A sweeping drop in revenues across the tech sector left San Fernando and Conejo valley companies swimming in red ink in the third quarter, despite significant cost cutting that occurred in the period. Local companies slashed hundreds of thousands of dollars in expenses during the quarter, only to find that their sales levels had dropped so low, even their trimmed down expense structures could not keep up. With projections for a tech recovery moving back again, this time to 2003, according to a number of pundits, it’s likely that the cutbacks will continue through the fourth quarter and beyond. “The cost cutting wasn’t enough,” said Bob Pearlman, a partner in charge of the technology industry practice for Grant Thornton LLP. “In the economy that we’re in, which is clearly a recessionary economy, there’s significantly more to do than cost cutting. Companies have to find ways to increase revenue, and it’s very hard to do now.” One analyst, who called the revenue drop throughout the technology sector “unprecedented,” said the situation poses special problems for that industry. “Revenue declines, which are somewhat universal, hurt earnings because almost all technology companies were built for growth,” said Robert V. Green, technology stock analyst for Briefing.com. “So what you’re going to see over the next six months is a readjustment of the operating models to flat or sequentially declining revenues.” Among the local companies reporting net losses in the recent round of third quarter financials are a number of telecom suppliers, including Accelerated Networks Inc., in Moorpark; AML Communications Inc. in Camarillo (which reported its second quarter results at the end of October); Luminent Inc. in Chatsworth; and Power-One Inc., in Camarillo; along with Capstone Turbine Corp., a Chatsworth-based manufacturer of microturbine systems and Unova Inc., a supplier of wireless computing and networking products and manufacturing systems technologies with headquarters in Woodland Hills. The total cut from the general and administrative expense budget line for all six companies was $43 million in the period. Individually, the firms sliced anywhere from 13 percent to as much as 50 percent off their expenses, compared to the same period last year. But with revenues falling so fast and so dramatically, it proved virtually impossible for companies to adjust costs sufficiently to compensate. “They were overestimating revenues and it’s not just the telecom industry,” Pearlman said. “It’s all over the place. You are constantly seeing revised estimates on revenue estimates and earnings estimates and they’re not upward projections.” Such was the case at Power One, which anticipated reduced revenue levels based on what the company saw happening in its North American markets only to be surprised by a second sore spot, its international business. As a result, moves to cut general and administrative expenses by 13 percent over the quarter last year had little impact on the bottom line. “I think we thought of a more short-term (weakness) a quarter or so ago,” said Martin Goeller, vice president for finance and corporate controller for Power-One. “But the realization ever since the beginning of the third quarter is this isn’t going to be a V-shaped recovery. It’s going to be an L-shaped recovery with an upturn in the end of 2002 or early 2003. Power-One saw sales plummet 67 percent in the third quarter ended Sept. 30 to $97.3 million. The company ended the quarter with a net loss of $13.5 million or $.17 per diluted share, compared with net income of $16 million or $.20 a diluted share for the same period a year ago. In announcing the results, Steve Goldman, the company’s chief executive officer said, “While we have made substantial progress in adjusting our business model to reflect the rapidly changing market conditions by streamlining our business, it remains difficult to predict customer demand and industry trends.” Power-One wasn’t alone. At Accelerated Networks, sales plunged 97 percent to $404,000 versus $11.57 million for the same period a year ago. Accelerated recorded a net loss of $12.6 million or $.25 per share in the quarter, despite a 50 percent reduction in general and administrative expenses compared to the same period last year. Assessing the performance, Accelerated’s chairman and CEO Gary J. Sbona, pointed out that the company had moved aggressively to cut costs in the quarter, but conceded that Accelerated is continuing to look for ways to reduce expenses further, including divesting one or more product lines. Some analysts believe the tech sector ran aground largely by assuming that the demand for new economy products, which had continued unabated for the past several years, would continue. In fact, they point out, the industry has been subject to cyclical downturns in the past, albeit not to the same degree, and executives misread the market by believing that this time, things would be different. “Hope springs eternal,” said Chuck Hills, director of research for Thomson Financial/First Call. “They’re all so involved with the trees, they don’t step back and look at the forest and look at history. They get convinced there’s something different about this cycle.” Old economy businesses have been grappling with these problems for years, and have changed their business models accordingly. Such a strategy allowed Variflex Inc., a Moorpark-based maker of sporting goods like in-line skates and skateboards and related items, to record a profit in the quarter, despite the slowdown in consumer spending. “All businesses, whether they’re newly created like telecommunications or established, have got to have realistic expectations about what they can do in sales,” said Mark S. Siegel, chairman for the 22-year-old company. “I think the difference between the more experienced business community and the less experienced business community is the more experienced community didn’t set unrealistic goals. We stayed grounded and our expenses were consistent with that.” Variflex last month reported a net profit of $53,000 or $.01 per share on revenues of $12.8 million for its fiscal fourth quarter ended July 31, its first profitable quarter since 1996. The company’s current management took the helm in 1998. Even where new economy companies bucked the trend, their experience often underscored the underlying problems in the tech industry. Ixia, which makes testing equipment for optical networking equipment, saw its revenues decline to $16.2 million in the third quarter, from $21.3 million for the like period last year, but the company nevertheless reported net income of $1.6 million or $.03 per share. Excluding non-cash stock-based compensation charges its net earnings were $3.9 million or $.06 per share. The reason? A large portion of Ixia’s expenses are sales commissions, so its expense structure self-adjusts to its revenue levels. “Our revenues are way down this year,” said Tom Miller, CFO of Calabasas-based Ixia. “We sell test equipment to people like Cisco and they’re having an awful year. But if you look at the first quarter, second quarter, third quarter of this year, you’ll see our operating expenses dropped sequentially. We pay out a lot in commissions and when revenues dropped so did that expense.” But Miller concedes that Ixia is somewhat unusual among tech companies, which for the most part, are built on business models that anticipate a steadily increasing market. The pressure on earnings is likely to plague these companies for some time to come. “The real focus should be on revenue growth,” said Green. “The question is when will revenue growth come back to the whole sector, and I think it’s more than a year away.”