MRV Communications, Inc. Q2 2008 Earnings Call Transcript

MRV Communications, Inc. (MRVC)

Q2 2008 Earnings Call Transcript

July 29, 2008 4:30 pm ET

Executives

Anne-Marie Frisch – IR

Noam Lotan – President and CEO

Guy Avidan – Acting CFO

Analysts

John Harmon – Needham & Company

Mike Lee [ph] – Andrew Garrett

Tim Savageaux – Merriman Curhan Ford & Co.

Timothy Quinlisk – Mayo Capital Partners

Presentation

Operator

Good afternoon, ladies and gentleman, and thank you for standing by. Welcome to the MRV Communications second quarter 2008 selected preliminary financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions) As a reminder, this conference is being recorded today, Tuesday July 29th, 2008.

I'd now like to turn the conference over to Ms. Anne-Marie Frisch, with the Investor Relations department. Please go ahead, ma'am.

Anne-Marie Frisch

Thank you, Jamie. Good afternoon, everyone, and thank you for joining us today to discuss MRV's second quarter 2008 selected preliminary financial results. Earlier this afternoon, the Company issued a press release reporting selected preliminary financial results for its quarter and six months ended June 30th, 2008. The press release can be viewed from the ‘Investor Relations’ section of MRV's website at ir.mrv.com. This call is being recorded and a replay of this call can be accessed by phone and will be available approximately two hours after the call's conclusion and will be available for one week on MRV's website. The dial-in numbers and pass code are available on our website and will be provided at the conclusion of today's call. This call is also being webcast live and a web replay will be available. Both may be accessed at ir.mrv.com. Additionally, there is a presentation on the “Investor” section of MRV's website that corresponds with today's call. You may access the presentation at mrv.com.

We would like to remind you that during the course of today's call, MRV's management may make forward-looking statements about financial and business guidance, product introductions, customer development, and the plans and objectives of management for future operations and the Company's future economic performance. These statements, which can be identified in the context of words such as "may," "will," "expects," "intends," "plans," "believes," "targets," "estimates," "forecasts," and variations of these words or the use of words of similar import, reflects management's current judgment on those issues. Because these statements deal with future events, they are subject to risks and uncertainties that could deal – that could cause the actual results to differ materially. In addition to these factors that may be discussed during this call, and those contained in the press release issued earlier today, important factors that could cause actual results to differ materially are contained in the Company's Forms 10-Qs and 10-Ks, which are on file with the SEC and are available on our website. By discussing the current perception of our market and making these forward-looking statements, we are not undertaking an obligation to provide updates in the future. Any future product feature or related specification that may be referenced in today's call are for information purposes only, and are not commitments to deliver any technology or enhancement. MRV reserves the right to modify future plans at any time. Additional risks not known to us may also our impair business or results of operations, or may prevent us from realizing our current expectations.

I would now like to turn the call over to Noam Lotan, MRV's President and CEO.

Noam Lotan

Thank you, Anne-Marie. Good afternoon, and thank you, everyone, for joining us today on our second quarter call. As previously announced on June 5th of 2008, MRV Board of Directors has appointed a special committee of independent directors to conduct an internal review relating to the Company's historical stock option grant practices, and related accounting, and MRV's accounting for earn-outs and profit sharing in two European subsidiaries. The review prompted by the determination of management that accounting measurement dates for certain stock option grants differ from the measurement dates previously used for such awards, and as a result MRV expects to restate its financial statement to record the affect of non-cash compensation expenses. Therefore, the financial statement and the related report of our independent public accountant, earnings press releases, and similar communication previously used by MRV should not be relied upon as a consequence of the pending restatement of our historical financial statement. For further information, please see our current report on Form 8-K filed with the SEC on June 6, 2008.

In addition, as the review of the special committee is ongoing, and not yet complete, and because of the current expectations that MRV may be restating it's historical financial statements, we have not include financial statement in our Q2 release that just hit the wires. We have stated that MRV would refrain from commenting further on subject matters of the review, its progress, or any litigation related to matters that are or may be the subject of the review until after it has been concluded.

