiDriver base ending the quarter with a total of 111 OptiDriver customers since introduction. During Q2, a total of 37 customers ordered OptiDriver, of which 26 where repeat buyers and 11 were new customers. The 11 new customers were comprised of four regional service providers, three data center operators, two enterprises and two municipalities. So we are continuing to see a broad range of interest in the platform. Also, six of the new OptiDriver customers were first-time buyers of MRV optical transport solutions. Including this activity, we posted the largest bookings for optical transport in a single quarter since late 2013.

Also during the quarter, we extended the OptiDriver family, introducing the OD-4, which is a single rack unit chassis that offers a low power and space option that is ideal for small footprint deployments or as an optical customer premises equipment. Like all of the existing chassis in the OptiDriver family, the OD-4 is compatible with all of our line cards, which enables our customers to easily and efficiently scale their networks. We continue to drive our efforts to position our transceiver business to meet the growing demand for 100-gig optical component. As we mentioned earlier, our substantial and trusted expertise in validating and delivering sophisticated and new optical components is a differentiator for our company. As demand for such components grows, we want to continue to be trusted partner for our customers to deliver such components, both as part of our optical transport and packet solutions and as standalone components to interoperate with other vendor solution.

As Mark mentioned earlier, we’re also excited that sales of 100-gig components and systems in the first half of 2016 have already met the level of all of last year. This market has great promise. Metro 100-gig coherent port growth is starting to ramp with industry analysts projecting rapid acceleration by 2018. While much of this early ramp has been with the web-scale data centers, Tier 1 telco service providers and in China, we are seeing some of this among our customers and expect this trend to expand among regional service providers and carrier-neutral providers within the next several quarters.

OptiSwitch also had a historically strong quarter in Q2, posting the largest quarter of bookings since late 2013. Additionally, in early May, we launched the Carrier Ethernet 2.0 certified OS-V Series. Already, we have closed 4 new customers, shipped units and recorded revenue. Number of the key attributes for the OS-V Series include: One, high scale next-generation traffic management and service assurance capabilities; two, the ability to upgrade for 1-gig to 10-gig in software, eliminating the need for costly truck rolls; three, a field-proven Master-OS operating system, which enables converged Layer 2 MPLS and Layer 3 services in a single device. And finally, a highly scalable open and programmable platform with capabilities for software-defined networking and network functions virtualization.

Speaking of SDN and NFV, we have started to expand our activity with customers and standards body. To date, most of our customer activity has been focused on preliminary proof of concept demos to gain feedback as we refined our strategy. In the second quarter, we saw some of our customers evolve these engagements into formal requirements and commercial tenders for the first time.

Finally, with OptiPacket, we are focused on positioning this solution for Carrier Ethernet aggregation in 100-gig demarcation use cases. We have several of our current and some new customers interested in these use cases and most notably, we are beginning initial testing of this solution with one of our Tier 1 customers this quarter.

Now, I will turn the call back to Mark.

Mark Bonney

Thanks, Scott. I am sure you can tell that we are enthusiastic about the business. The market has created opportunity, and we are well positioned to capitalize on it. We are seeing great progress in our product transitions. The first sales of the OptiSwitch V Series and the consistent growth of repeat OptiDriver customers are great validation of our customer satisfaction and a positive indicator for the future results of these key solutions. Additionally, our success in 100-gig deployments, where we have already surpassed 2015 full year revenues, illustrates our traction in the expanding segment of the market. The continued sequential growth of both packet and optical product revenue; our gross margins, which are among the highest in our industry; and our strong balance sheet are solid proof points for our enthusiasm. The MRV team is dedicated to product innovation, customer satisfaction and shareholder value. And thank you all again for your support.

Greg, we will now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] First from Wayside Capital, we will hear from Caroline Hughes [ph].

