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Rocky Start for New Sorrento

Light Reading
News Analysis
Light Reading
9/5/2003
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Shortly after completing a corporate restructuring and the acquisition of LuxN (see Sorrento Completes LuxN Buy), Sorrento reported disappointing revenues for its second fiscal quarter of 2004, which ended July 31, 2003 (see Sorrento Q2 Revenues Fall).

Yesterday the company announced revenues of $4.5 million, down from $7.9 million in the first quarter.

Phillip W. Arneson, chairman, CEO, and president of the company, told investors and analysts during the conference call last night after the market closed that the drop in revenue had nothing to do with a change in customer loyalty, but was due to timing of revenue recognition. Company executives noted that it had not lost a single deal in the second quarter in North America. But sales to Comcast Corp. (Nasdaq: CMCSA, CMCSK), a typically strong customer, dropped off during the quarter as a result of its acquisition of AT&T Broadband (see AT&T Completes Comcast Merger). But the company expects orders to increase over the next several quarters.

Net loss from operations for the second quarter of fiscal year 2004 increased to $4.1 million compared to $3.6 million in the first quarter. But on the positive side, the company reported a net income applicable to common shares of $12.5 million, or $2.13 per share, for the second quarter. This is compared to a net loss of $6.2 million in the first. The net income resulted primarily from one-time gains related to the company’s recapitalization of debt, completed during the quarter.

Sorrento also improved gross margins to 30 percent up from 25 percent the previous quarter. And it reduced operating expenses in the second quarter to $5.5 million, a 2 percent improvement over $5.6 million in the previous quarter.

Now that the company is improving gross margins and has finished its recapitalization, its biggest challenge is increasing revenue. It has targeted a revenue breakeven level of $12.5 million per quarter. Even with the LuxN merger, the company expects to keep the breakeven at this level. Arneson is hopeful that new products and customers from LuxN will help it reach this point, but he did not specify a timeline. LuxN will add 20 new customers to Sorrento’s roster.

“We’ve done exactly what we told you we’d do,” said Arneson. “We’ve completed the recapitalization. We continue to improve operational expenses, and we will continue to make mergers and acquisitions such as the LuxN merger that will strengthen the company.”

But in order to move forward and to acquire other companies, Sorrento will have to raise more capital. According to its balance sheet, it ended the second fiscal quarter with about $5.1 million in cash and equivalents. This is down from $8.8 million at the end of April 2003. The LuxN acquisition was valued at around $17 million to $18 million (see Sorrento Bids for LuxN).

While the company has considerable assets, like the two buildings it owns in San Diego, Arneson admits that it will likely have to turn to outside investors for more funding.

Sorrento’s stock was up $0.13 (4.81%) to $2.83 in early trading this morning.

— Marguerite Reardon, Senior Editor, Light Reading

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