Since the adjustments to MRV historical financial statements have yet to be determined, it is important to understand that current financial results and comparative information from 2006, 2007, and 2008 has been included in the press release and in my prepared remarks only to provide a context in which to assess our performance for the current period. Any related disclosure regarding trends and guidance must be considered preliminary and subject to change and such changes, if made, could be material.

In today's call, we would like to cover the following topics. Our top line growth, which we are very proud of as it demonstrates the strength of our product and our people. Then we will briefly review the performance of each business segment. We will also touch upon operational controls. We will highlight recent customer wins, product announcements, success in marketing communication, and raising our profile in the media and with industry analysts. And finally, provide you with guidance and outlook for the third quarter.

Starting with the second quarter, I'm pleased to report that we had a very solid second quarter with continued year-over-year growth, coupled with improved operational performance. Revenue for the second quarter was a record $147.6 million. This was a 45% increase over the second quarter of the previous year. And for the first half of the year revenue increase is 43% ahead of the first half of '07.

For the past ten quarters we have delivered double-digit growth, year-over-year revenue growth. On a geographic basis, growth in Q2 in the Americas was 49%, 22% in Europe, and 259% in the Asia-Pacific region. Growth was across the board with no particular customer concentration.

We are intently focused on our top line success and how it can translate to our bottom line. In many respects, I feel that we're making good progress. Each division and each business segment appears to be gaining momentum and accomplishing their targets and goals according to plan.

The Network Equipment segment posted the strongest growth in recent history and its best quarter ever with $33.6 million in revenue. This is a 28% increase over Q2 of last year and a 29% growth over the first half of the year – for the first half of the year. Historically, our Network Equipment business has been our highest gross margin segment, and therefore has the potential to make a significant impact on the bottom line. I'm pleased that our Network Equipment segment has grown above carrier Ethernet growth rate.

For the first half of the year, our Network Equipment revenue grew 43% in North America, driven by our OptiSwitch revenue, which doubled. Clearly, we are gaining share in Network Equipment, especially in North America. Our growth is driven by the strength of our people, our products, and the overall demand for small deployments of metro Ethernet in both domestic and international markets.

Our mission is well defined. To lead in optical network equipment through our rich technology heritage, tireless commitment to customer satisfaction, and efficient execution. Within this mission statement, we have chosen to focus our expertise and concentrate our effort on the following subcategories – carrier access and aggregation, packet optical transport, and wireless backhaul. We believe that these areas are critical to our customers and fit well with our technologies and core competency.

We have discussed in previous calls that our strategy to drive bottom line results is to gain operating leverage by maintaining headcount and expenses while growing revenue in the higher gross margin segments of our business, in this case, the Network Equipment Group. I'm pleased to say that we have grown Network Equipment revenue significantly without having to increase headcount. At the end of Q2, we have 501 employees in Network Equipment, compared with 507 in Q2 of the prior year.

We have also had success with our Network Integration business, which grew 17% year-over-year, 29% sequentially, and 11% for the first half of '08. Operational performance did improve in Q2 from Q1, and Network Integration also contributed to improved productivity. In our Optical Components segment, principally Source Photonics, we had strong revenue growth from both our legacy Optical Group, and the integrated Fiberxon group. Optical Components revenue for the quarter was $56.2 million, reflecting a year-over-year growth of 112%, including Fiberxon. Sequentially, Optical Components grew 12% in Q2, and 115% for the six months year-to-date period.

As we stated before, our three reporting segments – Equipment, Integration, and Optical Component – provide a level of stability resulting from both product and geographic diversification, which helped reduce the Company's exposure to the ups and downs of the global economy, and help provide growth opportunity.

In summary, Q2 was our highest revenue quarter on record, and we're very pleased with both our revenue growth and improved efficiency.

Talking about efficiency – we have repeatedly stated that profitability is a priority for MRV. Over the last several years, through the dedicated efforts of MRV employees, we have achieved significant growth that has transformed the Company. We are now working to further improve operating efficiencies that will translate into bottom line results. Our goal has been and remains achieving consistent profitable revenue growth to drive sustained shareholders’ value.