Unidentified Analyst

Thanks for taking my question. Actually, I have two. Gentlemen, you talked a little bit about the 100-gig improving, can you please elaborate on the demand you are seeing for this and how you are positioned in that market? And then secondly, it’s exciting to hear that you are already winning customers for the new OptiSwitch OS-V Series. Could you please tell us more about the capabilities of this product line and what demand you expect to get for it? Thanks.

Mark Bonney

Thanks, Caroline. I appreciate the questions. Both very good questions. Scott, why don’t you talk a bit about the 100-gig? As I read the question is, 100-gig, how we are positioned and what we see for demand there?

Scott St. John

So, thank you. Yes, we are seeing strong demand for 100-gig as we mentioned earlier in our comments. And we are really very well-positioned, we believe, with both our OptiDriver and our OptiPacket platforms within the metro to take advantage of the 100-gig demand. Specifically with OptiDriver, what we have is a compact form factor in our 100-gig interface cards and our family of chassis that really allow us to offer high density of 100-gig interface in a very small footprint, which is one of the reasons our customers like us as a solution designed specifically for the metro where there can be more space-constrained environment. With OP-X, we’re also one of the very first to introduce a 100-gig Carrier Ethernet demarcation solution to the market. So again, feel like we are very well-positioned to take advantage of the strong demand in the metro for 100-gig solution.

Mark Bonney

Great. And let me just expand on that just a bit, because we have read from number of sources, industry analysts, their projections of the growth of 100-gig in the metro. We are seeing that. We spoke – as Scott spoke on the prepared remarks, we are seeing that we are getting a nice uptake there and as we said, we have doubled our – or we have already had revenues equal to – in 2016, equal to what we did all of 2015. So good strong demand there and extensive capabilities in both the OptiDriver and the OptiPacket. The second question was about the V Series. And specifically, when we think about our position in Carrier Ethernet with our NIDs, we have got longstanding position. We have got thousands of NIDs out there in many, many different locations. The opportunity with the – with our new product enhancements really does position us very well. And Scott, why don’t you give a couple of examples. And one of – one to stress in particular would be the one that you mentioned on – in your prepared remarks. Let’s just make sure everybody’s clear about that.

Scott St. John

Sure. I think most importantly what’s important to know about the OS-V Series launch is we have introduced some significant new enhancements in the platform that are very focused on ease-of-use and helping our customers reduce operating expense. And so the one example I mentioned or one of the points I mentioned in the prepared remarks was about the ability for us to do upgrades from 1-gig to 10-gig services on the same platform with a software upgrade. Simple example on why this is important and how it relates to our focus on ease-of-use and reduce operating expense is one of the most expensive parts of operating a service provider network is truck rolls for maintenance, new installations, upgrading service. We have now brought to the market the capability do that remotely in software. So, a customer has installed that 1-gig, they want to upgrade 10-gig that can simply be done remotely without the need to dispatch a technician. So, again, just one example there.

Also want to make it clear that this is not just a movement from a legacy platform to a new platform that will essentially transition a similar market for us. There is an expansion here of our market opportunity with the OS-V Series, particularly in the fact that it provides us a much stronger position in the 10-gig Carrier Ethernet mid-market. And as we know, we talk a lot about 100-gig, but we are still at the point in the market where 10-gig is getting closer to crossing over with 1-gig. So, that’s an important thing for everybody to know is there is a significant element here of expanding our addressable market in Carrier Ethernet. Thanks. Thanks again Caroline for the question.

Unidentified Analyst

Thanks.

Operator

[Operator Instructions] Alright. It looks like with nothing further from the audience, I would like to turn things back to management for any additional or closing remarks.

Mark Bonney

Thanks very much, Greg. So, thank you all again for joining us today. We look forward to speaking with you soon. We will be attending the Gateway Conference in San Francisco in September and hope to interface with you there. Thanks again and talk soon. Thank you very much.

Operator

Ladies and gentlemen that does conclude today’s conference. We appreciate your participation. And you may now disconnect.

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