Dear Fellow Stockholders,

2015 was a transformative year for MRV Communications.  The sale of the Italian network integration business not only strengthened our balance sheet, but also enabled us to focus all of our attention on executing on the exciting growth opportunities for our network equipment business.  Over the past several years, we made significant investments to enhance our product lines with key differentiators that enable us to command industry leading gross margins, grow with our expanding customer base and capitalize on the strategic value of our position in our dynamic target market segments. 

With those investments, we strengthened our product portfolio and enhanced our market positioning.  For example, with the release of OptiDriver®, our next-generation optical transport platform, we believe our offering is among the lowest latency optical transport solutions in the world. Low latency is an important attribute for numerous communication environments and critical for certain applications such as high frequency trading.  Further, we enhanced our packet solutions with the introduction of OptiPacket®, the only purpose-built optical and packet tool for 100G aggregation. OptiPacket provides significant advantages to our customers who are seeking 100G aggregation in metro networks and is also an important element of our end-to-end solution for regional service providers. As part of a complete refresh in our access product portfolio, our new generation of OptiSwitch®, the V-Series of Carrier Ethernet network access devices, contains X86 integrated circuits and are built to be SDN/NFV ready. Additionally, all of these hardware devices can be connected with our Pro-Vision® advanced service orchestration software that enables our customers a full solution with many advanced capabilities including the ability to remotely turn up new services and monitor network devices, thereby reducing their operating costs. These product features, combined with our highly scalable, fully outsourced production, test and delivery operations model, position us to capitalize on significant growth opportunities in our target markets.

Clarifying our 2016 Product and Market Priorities

We aligned our go-to-market strategy and our associated development roadmap to focus on targeting regional service providers, carrier neutral providers (CNPs) for data center interconnect and our existing global service providers.  We believe this strategy plays to our commercial and product strengths and also enables us to focus our activities on those segments of the market that offer us the greatest opportunities for profitable growth, particularly as the shift toward 100G drives investments in carrier grade solutions for metro networks.

Our first commercial priority is to leverage our expanded solutions offering to target regional service providers. Our success deploying end-to-end solutions to regional service providers, such as CentraCom, demonstrates our value to this segment. Also, we believe our positioning will strengthen as consolidation in the network equipment industry continues and former competitors focus on larger service providers as part of their new companies. Our broad end-to-end product portfolio matches well with customer needs in this segment, as we enable customers to deliver new high-capacity services with a portfolio that includes service life cycle and network management, advanced packet switching and routing for carrier Ethernet access, aggregation, and metro applications, and a modular and competitive optical transport line. 

Our second priority is to expand our position among CNPs in the data center market. CNPs are multi-site terabyte scaled data center operators focused on providing colocation and interconnect functions, such as internet exchanges, many of whom have already embraced our value.  The synergy between the needs of CNPs and the emerging needs of regional service providers is strong. The broader data center growth drivers are compelling, particularly in the metro region as enterprises seek to outsource more IT functions to third-party data centers. We believe the requirements of this market- high density, low power consumption, limited rack space, low latency, faster service turn-ups with embedded diagnostic tools and a desire for simplicity - all favor our solutions. The CNP market is relatively underserved as many of our competitors focus on meeting the requirements of large, web-scale companies, creating further opportunity for MRV. 

Our third priority is to continue to build on our existing relationships with large global service providers. Our customers in this segment are transforming their businesses by growing organically and through acquisition as the service provider market grows and consolidates. We are committed to building on our position as a trusted partner to our customers by providing them with proven solutions such as our OptiSwitch and OptiPacket platforms. Additionally, we recognize the unique and comprehensive service and product development requirements that large customers in this segment require. By providing dedicated product support and further investing in our Pro-Vision service and network orchestration platform, we're able to collaborate with our large global customers to stay ahead of technology trends such as software defined networking, network functions virtualization (SDN/NFV) and others. We believe, by building on our existing relationships with large global service providers and focusing intensely on their requirements, as these customers grow, we will grow. 

