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Place on Deloitte’s Fast 50 Not Always Sign of Success

Place on Deloitte’s Fast 50 Not Always Sign of Success By CARLOS MARTINEZ Staff Reporter Deloitte & Touche’s 2002 Los Angeles Technology Fast 50 list, which includes 23 San Fernando Valley and Ventura County companies, is under fire by analysts who say the list is filled with money losers. The annual list of the area’s 50 fastest growing tech companies, sponsored and compiled by the New York-based accounting firm, has been under scrutiny by analysts and venture capitalists alike who say many of its companies are hardly worth considering for future growth or investment. “I just don’t see the point of it,” said Ronald Tobin, a partner in the Los Angeles venture capital firm Metro Capital Investments Inc. “There are just too many companies that are probably a year away from calling it quits,” he said. The Los Angeles list is one of 22 Deloitte & Touche uses to highlight the fastest growing technology companies in the U.S. To qualify, companies must have been in business for at least five years, not be a subsidiary or division, and have had 1997 revenues of at least $50,000 and 2001 revenues of $1 million or more. Tobin said the list is littered with companies that are struggling to survive, like MRV Communications Inc. of Chatsworth, Vitesse Semiconductor Corp. of Camarillo, Optical Communications Equipment Inc. of Chatsworth and Semtech Corp. of Camarillo. MRV, for instance has seen its numbers drop steadily over the past year and a half, forcing the company to cut its staff and reduce production. For the quarter ending June 30, the company reported a $21.1 million loss on $61.6 million in revenue, compared to a loss of $94.1 million on $89.5 million in revenue in the same quarter a year earlier. The company’s losses have been cut, but analysts who follow the company are unsure when or if it will ever recover further. Gary Dickey, a partner in Deloitte & Touche’s Technology and Communications Group which runs the Fast 50 program, defended the list, saying the program is meant to highlight companies that show fast growth over a five-year span. “We want to show that these are companies that have shown significant growth and are not a flash in the pan,” Dickey said. “This is the best way to show that, even though some of the companies may be having difficulties.” Nearly half of the 50 companies listed are located in the so-called Technology 101 Corridor, running through the Valley and much of Ventura County. Dickey said only two companies slated for the list declined inclusion because of their financial troubles. He would not identify them. Sandy Harrison, an analyst with Banc of America Securities, said MRV and other companies like it have been severely hurt by the tech downturn and its future is too uncertain to highlight its past growth. “The biggest issue (for MRV) is the continuing weakness in the tech market and the weakness overall in the economy,” he said. “They are doing all the right things, but I don’t know if it’s going to be enough.” But whether MRV belongs on the Deloitte & Touche list, Harrison was uncertain. “It’s difficult to tell if indexes like that are meaningful when you have a lot of those companies in trouble. It doesn’t really make much sense,” Harrison said. Likewise, Jeremy Lopez, a technology analyst with Morningstar Inc., said the Fast 50 does not necessarily represent the best tech companies. “Companies that were doing well two years ago are barely surviving and they’re on the list, so I don’t know what value that has for anyone,” he said. Lopez, who covers Vitesse Semiconductor, said that company has become a penny stock in recent months and is far from being a fast-growing company. “Their revenue dropped to $301 million from $442 million a year earlier. That’s a 13-percent drop and, while they may have the resources to survive, it’s going to be a difficult climb back,” he said, noting that his latest report on Vitesse will be his last since Morningstar will no longer cover it. The second highest ranked company on the list is Calabasas-based NetSol Technologies Inc., a software and IT firm that has shown a 3,452-percent jump in revenue over the past five years. But it experienced massive losses last year. In 2001, the company reported a $14.1 million loss on $6.7 million in revenue, compared to a year earlier when it posted a $3.9 million loss on $7 million in revenue. The company has no analyst coverage and officials from NetSol declined comment. But to Tobin, NetSol is an example of the Fast 50’s penchant for including troubled companies. “It’s nice to be on a list, but it doesn’t mean anything if a company is going down the tubes,” he said. The Fast 50 does have some fast-growing, profitable companies, like Thousand Oaks-based biotech behemoth Amgen Inc., 45th on the list with its 67-percent growth over the last five years. Amgen last year reported $1.11 billion in net income on $4 billion in total revenue, compared to a year earlier when it posted $1.13 billion in net income on $3.4 billion in revenue. Merrill Lynch analyst Eric Ende said Amgen will continue to grow with its new Aranesp arthritis drug taking a greater chunk of the market and a proposed psoriasis drug awaiting federal approval. Video game-maker THQ Inc. is another firm racking up rapid sales and profit growth. THQ figures to surpass last year’s performance easily and continue to bolster its margin through 2003, said analyst Anthony Gikas of U.S. Bancorp Piper Jaffray. “There’s no doubt they’re going to continue to grow so long as the video game market keeps going the way it has,” he said. During 2001, THQ reported $36 million in net income on $379 million in total sales, compared to a year earlier when it reported $18.2 million in net income on $347 million in sales. All of the companies on the Los Angeles Fast 50 list will be considered for Deloitte & Touche’s annual Technology Fast 500, a ranking of the 500 fastest growing technology companies in the U.S. That list will be issued in November. In the Slow Lane: Valley companies that made the Fast 50 list. 2. NetSol Technologies, Calabasas 5. Digital Insight Corp., Calabasas 6. Capstone Turbine Corp., Chatsworth 7. Medi.com, Thousand Oaks 8. Optical Communication Products Inc., Chatsworth 9. DCH Technology Inc., Valencia 10. Sonic Desktop Software Inc., Northridge 12. Line 6 Inc., Agoura Hills 17. North American Scientific Inc., Chatsworth 19. InfoStreet Inc., Tarzana

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