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SRS Labs has slowed the bleeding with a back-to-basics strategy



SRS Seeks to Stop Bleeding, Go After new Markets

Like a beaver patching up a dam, audio technology company SRS Labs Inc. has worked feverishly to stem gushing losses.

And after a year of major strategy changes, the levee seems to holding.

Where the company posted a $3 million loss in the first quarter of last year, the loss in the first three months of this year was cut in half to $1.5 million on sales of $4.3 million. The company says it hopes to reach profitability at the end of this year.

Santa Ana-based SRS is shopping for acquisitions and looking for new markets for its technologies that enhance sound on stereo systems and the Internet, according to founder and Chief Executive Tom Yuen.

“I think that we have gone through some fairly difficult times,” he said.

Best known as a co-founder of AST Research Inc., Yuen helped fund SRS in 1993 and took over its day-to-day operations in 1999 as the company’s financial performance slipped and several key executives left.

“We have a very positive trend going on right now and I think we’ll be able to keep it going,” Yuen said.

A year ago, SRS executives also thought they had some strong trends and had big plans in place to capitalize on them. The company, which had just undergone a restructuring that resulted in three separate business units, planned to spin off its chip making subsidiary, Valence Technology, in the third quarter.

The potentially lucrative sale stood to give the company more cash to research other technologies that could lead to more spinoffs making SRS Labs an incubator such as CMGI Inc. or IdeaLab!.

“We looked at those companies and saw that they got favorable valuation for their shareholders by their business models of spinning off companies,” Yuen said. “Looking at our resources, we had hoped to ride with a more favorable return for the shareholders as well as building a strong financial base.”

But at the last minute, after conversations with their bankers, SRS backed out of the Valence sale.

“We were seduced by market conditions,” Yuen said. “We looked at the timing and had tried to cash in, but the window of opportunity passed. We had to return to a back to basics business model.”

That meant earning money with the one-two punch SRS always had: licensing new sound technologies for use in home electronics and on the Internet, and by selling electronic components directly.

Luckily, the company inked perhaps its biggest licensing deal last year with Microsoft Corp. Microsoft uses the company’s WOW audio enhancement technology in its Windows Media Player, used to play music and other digital audio on computers.

Despite the Microsoft deal, SRS still has a long way to go in proving that it has turned around. Investors have knocked SRS shares 65% off their recent high, taking the stock from 13 last June to a recent close near 5.

But Yuen says SRS is just getting started.

“The Microsoft relationship is just starting to bear fruit,” he said.

SRS is looking at other deals that could be coming this year, Yuen says. The company brags that its $20 million cash,one of the company’s biggest assets,will prove useful as the company looks to buy its way into high-growth, high-profit products.

“There are lots of bargains and companies to be had out there. We continue to look at the marketplace,” Yuen said. “But any deal has to be accretive. It has to give us immediate earnings rather than a deficit.” Along with cash, the company could use its stock as a method to acquire new companies, Yuen said.

SRS has other plans to exit its slower-growing markets, such as sales of electronics and components, by as early as September. While the hardware division made up nearly half of the company’s sales in the first quarter, the business also declined by 50% in the period.

The company also plans to beef up its senior management team,a move that is a long time coming for Yuen and the current management team.

“I’m the CEO, the COO and the VP of marketing,” Yuen said. “I need more people to share the load.” n

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