SAN JOSE, Calif. -- Sunrise Telecom Incorporated (Nasdaq: SRTI - News), a leading provider of service verification equipment for telecommunications, cable broadband and Internet networks, today reported sales for the first quarter of 2005 of $11.7 million, compared with $13.8 million in the first quarter of 2004 and $20.1 million in the prior year fourth quarter. Diluted GAAP net loss per share was $(0.09), compared with $(0.15) per share in the first quarter of 2004 and GAAP net income of $0.02 per share for the fourth quarter of 2004. The net loss for the first quarter of 2004 includes a charge of $7.3 million, or $(0.15) per share, for income tax expense related to recording a valuation allowance against the Company's net deferred tax assets. Backlog at quarter-end was $7.6 million, compared with $5.9 million at the end of the first quarter of 2004 and $5.3 million at the end of the fourth quarter of 2004.

Sunrise Telecom President and CEO, Paul Chang, said, "Our first quarter revenue was impacted by seasonal weakness in our Wireline Access group and shipment delays in the Broadband Cable and Fiber Optics groups. The majority of the delayed shipments were to our North American customers, resulting in the disproportionate pressure on our sales in that region.

"At the same time, our order activity was very strong contributing to a $7.6 million backlog at quarter end. Our strategic product lines, including VoIP testing solutions for cable operators and our optical testing platform, STT, represent a substantial portion of orders, demonstrating our increased presence in high growth applications. Based on the current backlog and opportunities in the pipeline we remain optimistic about this year's prospects and reiterate our goal of delivering revenue growth in 2005."

Products

During the first quarter of 2005 Sunrise Telecom saw strong demand for its Broadband solutions driven by an aggressive roll-out of voice services by cable operators. Said Paul Chang, "The order volume in our Broadband group more than doubled over the levels achieved in the first quarter of last year. VoIP deployments by cable providers generated demand for both our central office solution, RealWorx, and our handhelds used by field technicians, our CM-series. We expect this strength to continue for the remainder of the year."

Sunrise Telecom also saw increased traction for its optical testing platform, STT, driven by FTTx deployments and metro network upgrades. In the first quarter Sunrise Telecom continued to receive follow-on orders from a tier-one US carrier that standardized on STT in 2004. During the first quarter Sunrise Telecom has also signed an STT contract with a leading carrier in Japan with initial revenues expected in the second quarter of this year.

New Product Introductions

During the quarter, Sunrise Telecom introduced the following new products:

Says Paul Chang, "Almost immediately after the release of our SONET/SDH module we received an order for this product from a tier-one UK provider, which was booked in the first quarter. This order demonstrates strong confidence by our customers in Sunrise's expertise and serves as an example of leveraging our installed base to introduce new solutions."

First Quarter Financial Highlights

In the first quarter of 2005, Sunrise Telecom recorded gross margin of 66% of sales. Gross margin was 71% of sales for the first quarter of 2004 and 67% for the fourth quarter of 2004.

GAAP loss from operations was $(4.9) million in the first quarter of 2005, compared with GAAP income from operations of $0.2 million in the first quarter of 2004 and $0.9 million in the fourth quarter of 2004.

Sunrise Telecom Chief Financial Officer, Rick Kent, said, "In the past nine months the Company has been investing in sales and marketing, including restructuring our North American sales organization and increasing our direct international presence. These investments have increased our quarterly break-even revenues, resulting in temporary pressure on earnings. At the same time, we made our sales organization more effective and better aligned with carrier needs. This positions us well to capture substantial growth opportunities in the market, and will have a positive near-term impact on our topline, mitigating earnings pressure over time."

During the past nine months Sunrise has also made several investments in R&D to support its technological leadership. One of the key areas of investment included establishing an R&D center in Beijing, China. This new center will ultimately lead to a reduction of Sunrise's R&D costs per employee.

Finally, the first quarter general and administrative expenses were impacted by legal costs associated with Sunrise's patent litigation to defend the Company and enforce its intellectual property and other legal rights.

Outlook

Said Rick Kent, "Based on the current backlog and strong traction of our cable broadband and fiber optics solutions, we expect our second quarter sales to be in the range of $15 to $18 million. Issues contributing to shipment delays in the first quarter appear to have been resolved, and we are now well positioned to translate order activity and growing demand for our products into topline growth.

"We see three major growth areas for Sunrise in the second quarter as well as the full year 2005. The first area is related to metro network expansion driven by the FTTx roll-out. We successfully target this area with our advanced optical testing platform, the STT. Another area is VoIP testing for cable operators, which we address through a combination of our industry- leading monitoring device, RealWorx, used at operator central offices, and the CM line of handhelds used by technicians at customer premises. Additionally our MTT sales have been getting increasing contribution from Ethernet applications in the access portion of the network driven by rapid adoption of Ethernet by large businesses. We see some interesting growth opportunities for our handheld Ethernet testing tools this year."

Sunrise Telecom Inc.