Chipmaker Avoids Market Pitfalls By Focusing On Size, Price
BY MARILYN ALVA
INVESTOR'S BUSINESS DAILY
The parking lot is full. Desks and offices are occupied. And everyone who shows up for work seems busy.
Normally, that's not so unusual. But this is the heart of California's downtrodden Silicon Valley.
What's more, the company with the full lot and busy employees, Power Integrations Inc. (POWI), is in the semiconductor business - an industry that's been in a deep slump the last few years.
So you can understand why Chief Executive Balu Balakrishnan might be a little proud of his company's performance.
"We've been profitable all through the downturn," he said. "And we've generated a lot of cash - $32 million last year."
He calls Power Integrations "one of the very few" chipmakers projecting growth this year. Sales are seen rising 15% to 25% from 2002, while earnings should tick up even higher.
How did Power Integrations emerge unscathed? The answer rests with a suite of integrated circuits used in power conversion adapters.
The company's silicon designs are smaller, lighter and more energy efficient than standard copper- and iron-based technology. Yet they cost end customers the same.
"In a world where there is relatively flat end-market demand, the company is growing because of its ability to increase its market penetration," said analyst Gus Richard of First Albany.
Power Integrations' products aren't visible to the human eye. Many are inside converters hidden within flat panel monitors and computer modems. Others are set into converters that plug into the wall and adjust the voltage that powers many household appliances.
The firm's integrated chips can help manufacturers make those boxy converters smaller. Its new LinkSwitch is a third the size of a quarter.
Smaller is better in an age when government and advocacy groups are encouraging manufacturers to make household and business products more energy-efficient.
The average American household has about 20 products plugged into the wall - VCRs, microvaves, TVs, modems, set-top boxes.
Even when they're turned off, these "power vampires" still drain more than $4 billion of electricity a year - or 7% to 10% of residential energy consumption.
"We can basically eliminate 90% of that waste," Balakrishnan said.
Rising Sales
Power Intergrations' products automatically adjust to whatever voltage is available, making them user-friendly anywhere in the world.
There's been no shortage of customers. Power Integrations' annual revenue has enjoyed 25% to 35% compounded growth the last seven years.
The firm had a big growth spurt in the mid-1990s after its first TopSwitch products went on the market.
Things slowed down in 2001, when the market slumped. They picked back up last year, with annual sales gaining 15% to $108.2 million and earnings rising 39% to 32 cents a share.
Power Integrations gets 38% of its sales from the cell phone market. The firm grew its share of that market 49% last year.
There's not a lot of competition out there. Rivals include much larger firms such as STMicroelectronics NV (STM), Fairchild Semiconductor (FCS) and On Semiconductor Corp. (ONNN)
But size isn't the point in this business, analysts say.
"It's not who is big," said analyst Jim Liang of Pacific Growth Equities. "It's who has the best technology."
On that end, Power Integrations is a pioneer and leader. The firm holds 56 U.S. patents and 58 foreign patents.
Until recently, its products were in 15% of a then-$700 million addressable market, the company says. Those products included its mainstay TopSwitch for the high end voltage market and Tiny Switch I for the lower end.
But new products have expanded Power Integrations' potential market to $1.6 billion. At the same time, the firm's market penetration rate fell to 7%.
"That means we have plenty of room to grow," Balakrishnan said. "We can grow our company even if the end markets are not growing."
The new products include TinySwitch II and TopSwitch GX. They address the low portable power market, where Power Integration had been the weakest.
A fourth product, DPASwitch, targets entirely new markets, including networking, high-end server applications and industrial controls.
Sales of LinkSwitch and DPASwitch are expected to ramp up in the second half of this year.
Penny-Wise
The company's biggest sellers are TinySwitches. But until recently, they hurt gross margins, says First Albany's Richard.
That's because they cannibalized sales from the company's older, more expensive TopSwitches. Power Integrations fixed the problem by cutting costs.
"If you can take a penny out of costs per unit, you can increase gross margins by a couple of percentage points," Richard said. "That's what happened in the last quarter."
The upshot: Earnings in the last quarter tripled from the prior year to 12 cents a share.
Analysts polled by First Call expect earnings to rise 81% to 58 cents a share this year, then tick up 34% to 78 cents in 2004. |