Aligning Development Activities with Customers' Current and Future Needs

Few companies in the world have the expertise and capabilities to deliver all of the key elements in our end-to-end metro solutions, which includes packet service delivery and switching/routing aggregation, packet optical transport and service orchestration. The credibility we derive from our expertise in each of these product categories is core to our solutions strategy. Our platforms are designed to feature a flexible architecture accommodating a wide range of services with maximum efficiency.  In this way, our equipment designs offer customers across our targeted markets the ability to carefully manage their capital expenditure dollars by delivering lower space and power for better costs and performance as well as a pay as you grow infrastructure. 

Throughout the year, we enhanced our award winning products, including the 100G offering with OptiDriver and OptiPacket, and built out our end-to-end packet and optical solutions portfolio. This was supported by a major Pro-Vision release, enabling full lifecycle service orchestration of packet and optical networks. In 2016, we plan to expand development efforts for higher capacity optical speeds of 200G in the OptiDriver product line. 

Our customers have given us very positive feedback on our new products. During 2015, the OptiDriver customer count almost doubled, reaching 85 cumulative customers at year-end including several new customers in the data center segment. OptiPacket increased adoption and established MRV as a provider of end-to-end solutions, with packet service delivery and switching/routing aggregation, packet optical transport and service orchestration. Additionally, we expanded relationships with global service providers with existing products.

Positioning MRV with the Resources and Structure to Grow

In December 2015, we sold our network integration business Tecnonet S.p.A. Total consideration was $26.4 million in cash, including the post-closing adjustment received in February 2016. We secured a very attractive valuation, particularly considering the business' high customer concentration, low gross margins, high working capital requirements and its location in Italy, which has faced economic instability for many years.   Following the sale of Tecnonet, our only remaining business is our Network Equipment business, that has developed a scalable and differentiated product line for optical and packet networks.

In addition, we continued to reduce our cost structure by implementing initiatives to improve efficiency and streamline infrastructure, which accelerates our path to profitability.  As a result, we entered 2016 as a better capitalized, more efficient and more focused company with a product line that is well-positioned for growth at high gross margins.

2015 Financial Highlights

Total 2015 revenues grew to $88.2 million, up from $86.5 million in 2014, increasing modestly as we managed several product transitions. Our measured and disciplined approach to managing the business yielded significantly better operating results each quarter in 2015 and full year over the prior periods. Our continued focus on cost optimization generated full year gross profit improvement of $3.0 million on increased sales of $1.7 million and annual gross margin increases of 250 basis points to 51.7%, among the highest in our industry. Operating expenses declined by $6.5 million to $49.4 million, while maintaining a level investment in R&D and product development of $20.4 million. Savings were achieved in all expense categories including labor, audit fees, legal, banking and insurance costs, materials, travel and supplies. As a result, we improved our operating performance substantially, reducing our operating loss by $9.5 million to $3.8 million.

At year end, our balance sheet - reflecting only network equipment operations following the sale of the network integration business - and our metrics - days sales outstanding, days of inventory, etc. - are all substantially improved over the prior year. In fact, in 2015, we reduced our overall working capital requirements by more than $17 million year-over-year.

At December 31, 2015, cash and investments rose to $31.4 million, compared to $16.4 million at December 31, 2014. Cash generated by operating activities was $165,000 in 2015, reflecting an $8.1 million improvement compared to 2014. Capital expenditures totaled $1.4 million, or less than 2% of revenue. Also, as a sign of our confidence in the future of MRV, we used approximately $4.9 million to repurchase approximately 502,000 shares of MRVC common stock.

In addition, throughout the year, we strengthened our team with key hires. In product line management, our additions include Adam Scheer, SVP of Product Line Management and Corporate Development, Mano Nachum, Senior PLM and more recently, Oded Bergman, PLM Packet Products.  And in sales and services, we brought in George Faucher, Senior Director of Global Services. Also, in 2016 we strengthened our board of directors with the addition of Brian Bellinger and Jeffrey Tuder.

Poised to Build Stockholder Value

We have succeeded in transforming MRV into a focused and differentiated packet and optical solutions supplier that is well-positioned to capitalize on major industry trends including software defined networks and network function virtualization.  Our award-winning product line and deep customer relationships enable us to command attractive margins and have positioned us for dynamic growth over the coming years.  I am proud of our talented team and appreciative of their dedication and commitment to exceeding the expectations of our customers and building stockholder value.

I would like to thank our stockholders for their continued support and trust.

Mark J. Bonney
President and Chief Executive Officer

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