With respect to cash position, we ended the quarter with $79 million in combined cash, cash equivalents, timed deposit, short-term and long-term marketable securities.

From many of our recent announcement, it is evident that MRV is successfully going the extra miles for customers in our selected marketing areas. During the quarter, we announced a Tier 1 customer win with telecommunication service provider Softbank Telecom Operations. After NTT and KDDI, Softbank is the largest and fastest growing carrier in Japan. They chose our Fiber Driver Optical multi-service platform as the basis for a Japan-wide wireless backhaul network and have completed its deployment in thousands of locations across Japan. This network is one of our largest installations worldwide with a Tier 1 carrier and demonstrates that the high performance and feature-rich Fiber Driver platform can scale to serve the needs of very large networks.

Some product milestones during the quarter include the OptiSwitch 9/10 M was one of the first to earn Metro Ethernet Forum Wireless Backhaul certification, the MEF18. Our TereScope 10GE was named ‘Best of Interop’ Finalist. OptiSwitch 9124 was named a Finalist for the coveted “Eos” award at NXTcomm. And our Fiber Driver product line was certified by the U.S. Department of Agriculture, USDA, for Rural Utility Service, RUS, making it eligible to serve as the basis of subsidized network infrastructure in remote areas.

During the quarter, we released our OptiSwitch 904, a carrier Ethernet demarcation device for wireless backhaul and MPLS transport applications. The OptiSwitch 904 serves as a network interface device at the next-gen wireless packet base station to terminate optical networks. The OS 904 offers a variety of optical services, including the ability to handle point to point, point to multi-point, or multi-point to multi-point connections.

Before we move to our outlook for the third quarter of 2008, I'd like to take a moment to highlight our recent successes in achieving higher marketing profile for MRV. This past June, MRV participated in NXTcomm. At the show, we wanted to make a statement about our ability to help carriers bridge their metro Ethernet and IP access networks to their optical transport networks. This is the packet optical market which is still emerging but is expected to be one of the industry's fastest growing segments. Just prior to the show, we announced new product features in our OptiSwitch and Lambda Driver product families to position MRV at the leading edge of the packet optical transport market. During and around the show, MRV conducted more than 15 meetings with key press and industry analysts. The results include more than two dozen press articles and analyst reports about our new product plans. A currents analysis report stated that "to MRV's credit, the vendor came to Las Vegas armed to show the telecom world that it is serious about packet optical networking."

We also used the NXTcomm opportunity to raise marking awareness by staging live booth demonstrations, speaking on panels, and winning best-of-show finalist award for our new OptiSwitch product line. I'm happy about this result and feel that we're making good progress in articulating our position, which we hope will drive our future.

Moving on to our outlook for the third quarter of fiscal 2008, traditionally Q3 is a summer quarter and is seasonably slower than our other quarters, yet we expect strong year-over-year growth. We are guiding revenue to be in the $139 to $144 million range, which is a 20% to 24% growth in revenue over Q3 of the prior year. And as a reminder, this expected growth is purely organic as the Fiberxon acquisition closed on July 1, 2007. While we are delighted with our growth record, consistent profitability remains a priority. Going forward, we will work hard on further expanding revenue in our higher gross margin segments, while keeping operating expenses in check. This will be the key to our success. As stated before, this balanced approach will allow us to leverage our position in the market into bottom line results.

With that said, let me now turn the call over to the operator for Q&A. Jamie?

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions) Our first question is from John Harmon with Needham and Company. Please go ahead.

John Harmon – Needham & Company

Hi, good afternoon.

Noam Lotan

Hi, John.

John Harmon – Needham & Company

Hey, I guess, first of all, congratulations in beating your guidance.

Noam Lotan

Thank you.

John Harmon – Needham & Company

First of all, I was wondering if you have organic growth numbers handy for the quarter and for Source Photonics.

Noam Lotan

One second. John, it's very difficult to assess because the two have been totally integrated so you cannot really split the two right now, it's totally an integrated entity.

