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MRV Dumps Passive Components

The axe has fallen on yet another underperforming components division. MRV Communications Inc. (Nasdaq: MRVC) has divested most of the passive component operations in its optical component subsidiary Luminent (see MRV Divests Components).

Like Agere Systems (NYSE: AGR/A), Nortel Networks Corp. (NYSE/Toronto: NT), and several other large companies, MRV has found the components business a disappointment. What looked like a "must have" in 2000 now has all the attraction of a stray pet tarantula (see Agere's Exit From Opto: Sad but Sensible and Bookham Buys Nortel's Components Biz).

In MRV's case, though, the company's not shedding components to focus on other core activities. Instead, it plans on keeping Luminent involved in the making of active components, while cutting out a chunk of passive parts. Sources say passive component vendors in China and other Far Eastern countries can match on performance and undercut on price, pushing Western vendors out of the market (see US to China: Do You Copy?). Luminent says it will now focus on actives, which are harder to copy.

The news involves two startups purchased by MRV in 2000: Fiber Optic Communications Inc. (FOCI), which has locations in China and Taiwan; and Quantum Optech Inc. (QOI), in Taiwan. MRV bought FOCI for about $309.7 million, $48.6 million of that in cash, in April 2000. It bought QOI for $36.1 million in an all-stock transaction in June 2000.

Local investors in Asia, led by managers of FOCI and QOI, have paid $8 million cash plus $2 million in promised purchases to MRV in return for all of MRV's interest in QOI and 80 percent of its interest in FOCI. As part of the deal, 430 employees are moving off MRV's books, cutting Luminent's headcount about 43 percent, to roughly 570 people from the 1,000 it reported as of June 30, 2002.

Perhaps most significantly, the buyer's investment group is taking about $19 million in debt associated with the former subsidiaries off MRV's hands. The deal closed October 15.

MRV spokesperson Diana Hayden emphasized that the company isn't exiting passives altogether, even though little detail's been provided about the specific products that are being canned. While active CWDM and FTTX system components and long-haul transceivers are Luminent's primary breadwinners, the company's still interested in the filters, couplers, splitters, WDM muxes, isolators, and circulators that make up its passive portfolio. Apparently, it just wants to see fewer of them on its expense sheet.

Interestingly, MRV's raw numbers don't show passives doing that badly of late. For the first two fiscal quarters of 2002, which the company's already reported (see MRV Reports Q1 and MRV Reports Q2), passives accounted for $15 million, or about 12 percent, of MRV's overall net revenues. Active components accounted for about $28 million, or roughly 23 percent.

Proportionally, these figures mimic the trends in 2001, when passives accounted for about $39 million, or 12 percent, of overall net revenues of $332.9 million, while actives accounted for about $97.6 million, or 29 percent.

Hayden says the passives being jettisoned will represent "less than 6 percent" of topline revenues for Luminent this year, while other passive products will continue to be developed on a selective basis.

Behind the scenes, MRV has felt encumbered by aspects of its Luminent holdings for a while (see MRV: Luminent's a Drag). Market conditions caused them to fail to perform sufficiently well for MRV to spin off Luminent as a public entity, and the subsidiary was made private by the end of 2001. What's more, MRV appears to be focused on its short-term performance and has touted its intent to build on strategic product offerings (see MRV Gets Another Margalit).

The news was greeted positively by at least one analyst that follows the company. "I'd say this is a good deal from a liquidity perspective," says Ittai Kidron of CIBC World Markets. He bases this first impression on MRV's claim that besides losing sizeable debt and gaining $8 million, it will save $2 million in personnel expenses quarterly as a result of the deal.

Indeed, the only downside appears to be that MRV may be putting itself in a tough position if the market for passive components ramps up significantly next year -- which at least one researcher sees as a distinct possibility. "We think the market for passives used in telecom applications will be over $1 billion this year and will double by 2005," says Stephen Montgomery, president of ElectroniCast Corp.

That's a chance that's been raised in the wake of other component closures industrywide (see Component Closures: Trouble Ahead?). But Montgomery says it may help that MRV isn't throwing out the baby with the bathwater. "A lot of companies just can't wait for the market to turn around," he says. "If you asked firms like Lightwave Micro [see Obituary: Lightwave Microsystems] whether they thought the market would return, they would say yes. But they can't wait."

Bottom line? While retaining a 20 percent interest in FOCI won't guarantee its ability to ramp up quickly if business builds again, the savings generated by the deal could put MRV in a better position to buy what it needs as the market may later dictate.

At press time, shares of MRV were trading at $0.90, up $0.07 (8.43%).

— Mary Jander, Senior Editor, Light Reading
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