John Harmon – Needham & Company

Okay, thanks. We have some numbers, we can probably back it out. Secondly, you can see where this question is headed. I mean you didn't really give profitability numbers to your segment, so let me ask the question this way. For your Network Equipment and Integration businesses, where – you talked about productivity improvements – so my question is, were expenses in line with your own expectations for those businesses?

Guy Avidan

Yes, basically the OpEx were – for all segments were in line with our expectations.

John Harmon – Needham & Company

Okay. Thank you. And finally, it's probably difficult without complete financials, but cash declined $3 million in the quarter. Can you maybe qualitatively talk about whether that went to operations or investing or financing?

Guy Avidan

This was actually due to increase in accounts receivable as we showed a huge growth in revenue and most of our revenue is actually in the second half of the quarter AR grew much more than the reduction in cash.

John Harmon – Needham & Company

Okay, so do working capital. Thank you very much.

Noam Lotan

Thank you, John.

Operator

Thank you. Our next question is from Mike Lee [ph] with Andrew Garrett.

Mike Lee – Andrew Garrett

Hi, this question is for Noam. Do you guys feel you have lost a lot of credibility on the Street regarding these option reviews? I mean this is your second one in the last three years. Am I correct?

Noam Lotan

I don't think you're correct, but I prefer not to answer this question. I certainly am not the judge of credibility on the Street, whether we have or not or what, and that's really up to the Street to decide.

Operator

Our next question is from Tim Quinlisk with Mayo Capital. Your next question is from Tim Quinlisk with Mayo Capital. (Operator instructions) Our next question is from Tim Savageaux with Merriman.

Tim Savageaux – Merriman Curhan Ford & Co.

Good afternoon.

Noam Lotan

Hi, Tim.

Tim Savageaux – Merriman Curhan Ford & Co.

A couple of questions, and I think you hinted at this to some degree, but with regard to the guidance, you talked about the typical summer quarter in Europe. Do we infer from that you expect your component – do you expect your Optical Component and North American businesses to grow sequentially, or can you give us any more color kind of by business line as to what's implicit, or what assumptions are implicit in your guidance?

Guy Avidan

We can’t answer in this moment. The biggest effect due to summer is actually related to the Integration.

Tim Savageaux – Merriman Curhan Ford & Co.

Right.

Guy Avidan

Not related to Source Photonics, the Optical Component business. I hope that answered your question.

Tim Savageaux – Merriman Curhan Ford & Co.

Understood. However in the context of – we recently saw some relatively weak subscriber numbers on the FiOS front out of Verizon. I know as sources got larger, that's become less of a percentage of the total. I wonder if you could comment on that to any degree and how that affects your expectations for Source.

Noam Lotan

Yeah, I think, Tim, you made the point yourself. I mean the FiOS is still very important to us, but it is becoming a lesser and lesser component of our revenue in our Optical Components, and there are always variations from quarter-to-quarter. But you can see that, nevertheless, we accomplished a significant growth in our Optical Components, both sequentially and year-over-year. And we continue to be the principal player in the FiOS program and continue to enjoy the deployment and growth, but we are less sensitive to the quarterly ups and downs of this deployment.

Tim Savageaux – Merriman Curhan Ford & Co.

Right. And, thanks. One final question. There's obviously been some degree of concern about the overall pace of carrier spending in North America. Doesn't seem to be affecting you guys. But I wonder if you can talk about – as you look at your North American Network Equipment business, obviously, you are gaining share from somewhere, but to what extent have you seen your customers – who I gather are principally kind of in the in the Tier 2, Tier 3 carrier arena, where some of that concern has been directed. What kind of environment you're seeing there with regard to appetite for investment? Any slowing or what have you?

Guy Avidan

Yep, even if you see carriers including Tier 1 that cut CapEx, they usually don't do it in the area of wireless backhaul or metro Ethernet, those areas are still getting a lot of investments, Tier 1, Tier 2, and Tier 3. So we are not feeling any slowdown in those bases.

Noam Lotan

Yeah, I think we're all looking at the same numbers, Tim, but it is what’s underneath – what’s beneath the numbers. You know, in our area, there's a – like Guy said, there is still a lot of activity, and certainly given the increase in bandwidth consumption, a lot of which you have written yourself about, and there's a lot of this deployment that's still going on, and we are enjoying it.

Tim Savageaux – Merriman Curhan Ford & Co.

Okay. Well, I’ll pass along for now. Thanks.

Noam Lotan

Thank you, Tim.

Operator

Thank you. Our next question is from Tim Quinlisk with Mayo Capital.

Timothy Quinlisk – Mayo Capital Partners

Hi, now can you hear me?

Noam Lotan

Yes, we can.

Timothy Quinlisk – Mayo Capital Partners

Okay. Good job executing in this difficult environment. I just had a couple of questions for you. On the last conference call, you gave guidance on a revenue range of $135 million to $140 million, and you really had some good product visibility, I think, in the OS-900 platform driving that revenue. Can you quantify kind of or just qualitatively give me an assessment of where the revenue excess came in the quarter? Was it mostly Network Equipment versus your original expectation?

Noam Lotan

Let me start and Guy will continue. First of all, what I stated on the call, there was no single customer driving this growth, and in the past we've had quarters where we – some of the growth was attributed to a single deployment, et cetera. This was much more evenly balanced and distributed and which is something we're really very proud of. And it's one of the things we've internally commented on it a couple of times. I think generally, the growth came from literally across the board. All business units bounced back, some of them were already doing very well in the first quarter and just continued their growth, and others, like the Integration business, for example, had a 29% sequential growth. So, kind of falls under the category of bouncing back. Guy, did you want to add something?

Guy Avidan

No, I mean the—

Timothy Quinlisk – Mayo Capital Partners

Okay, I guess I was – I am trying to drive at – in the previous quarter’s guidance there was also a profit expectation based on the revenue range, and clearly you are well above it. And to the extent that that was Network Equipment that would sort of imply – if I wanted to imply that – that you actually reached profitability in the quarter when you exclude maybe some of the audit related issues. I mean can I – you are not willing to go that far?

Noam Lotan

Well, as I said earlier, we're not really supposed to comment anything about what we already released.

Timothy Quinlisk – Mayo Capital Partners

Okay. All right. Somebody, I think Tim Savageaux asked the question about the cash levels. But a lot of that is the strength in integration which should theoretically unwind as we go into the next quarter as sales trail off on a seasonal basis. And can you comment on kind of the cash requirements coming out of the Source business given the huge growth there, and any product information that can give us a sense of how diverse that business is and whether it's gaining traction in certain segments would be helpful as well.

Noam Lotan

Yes. So I think I'll let Guy comment on it, but clearly, the Source is growing, and growth while it is a – is very satisfying, it does require investment.

Guy Avidan

And again whenever it comes to growth, the Source Photonics business, we have a credit line that will enable us to even grow this business much more without reducing the cash position of MRVC.

Timothy Quinlisk – Mayo Capital Partners

So the cash – quarter-to-quarter downturn in cash more reflects the receivables growth, primarily from the Integration business?

Guy Avidan

No, from everybody – Integration, and Equipment, and some of the Optical Components.

Timothy Quinlisk – Mayo Capital Partners

Okay. Okay. I'll get back in the queue. Thank you.

Operator

Thank you. And at this time, I'd like to turn the call back to management for any additional remarks.

Noam Lotan

Well, thank you operator, and thank you everyone for being on the call today. We are very happy with our second quarter, and certainly with the first half of the year. Obviously, we made great strides in revenue and we certainly anticipate continued success during 2008. And with that, I'd like to thank you very much for being on the call, and hope to see you on our call next time. Thank you very much. Have a good afternoon.

Operator

Thank you, sir. Ladies and gentlemen, this concludes the MRV Communications second quarter 2008 selected preliminary financial results conference call. If you would like to listen to a replay of today conference, please dial 1-800-405-2236, or internationally at 303-590-3000, with access number 11116587, followed by the ‘#’ sign. Once again, if you’d like to listen to a replay of today’s conference call, please dial 1-800-405-2236 or 303-590-3000 with access number 11116587 followed by the ‘#’ sign. We’d like to thank you so much for your participation and wish you a pleasant day. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. U.S.ERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!